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Investors Don't Fund "Great Ideas." They Fund "Great Ideas That Have Been Proven!"

Entrepreneurs who need outside capital should get paying customers first

Now that sounds like professional investors don't want to take on risk.  There's nothing further from the truth.  That's their business, whether angels, private investors or venture capital firms - investing their capital in high risk ventures in the hopes of finding one that generates significant returns. They also have the risk of losing their entire investment if they pick wrong.

  However, there's a difference between "taking a prudent risk" (where the prime determinant for success is the belief that the entrepreneur has the ability to overcome the potential risks of the business concept) and "buying a lottery ticket" (where the prime determinant for success is a guess fueled more by pure luck than belief).  Without a proven business concept, investment in a start-up venture becomes a luck play. And they just don't do the lottery!

I do some selective mentoring of very early stage entrepreneurs.  Recently, speaking with one of them I had to deliver some tough love.  He had created an innovative business concept that had some real interesting elements.  However, as great an idea as it was, it was just that...an idea.  Like a lot of entrepreneurs, he was long on the idea, short on how he could bring that idea to reality. Instead he was focused on raising capital.

He had been spending all his non-working hours (after his normal day job) putting his plan together in hopes that he could attract professional investment capital. But, he had spent very little time really understanding how he could execute that plan. He didn't understand that as exciting an idea as it was, without some proof that it could work - e.g., actually have real customers use and maybe even pay for the service - he had, literally, no shot at any type of investment.  His passion and naivete were blinding him to the realities of why businesses succeed and why investors invest in them.

This is a common malady among start-up entrepreneurs. A great idea is not enough. But most of them don't realize it and those that do, have no clue how to address it.  Before you ever see a dollar's worth of professional investment, you need to get your idea through proof of concept. And you need to do everything you can to make that happen. Here's some guidance:  

Passion is not enough. You need to listen!
Passion is the most critical characteristic an entrepreneur needs to survive and succeed.  But it is that same passion that often blinds the entrepreneur about the realities he/she faces with their business concept.  There's a difference between being an evangelist and a zealot.  An evangelist is trying to convert folks to their belief/passion, and therefore, is open to listening to other thoughts.  A zealot has no room for non-believers.  There is but one true belief. You may believe you have the greatest business concept ever devised, but your passion strains your objectivity.  Keep an open mind.  Listen, especially, to folks who poke holes in your concept.  They're probably countless things you hadn't thought about.

Get in front of potential customers any way you can.
If you know how you can implement your concept, do whatever you need to do to "bootstrap" your concept by scraping together whatever you can to, at least, demonstrate your product or service to potential customers.  Do this before you EVER think about potential investors.  At this stage, they will tell you more about whether your idea makes sense than any investor ever could.  They will be the ultimate judge.  And maybe one of them will like it enough to work with you through proof of concept.

Your plan has to address how and why; not just what and when.
I have a saying - there are a million great ideas and about a thousand great idea executions. The numbers are meaningless, but, in my experience, the ratio is about right. That you're going to grow your business to $X millions of dollars of revenue by 2016 means nothing if you don't have a clue as to how you will do this and why people will really pay for your product or service.  A business concept without the steps to implement it is just an idea. If investors don't get a sense that you know how to bring your concept to reality, you're wasting your time and theirs.

Don't be afraid to reach out to the people who know you best.
Sometimes, getting to proof of concept requires more capital than you have access to or "bootstrapping" will allow. Then it may be time to reach out to friends and family; the people who know you best. They will believe in you even more than customers or professional investors.  They know you better. Whether it be for a loan or an equity stake in your future business.  If you truly believe in yourself and your concept, why not?  But know that this is not without its own risks. Once you've done this, your relationship with them will change.  You will be more than just a friend or part of the family.  You will be part of their future!  If you believe enough in your idea, this added burden is worth the risk.

No matter how great your idea is, investors don't fund ideas.  You need to get to proof of concept with real customers to bring your idea to reality.   Then and only then can you get their attention and, potentially, their investment.

"The Entrepreneur's Yoda" knows these things.  He's been there.  May success be with you!

Have you been there - where you thought you had a business that was really just a nice idea?  Please share your thoughts in your comments.  It can help another entrepreneur.

If you like this post, by all means, share it with your networks and colleagues.

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