Today I got a phone call from Roseburg entrepreneur who came up with a really unique product… in a unique industry… that solves a problem I never even knew existed until today.
I can’t reveal what the product is… but I can pretty darn confidently say that 9 out of 10 people would never think you need this… UNTIL you saw what it does and the story behind it.
Amazingly touching story.
But, this Roseburg entrepreneur is like most people starting companies up.
He zeroed in that his main problem right now is funding so he can buy inventory…
… when rounding up investors and buying a bunch of inventory so he could be “bulk” rates is the last thing he should be dong right now.
He Doesn’t Need Investors. Here’s Why.
Yes, we live in a small town. But even here in Roseburg there’s a lot of money floating around that when the right pitch comes across their table… it won’t be too hard to find investors. Heck, we just held our Roseburg Angel Investor Network conference in November and invested $135k into ONE Oregon business. There’s money here.
So its easy to jump right away and say… “I’ll just raise some cash and get this puppy going!”.
But I’ll argue that for lots of companies… that’s not the best choice.
Let Me Ask You A Few Questions…
- Do you want to give up equity in your business if you don’t have to?
- Do you want to have investors tied to you forever and you have to be held accountable to them, if you don’t have to?
- Do you want to know another way to round up “funding” without ever giving up an ounce of equity?
I’m going to assume you answered NO to the first two and YES to the last one.
So here it goes…
Why Raising Funds In This Entrepreneurs Case I Feel Is A Bad Idea.
This particular Roseburg entrepreneur I was chatting with has a physical product.
Production cost is about $100 a piece… and he projects selling them for $300-$350 each.
It’s not a product that a lot (if any) people are really seeking out… but when they see it in their time of need… are likely to buy it and not bat an eye at the $350 price tag.
Production time to make a unit is less than a week or so (low turnaround time)
He hasn’t sold ANY of this product yet (unproven concept). And in my book, no matter how much people like your product or say they’d buy it… the ultimate “vote” of confidence for your product is when they actually open up their wallet and spend money with you. Until then, don’t trust a word people say that you survey.
What He Should Do Instead Of Raising Investor Money.
First off, he needs to prove the concept before he dumps money into production.
What if he produces 100 units at $100 each ($10k for all you math whizzes out there) and then goes out and tries to sell the product… and finds out the market doesn’t like the product AS-IS, but they feel it would rock if he made a tweak? He’s out $10k.
On the flip side… what if at the start… he sacrificed his profit margins just so he could prove the concept? Prove that people are willing to buy the product at a certain price point.
Little to no risk.
So, with that in mind… here’s what I’d do if I were this entrepreneur. It’s the way I started my last 2 businesses without any investor funding… without outlaying much if any of my own money to start it… and without taking on the risk of hoping the market will buy it.
He needs to put together a few demo units of his product… mark down 10 target ideal customers… walk into their door and start SELLING his pants off.
Sell some units to prove there’s a market.
Produce those units on the fly.
Deliver the product.
Get great testimonials from those customers that he can use in his marketing materials moving forward.
Then, after he’s proven the product is a fit for the market, he’s got some profits from those sales and gets those customers to re-order…
… now he’s got some cash to invest in ordering more units at once to take advantage of the bulk discounts from his vendors.
And he gave up ZERO equity in the business… and had his customers fund his business for him… while at the same time PROVING HIS CONCEPT in the real world.
Can’t get much better than that.
Then yes, if down the road he really sees the company can scale big but he needs some capital to really grow faster… then possibly seek out an investor.
Get Into The Practice Of Pre-Selling.
I can’t think of a type of company where pre-selling your products before they’re produced… to reduce your risk… provide proof of concept before you go big… and test the waters… isn’t a good idea.
I started my software company, Carrot, that way. (in fact, this website is running on our Carrot software).
Surveyed the market, found out what they wanted, put together a product concept (just an idea, thats it), emailed that same market and said…
… “If you have xyz problem… and I put together software that did xyz for you… would you buy it at xyz price?”
Then… I follow it up with… “Awesome, I’m taking in 50 “beta” testers to try it out. You get a discount. Pay here. First come first served. We’ll have the software done in 3 months”.
Think it can’t work? It does.
Ever heard of Tough Mudder? The largest mud run in the country.
They did over $75million in sales last year. The company is only like 3 years old.
They PRE-SOLD spots in their first race before they ever built the track, spent the money to find a location for the race, etc.
Once they sold so many tickets, they knew the concept was a winner, found a location, built the course, and smiled all the way to the bank.
So, on your next product idea… pre-sell the heck out of it before you invest in producing it.