Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast. The Angel Connection is published weekly.
RESEARCH TRIANGLE PARK – I often see value propositions that don’t show real value.
Explaining the value of your product or service in glowing superlatives and technical advantages comes up way short of portraying the return on investment that your customer needs to justify a purchase. Investors need to be convinced that your proposed buyer will really buy. A quantified value proposition that is compelling and intuitive will greatly increase your chances of convincing them that you have a solution that will sell.
A typical section of a business plan is an exhibit that explains the benefits that your product or service brings to your customers. These benefit statements have to answer the question, “so what?” It is insufficient to list benefits that simply explain what a product does, as follows:
• The service increases accuracy in selecting emergency procedures
• This repurposed drug quickly reduces acute fever
• This device has greater memory capacity
The investor is left with the question as to what is the resulting benefit to the buyer. Each one of them needs another phrase to bring home the point:
• The service increases accuracy in selecting emergency procedures, reducing emergency room errors and associated costs by 50%
• This repurposed drug quickly reduces acute fever, potentially saving the lives of 75% of the 20,000 patients who die each year from acute fevers and reducing typical intensive care costs by 10%
• This device has greater memory capacity, increasing throughput by 45% resulting in a comparable reduction in future equipment costs for these devices
Every value proposition for a “must have” kind of product or service should result in a clear financial result for the buyer. This takes careful thought to identify the real financial benefit of your solution. Some entrepreneurs say this is impossible. I say, if you cannot do this, then you don’t have a viable value proposition. You must be able to show what the financial return will be, and over what period of time, for the purchase of your product or service. Some things to look for are:
• Increased sales productivity leading to increased sales revenue
• Product cost savings that improve gross margins
• Reduced operating expense that improve net profit
• Personnel productivity improvements that result in real staff reductions
Don’t fall into the trap of claiming benefits that really don’t result in relevant financial improvements, like:
• Process efficiencies that do not reduce staffing requirements
• Savings that do not effect the P&L
• Savings that are too far in the future to be relevant to the purchase decision
Return on Investment (ROI)
At the end of the day, a viable ROI has to be presented. Your potential customers have limited budgets. If the ROI you offer doesn’t bubble up to be a top priority for your customer’s spending plan, you will not achieve your sales objectives. Investors want to see high multiples for the return over a short period of time, convincing them that your solution is a “no-brainer” for a purchase decision.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.