Proof of Concept
Posted by Trevor on 23 March 2012 | Post a Comment
It’s hard to place a value on an idea when there’s no evidence to support that value, no matter how great you think the idea is. You might be convinced that you will turn it into a billion dollars one day, but the investor sees nothing but hope. And as much as she wants to invest someone’s hard earned money in your idea, how can she without knowing that there are sales or customers lined up waiting, without knowing that the idea is workable?
What works very well to provide that evidence is to run a proof of concept. This means starting smaller and investing your own money, heart, and effort in a model or scaled-back version of the concept. If you can show that customers respond to the idea on a small scale, then investors are better able to see how the business will respond to an injection of capital, and you’re more likely to get the capital you need. Proof of concept works. I know because I’ve used it.
I had a great idea for a business that utilized a unique infrastructure. I believed it would produce higher gross margins than a traditional infrastructure would. Potential investors praised the idea but struggled to move from interest to belief because it was unique.
I needed proof that the idea was solid, so I acquired a product that was smaller than the ones I was targeting and built the business model around it. It cost me a few thousand dollars, but was well worth the price as I used it to get all the kinks out of the system. Six months later I showed potential investors the numbers my proof of concept had generated. Although we were now looking at numbers in the thousands, whereas we had been speaking about a multi-million dollar investment, they could grasp the concept better. When they saw the gross margin of 85%, it was not difficult to convince them of the potential for their investment.
You need something to convince your investors of your idea’s soundness. A proof of concept works best. But if you can’t do one because you are struggling for cash and find it to difficult to do, come to the table with customer feedback. Perhaps there are distributors you can visit to showcase your idea. Their opinions might sway an investor more than yours do. There could be a trade show where you can hire an exhibition booth and conduct a potential customer survey. You can put information on-line and offer incentives to anyone who completes a simple survey.
In some way you have to show the investors that enthusiastic customers exist. Otherwise you won’t get the capital you need.
[toggle title=”Click for Photo info” class=”toggle2″ titlebg=”#af8400″ contentbg=”#af8400″ title_color=”#ffffff” ]The photo that accomanies this post is looking out from Main Street, Bellevue, WA across the Eastern edge of Lake Washington toward Seattle. [/toggle]