Don’t Forget Your Revenue Engine

I’m on the coach­ing com­mit­tee for a Seat­tle area angels net­work, and have been struck lately by some of the traps that fledg­ling entre­pre­neurs can fall into when pitch­ing angels:

• They “sell” us as if we were prospec­tive customers
• They fail to describe their propo­si­tion for prospec­tive investors (i.e., what their financ­ing terms are)
• They lack a dif­fer­en­ti­a­tion strategy

And very often,

• They for­get to describe how their rev­enue engine will work.

If you’d like to increase your chances of secur­ing financ­ing from angels, make sure you take the time before­hand to have good answers to the ques­tions you can expect to hear from poten­tial investors. No mat­ter which angel group you pitch, they’re all likely to ask sim­i­lar questions.

What Fuels Your Rev­enue Engine?

Angel investors are increas­ingly cau­tious about where to invest their cap­i­tal, so they tend to sub­ject entre­pre­neurs to more scrutiny than in boom times. Except for those with money to burn, angels won’t invest in your com­pany unless they understand:

• How and why you will make money
• How they will make money on their investment

What angels want to under­stand is how you plan to turn your ideas into money, and what evi­dence you have that there’s a mar­ket for your par­tic­u­lar prod­uct or ser­vice. They really want to believe that you’ve thought through the key com­po­nents of your “rev­enue engine” and that its mechan­ics are sound.

Tell Us More

For each of your poten­tial rev­enue streams, angels want to know:

• Who will want to buy your prod­uct or service
• Are there enough other peo­ple like that to sus­tain your busi­ness over time
• Why is your propo­si­tion com­pelling to your future cus­tomers – what “job are you get­ting done for them,” or what needs will you sat­isfy – and how is this bet­ter than their alternatives
• Why will they want to buy from you instead of your competitor(s)
• What value do you deliver to cus­tomers, and what will they want to pay for your service
• How often do they tend to pur­chase your prod­uct or ser­vice: once a month, once in a lifetime

Your answers will be more con­vinc­ing if you have some early mar­ket val­i­da­tion, and evi­dence of pay­ing customers.

How Will Cus­tomers Buy

What’s your dis­tri­b­u­tion strat­egy, and how will you sell your prod­ucts or ser­vice? Will cus­tomers need a trial expe­ri­ence, val­i­da­tion by trusted sources, or other proof points before they’ll be will­ing to buy your prod­uct? (Ques­tions like this help angels under­stand what it’s going to cost your busi­ness to acquire new cus­tomers – a key dri­ver for how entre­pre­neurs tend to burn through investor capital.)

Where and how will cus­tomers want to buy your prod­uct? Will you need direct sales peo­ple or man­u­fac­tur­ers’ reps to pro­vide pre­sales sup­port, or will cus­tomers pre­fer to con­duct the whole trans­ac­tion online? Will con­sumers need to see or touch your prod­uct with sup­port­ing mer­chan­dis­ing in a real-world retail environment?

How do you plan to recruit your sales or dis­tri­b­u­tion part­ners? Will they need any spe­cial train­ing, cre­den­tials or other “enable­ment” to equip them to sell and sup­port your product?

Do you have a con­trolled roll-out and dis­tri­b­u­tion plan, start­ing in a lim­ited num­ber of mar­kets, or do you want to “get big fast”? Can you finance your inven­tory if demand exceeds ini­tial fore­casts? Can you finance the impli­ca­tions (gen­er­ally multi-million dol­lar) of get-big-fast strategies?

Note that angels tend to be cyn­i­cal about grandiose nation-wide dis­tri­b­u­tion plans when a start-up has no prior track record…

Why You

Me-too prod­ucts and ser­vices aren’t very inter­est­ing to angels, because it’s hard for investors to believe they’ll (a) ever get their cap­i­tal back and (b) earn a mul­ti­ple on what they’ve invested. Trusted brands and known sup­pli­ers have a huge advan­tage over start-ups unless there’s a clear and com­pelling advan­tage to your prod­uct or ser­vice – one that is read­ily appar­ent and mean­ing­ful to customers.

What sets you apart? How do you prove it to would-be cus­tomers? Is it eas­ily explained, or must cus­tomers expe­ri­ence the prod­uct first before they under­stand its advantages?

Can you sus­tain this advan­tage over time? How sig­nif­i­cant is this “edge” to your cus­tomers? Will they pay a pre­mium for prod­ucts with this advan­tage – or be will­ing to take the risk of doing busi­ness with a start-up?

Because there’s a risk in buy­ing from fledg­ling com­pa­nies, your dif­fer­en­ti­a­tion has to be com­pelling enough to cus­tomers to help them over­come the per­ceived risk in doing busi­ness with a com­pany that might fail – a sit­u­a­tion that could leave them unable to get ser­vice or spare parts.

You may also find it impor­tant to think through your dif­fer­en­ti­a­tion strat­egy as a part of what it takes to recruit sales peo­ple, biz dev folks, or chan­nel part­ners. Like angels they want to under­stand how doing busi­ness with you – or join­ing your com­pany instead of oth­ers – will trans­late into money in their bank accounts.

Where Can You Get Help

Start by doing some home­work online – there’s a huge amount of infor­ma­tion scat­tered across the Web.

When you’re ready to engage in dia­log or seek help from peo­ple, there are lots of resources for entre­pre­neurs – at least in major urban areas. Per­haps your state or coun­try has entre­pre­neur­ial or eco­nomic devel­op­ment zones, with sup­port­ing incu­ba­tion ser­vices. Maybe there are incu­ba­tors with advi­sors in your city. Check out the com­mu­nity col­leges to see if they offer classes in entrepreneurship.

Look for pro­fes­sional asso­ci­a­tions like Seattle’s North­west Entre­pre­neur Net­work, or “uni­ver­si­ties” that are run peri­od­i­cally by lead­ing angel net­works. These asso­ci­a­tions are gen­er­ally set up to share best prac­tices, war sto­ries, and help entre­pre­neurs con­nect with founders who’ve been suc­cess­ful with prior start-ups. They can also help intro­duce entre­pre­neurs to ser­vice providers who focus on the start-up world.

There are thou­sands of con­sul­tants who are will­ing and able to help – but fig­ur­ing out how to pay them may be a chal­lenge for very early stage companies.

And for peo­ple who really want to think through their rev­enue engine, there’s a won­der­ful book by ser­ial entre­pre­neur Steven Gary Blank, The Four Steps to the Epiphany: Suc­cess­ful Strate­gies for Prod­ucts that Win. There are many busi­ness books on the mar­ket, but this is one of the ones that’s most insight­ful for the spe­cial chal­lenges of early stage ventures.

Tagged as: angels, early stage companies, revenue strategies, start-ups