Seasoned investors say that nine times out of 10, an entrepreneur is too busy focusing on the "idea" to think through the business model.
We're not venture capitalists, but since our business involves partnering with companies to build and grow businesses, we end up in a lot of conversations with entrepreneurs who say they have a "great idea." We've written previously about why execution is everything and ideas by themselves are not all that valuable. Far more important is a solid business model that will make money.
It's astonishing how many entrepreneurs and even corporate executives focus on the great idea while looking past the fundamentals of how a business will make money and provide a return to capital providers.
Some of the entrepreneurs we've spoken with recently have pretty good ideas. All they need is $2 million to get it started.
First thing's first. We immediately ask them 10 questions to see if the idea is worth our time--just as any investor would. These questions usually distinguish the CEOs and entrepreneurs who have a good shot at being successful from those who will not:
Who is your customer?
What are their needs and why will they buy your product or service?
How can you prove that the need exists--either through an existing market or a proof of concept?
What is the customer willing to pay for your product/service and how do you know they are willing to pay this amount?
Once you have built your business (presumably that's why you need the money), what will it take for you to deliver your product or service on an ongoing basis?
What is the estimated cost to deliver your product/service to the customer on an ongoing basis?
What am I buying for my investment? In other words, what will I "own" when you are finished spending my money?
What additional investment will be required once you burn through the initial capital investment?
What would it take to do it for less? Could we invest less and learn more before committing the full amount of capital?
If I believe in the above business model, why should I believe that you are the ideal person/team to build it for me? Would I be better off investing in the business model with someone else?
Each of these simple questions can be answered in a sentence or two. Most seasoned investors will tell you that at least nine times out of 10, the average entrepreneur is too busy focusing on the "idea" to think through the basic business model. Those who have a solid understanding will easily find investors who are willing to back them.
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