It's tough to raise capital with just an idea. Developing a solid foothold will help your pitch to investors.
Most entrepreneurial ventures start with an idea. Before long, someone says, "We need money!" and the effort shifts to convincing investors, a corporate parent, or friends and family to fund the effort.
If the management team doesn't build something of value before raising capital, it will likely give away the company to investors and retain little of the value. The team needs to have leverage in discussions and negotiations with investors. The more value that exists, beyond the idea, the more value the team will extract going forward. Somewhat ironically, investors will be easier to find once the team has created more value and they are able to retain a greater share of the company in the transaction.
The first step toward gaining a foothold involves finding a spark (see Before Raising Capital Find Your Spark)- something that makes you uniquely suited to build an idea into a business. This could be a proprietary asset such as a reputation among a base of customers, a unique skill or expertise, a valuable asset such as a truck fleet or a desired location, or even someone's time and effort--sweat equity to build the business.
Next, the team needs to build solid footholds for building the business. Ideally, these footholds are customers and revenue, but they could be something less, such as a product prototype or useable technology. These footholds will give the entrepreneurial team something of clear and demonstrable value when raising capital.
The key challenge is creating something from nothing. This is where sweat equity usually comes in. You need to be able to create these customer relationships or essential technology without having the funds to pay people. Successful entrepreneurs make deals with key employees, give away equity, and sign up customers on future promises. They do anything to build the foothold on a shoestring budget.
Once you have a solid foothold, the conversation with investors will be much easier. You aren't talking about what you might build, you are talking about what you have built. This change in conversation is critical to having the ability and the leverage to raise capital on terms that are reasonable.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark