There are many reasons entrepreneurs seek funding for their businesses. They may be ready to ramp up manufacturing and lack the resources to do so. They may need the capital to invest in getting the word out about the new product they've developed. Often, they simply need access to the many valuable resources investors have at their disposal.
For many business founders, though, investors bring a far more important asset to a startup. Most investors are experienced professionals who can bring experience and insight to a particular business. In the sixth episode of Entrepreneur's new streaming series Elevator Pitch, we meet a group of founders who were desperately in need of this type of expert guidance. Here are three important lessons entrepreneurs can take away from the episode.
Investors are consultants.
First up in the episode were Jared and Karina Rabin, the husband and wife team behind Hang-O-Matic, a popular picture-hanging tool. At first these two drew "bait and switch" concerns. They spent most of their pitch talking about their already-successful product, and then suddenly revealed they wanted investment in a newer tool. Know that in these situations investors will usually want a piece of the original, successful product before considering anything else. They'll probably send you packing otherwise.
So, the investors agreed to let the Rabins up to the boardroom, but if the investment wasn't specific to the original tool, they weren't interested. After all, the couple already made clear they had more than enough in earnings to fund their planned new product.
Fortunately Jared and Karina revealed quickly their primary interest was in finding a business partner who could advise them as they moved their company forward. That means they were just fine with investors taking a stake in the original product, not just the newer one. The investors were immediately interested, agreeing to serve as a team of consultants in exchange for equity in the company. This was a perfect fit for the couple, who were exhausted after years of working nights and weekends to build their company. The success of this pitch clearly shows that investors can be highly valuable advisors to their portfolio businesses. Be open to the idea that this could be just the relationship you need as well.
Conduct market tests first.
Dawn Maslar, author of the book Men Chase, Women Choose, approached the panel with a product called a Devotion Test. After sampling a man's saliva, she said, the test can detect whether a man is committed to the woman he's currently with. The panel was feeling a bit unsure about Maslar's product but they were curious enough to invite her into the boardroom anyway to hear more.
Once inside the boardroom, Maslar failed to win over the investors. Their biggest objection was they simply weren't convinced there is actual customer demand for her test. With a sales history or proven market research, she may have been able to debate this objection. She didn't have that though. All she actually had her own opinion. The investors' decision to opt out demonstrated the importance of having market data in place before approaching investors.