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By: Michael Carnes, Equity Funding Specialist at SBTDC
Think about successful businesses. Whether a small or large business, traditionally funded or via angel or venture capital, all of these have business fundamentals that remain constant, regardless of funding source. It is safe to say that the same business fundamentals that make traditional businesses successful also make growth ventures good investment opportunities.
It’s all about the value proposition. First, and perhaps most importantly, is that successful businesses have identified a compelling unmet need in the marketplace. They know who their customer is, what problem they face, how their solution provides a quantifiable benefit, and how they are a step above the leading competitors. This is the value proposition, the foundation upon which the business is built.
While many companies start out with an idea of what their value proposition might be, most successful companies work diligently to refine and focus their efforts to discover the most compelling customer needs that their product or service address. Continual dialogue with customers to understand their problems and needs should shape a company’s offerings.
Developing relationships and having discussions with customers goes beyond understanding the customers' unmet needs. Speaking to customers also helps the business to understand competitors in the field.
Michael Porter, a well-known business academic, provides a strong framework for evaluating competitive forces in an industry. Great companies are able to speak to these forces and understand their impact on the value proposition. According to Porter, the state of competition in an industry depends on five basic forces:
- threat of new entrants
- bargaining power of suppliers
- bargaining power of buyers
- threat of substitute products or services
- existing industry rivalry
Successful businesses spend a significant amount of time and effort iterating their value proposition, and the current version is likely not what it was at the beginning. If a business does not investigate its customers, there is a real risk that it might be missing the ark.
When raising equity funding, a business can be sure that investors will be expecting it to have a deep understanding of its customer, the competitive landscape, and how the solution provides a tangible economic benefit. In fact, investors will check with these customers and their industry contacts to make sure that the core elements of the value proposition are complete.
In conclusion, we suggest you take time to think about how your company is keeping the customer in focus and how you will be intentional in your constant pursuit of a refined value proposition that addresses the points discussed above.
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