Asking for money is an odd thing. You know you have a great idea, product or service, but how do you convince someone else that it is great? How do you convey to an investor why you need funds and how you are going to use that money to grow into an even greater company?
Investors are on the lookout for one thing: ROI.
ROI
Return on investment, or ROI, is where an investor provides capital to a business with the intent that that business will make enough money to provide a “return” or more money than what they originally put into the business. So, in other words, you give a company $100 with the hope that they will return at least $101 dollars to back to you.
When an investor looks to give you their money, they first ask a handful of questions.
- What are you doing that is different?
- How many other companies are out there claiming that they have the same technology as you?
- How big is the market that your company is in (total addressable market), and what will your company do that is different enough (competitive advantage) to have you “win” in that market?
- Is it possible for you to add or change something about your technology to have it grow outside of your current market into others?
There are hundreds of questions that investors are going to want you to know about your business and your technology, but there are three that are very important ones to know the answers to before you seek out capital.
Value Proposition
Typically, companies struggle with the first question:
What do you do that is different or what is your company’s value proposition?
The most common answer is that a company and its technology does the same thing as its competitors but at a lower price. But is doing the same thing at a lower price really different? Did you drive to Blockbuster and pick out a few movies versus having DVDs delivered to your front door whenever you wanted because of price?
Not really.
Customers chose Netflix as a different way to watch movies because their technology did something different. They no longer had to travel to a store to select a movie. Instead, they were able to pick out movies from their couch.
Knowing what the technology and the service did differently changed the way people rented and watched movies. Not to mention, technology eventually eliminated the process of physically returning a movie to a store when it was due (and for many of us, returning it when it was overdue). Technology was the driver that allowed Netflix to execute on what it did differently.
By using its technology, Netflix’s customers abandoned their routine of traveling to a store to watch and return a movie, to a time-saving platform, playing movies with the click of the button. Most important of all, they eliminated the lousy process of returning overdue movies.
Based on this scenario, what would you say Netflix did differently or, what is their value proposition? What is the thing that they did that not only benefited their customers, but used their technology to change the way customers viewed movies?
One of the big things that stands out is time.
Netflix used their technology to give customers more time to do what they were paying to do: watch movies. And what is most interesting is that their technology evolved from snail mail to streaming, further eliminating the amount of time it took users to watch movies. They created a technology platform that created a stickiness within their customer base, giving the customer what they wanted when they wanted it. Technology was used as the engine and the vehicle. So focus on what your technology does differently outside of something like price.
Is it that it saves people time? Does it give people what they want in a flash? Does it provide them a certain type of data that no one else can? Often the answer to these questions will involve your company’s technology and how you are using it as your engine, and maybe also, your vehicle, to do what you do differently. Once you are able to answer this question, your answers to the other questions will begin to take shape.
Competitive Landscape
Many investors will not only be asking what your technology does differently, but who else has a similar technology. Netflix was taking on a goliath: Blockbuster.
They dominated the market of renting movies, so much so, they didn’t bother evolving their technology. When thinking of your company and what your competitors are doing, what can you do to stand out? Is it that your competitors do not provide an app to their customers, but you do or plan to do so? Is your technology able to take your customers’ data and provide them actionable information to change the way they do business?
Companies are able to take their technology and differentiate themselves from their competitors by answering many of the questions above. Netflix harvested their customer data and how its customers (you) were digesting content on their platform. They then used this information to differentiate themselves by giving this data to create an even easier and faster way to watch new and different content.
This content also informed Netflix of what their customers were watching the most. However, none of this content was Netflix’s content. They were providing the platform to watch the content because they were aware that the owners of this content would eventually become their competitors. As a result, Netflix started producing its own proprietary content, Netflix Originals.
Know your competitors like you do your customers, and what makes you different from them.
Total Addressable Market
Once you know the how and the why customers are going to use your technology, an investor will want to know where (who) it can be applied to.
How large is your potential customer base or your total addressable market? How can you leverage your technology and what you do differently to beat out your competitors? What is the potential of that?
Many companies know their ideal customers, but they don’t take the time to calculate how many are out there. Focus on how your technology can help you understand how many customers there are that would be interested in your product or service.
Can you be like Netflix and evolve your technology to go from a hard asset powered by a back-end technology, to a customer-facing technology? Are you able to help your customers access your solution anywhere via an app? Can you then use that technology to grow into other services or products like adding TV shows, games or kid specific channels?
Technology allows users to interface with a company at any time of the day (or night). In today’s world, using your technology to continuously grow is mandatory, and it allows companies to do it quickly. Many companies struggle with how to evolve and venture into new markets. In most cases, reviewing data will give most of the answers. Based on how customers use and interact with your product or service, you should gain insight as to where to grow your technology next.
Will your technology and the resources it provides allow your company to create its own goods, like Netflix?
If you can establish a market where your technology and company are a market leader, understand the market risks. Understand what factors could impact the market that you are in and your place in that market like regulatory pressures or other competitors entering the market. Create solutions that mitigate those risks, further strengthening your company’s customer base, and ideally, resulting in additional market opportunities.
Define a path for where your technology is going, and how it can dominate that path and other paths before talking to an investor.
Remember ROI?
In the end, technology powers almost every company and will probably continue to do so far into the future. Getting very clear around what your technology does differently, how it does it differently from your competitors and where it can expand to do those things differently is crucial. Investors are going to be looking for concrete answers to all of these questions, but keep in mind, their main focus will be on how these answers are going to generate a strong ROI, and the faster your technology can do that, the better.