product value proposition

An investment value proposition is the overall monetary value an entrepreneur proposes his company will deliver at some future point to the investor in exchange of the investor’s money. The exchange the investor is looking for is a higher multiple return on the capital invested in this company than what could be derived from existing public market instruments such as shares on a stock exchange.  Investors look for higher returns because of the risks involved with entrepreneurial companies however wage their capital in the hopes the returns will be far higher than traditional investment instruments.

Elements of an Investment Value Proposition

A product value proposition has a number of critical elements that form the value offering to customers.  The design of the product is tailored to the unique needs of the target customers.  It addresses the problem and capabilities better than competitors thus creating differentiating advantage in the marketplace.

An investment value proposition is very much like a product value proposition but with differences in the elements of value. The key elements important to investors are described below.

The Nature of the Business and Market

The type of business a company is building and the nature of the marketplace in which it will operate is a major starting point in the evaluation of investment opportunities. The reason for this is high adoption rates in large growing industry sectors provide fertile ground for scalability. What is meant by scalability is the ability to grow a company based upon high metrics of market size and growth rates in an industry which ultimately lead to higher returns for the investor. To use the axiom, “high tides raise all boats” that means in a large, fast growing market opportunities abound for a company to be successful.  These conditions signal to an investor the right fundamentals are ripe to look deeper into an investment opportunity. This is why many investors look at industry sectors well over a billion dollars in size and double digit growth rates.

Understand the Market Need

Investors want to know if the entrepreneurial management team has a comprehensive understanding of the customer and how to satisfy their needs.    The product offering shouldn’t be a “half inch drill”; it should be a “half inch hole”, that is it should be a product that is a solution to a problem. Using solid market research and analysis, entrepreneurs can improve their chances of securing the investment required by knowing what solutions matter to their customers.

Sustainable Competitive Advantage

Another factor influencing an investor’s decision is whether the business has a competitive advantage and if this advantage is sustainable.

Competitive advantage can diminish over the course of the business due to many reasons. Customers’ perceptions to the product may change over time. Their requirements and needs may change. New competitors will enter the market. Or simply, patents and legal rights held over a proprietary technology or invention might expire. Whatever the reason, entrepreneurs need to demonstrate that the business model identified for the company will be sustainable.

The Management Team

No matter how impressive the product or how lucrative the market opportunity, a capable management team makes a tremendous impact on a company’s success. As it has been observed, the quality of the management team is the deciding factor.

The Milestone Plan

Developing a milestone plan and meeting the milestones as set forth in the business plan demonstrates to potential investors the capabilities of the company through “real live” performance executed by the management team.

Reaching significant milestones that create step-ups in the share price has a powerful benefit for founders and investors. Demonstrating value is the basis of creating a solid investment value proposition.

What Investors Don’t Like to See

The following five mistakes should be avoided when dealing with investors – committing any of these mistakes, even once, may compromise the chance of sourcing the required capital:

• Not explaining the problem the product is solving – In other words, failing to communicate how the product will ease customer “pain”.
• Falling in love with technology and ignoring customer needs.
• Stating there is no competition for the company’s product – Any product has at least some sort of competitive substitute. For example, although the first fax machine had no direct competition, there certainly were other means of delivering messages such as the telephone and postal mail.
• Failing to prepare a detailed financial plan – Entrepreneurs need to demonstrate they know their numbers inside-out and that they have done detailed and careful financial analysis.
• Claiming the financial forecasts are conservative – The moment entrepreneurs say the phrase “we prepared conservative projections” they signal to investors their naïveté. There is no room for wide-eyed optimism.