Apr 10
29
Getting Your Project Funded – Some Basic Rules Of Engagement
Pretty much everyone that I meet has a pet project that they want to take to market, or knows someone who has one.
But almost invariably when the discussion turns to what needs to be done, the person at the center of the play – the entrepreneur if you will – has a misconception about how to get traction, particularly if they are new to the field of play.
Earlier of this month I had several meetings with someone who had started a company and wanted to do a seed capital raising. She wanted me to help polish her pitch and her plan. (I ended up not going forward with the engagement because there was an unwillingness to address the core issues of who the customers actually are and what they are willing to pay for – covered below). Then yesterday I had a meeting with an author who has written several manuscripts and wants to get a publishing deal. Both of them had a similar problem, although they probably don't see it this way. They want to push a button and go from zero to – deal done and dusted…
In the case of the company, the founder had bootstrapped the business (a Web 2.0 play) with about a hundred K of her own money to get software development, corporate governance in place etc – and had written a biz plan, which is a healthy start. She had done some pitching, and had failed to get engagement or to close. When people don't close you have to ask why. It could be that the pitch is muddy, which this one was. But it also appeared that a lot of the assumptions about the business model didn't get me excited. Certainly when I tried to look at it not from the point of view of how cool it was, which was the founder's point of view, but from an investor point of view, I couldn't see why I would get motivated to write a cheque. Paying money takes you beyond coolness.
The entrepreneur needs to get laser clarity on who the real first customers are going to be and what they want – want so much that they will pay for it. She didn't want to go down that road. She felt that to deal with the concept of corporate customers would mean that the coolness factor would be diminished for the bulk of the people that would use her service and would move the model to a B2B structure. Instead she wanted to run a B2C business reliant on ads for the revenue. Well, ads are a fine way to generate money when you have serious online traffic once you get there. but generally you have to do some serious marketing to get to that point and that requires having a nice bank roll before you start.
If I am investor, I have to take a giant leap of faith to invest in an absolutely virgin business with no track record where the entrepreneur says to me, “I am going to create something that is so cool that people from all around the world will come and visit”. Because if you look at the data – and it is freely available – you will see that online ad revenue, while massive, is only massive because of the enormity of the global audience. When you look at the fraction of conversion from banners, and google ads etc, you would not want to be taking a big risk on a start up with no history – particularly one with an esoteric value proposition. On the other hand, if you come to me and say, “look, I have had direct conversations with these companies, and I have identified the things that they feel they need and I believe I can supply them by doing what I am doing. They have a budget for consumer research that is x and I can probably deliver what they need within 6 months if I generate only a small volume of traffic providing the cool stuff that is at the heart of my value proposition…” I start to get interested.
I think, “ahh – this business is not reliant on mega traffic to generate money. Their play is to generate a small amount of traffic in order to acquire indicative consumer information that is currently a known pain point, and there is a known value for the kind of information that is going to be generated, and there should therefore be a strong potential to convert small traffic into sustainable revenues”. This is a model that has a reduced threshold of risk. It may not be as sexy, but it starts to look investible….
Entrepreneurs have to understand that the first customer that they have to sell to is the investor.
The investor has to be convinced to hand over real dollars from a real bank account. And what do they get in return? Pieces of paper that say essentially, “this is a share certificate for x shares”.
Not a very appetizing exchange in my opinion, unless attached to those share certificates is a concept that is so blindingly simple for the investor to understand that he or she can go home and explain it to his or her spouse or to the guests at a dinner party and for those second and third degree people in the network to “get it” too. In other words the concept has to be equivalent to a meme – an idea virus….
In the case of the author looking to get published, the steps forward are not really much different.
You have a manuscript. It is a ripping yarn. Just like in the Beatles' song about the Paperback Writer, “It took me years to write, will you take a look?”…
Where do you take it? What do you do with it?
If you really have a desire to dance with death, you self publish. You might make 100% of the revenues, but the revenues are going to be really small unless you really have your act together and understand the whole book creation, distribution and reader ecosystem.
What you want, is to get a mainstream publisher to take you on. And because mainstream publishers are very busy and have very tight margins they like to de-risk their investments just like the investor in the Web 2.0 start up does. So they prefer the books that they consider to be pre-qualified by literary agents. They don't care that the agent is going to push the price of an advance up as high as the market will bear. That actually helps validate price and helps de-risk the investment, paradoxically.
What the publisher wants is for the agent to provide them with a rationale, pre-shrunk, of what the economic and social drivers will be to enable the book to recoup the investment…. Pretty straightforward due diligence stuff to be honest.
But this means that, as an author, your target customer is no longer the public who will ultimately buy your book; it is not the retailer who will stock your book; it is not even the publisher who will provide the editor, the marketing clout, the distribution clout and the PR. Your customer is now one person – a literary agent!
Now there actually aren't that many good literary agents around and the ones that are good are spread over the planet. Some live in the big cities of the world and some live in the country. They have one thing in common though. The successful agents ply their business across their networks based on high levels of trust. When they present a new author as the next big thing, they have to ensure that they too have pre-qualified the product and the person. Their reputations are their greatest asset.
The task now is for the author to identify an agent to deal with and then to create a presentation to that person that is going to convince them that they should take you on. That means in turn that the author needs to start preparing the due diligence book that will get them through the door and into a meeting remembering always, “First impressions are best impressions and you only get one opportunity to create a first impression”.
The sorts of things that you migh need, as an author, are:
The elevator pitch. One page of copy that sells the reader on why they should pick this book up.
The target market for the book – the End User. The in detail profile of the early adopter customer; the person who is going to tell all their friends about the book. Dan Brown didn't start with The Da Vinci Code being the biggest book in history – he finished with that. Imagine where he started… Just like you – trying to figure out who was going to represent his manuscript.
The price point for the book, and where it will fit in the racks of the book shop, and who is going to interview you and why, and…. You need to think of all the questions that you would want answered if you were going to invest a lot of your time and money in this project. All those considerations are critical for the literary agent to know that you have thought through so that he or she doesn't need to educate you to start with.
And then there is the most important thing in the whole deal – “who do you know?” It always makes life easier if you can get a door opened by someone who knows someone…. And when you think about it you probably already have in your personal network someone who can help you get the first meeting…
Its not easy to do all this. It is actually really hard, and you will almost always miss something. But the fundamental issue is this: identify who your real first customer is first. Figure out what they want in order to make a purchase decision. This is tricky because to do this you have to imagine and then map the business ecosystem that you want to operate in – and a lot of people don't understand this… However, it can be done, and if you can figure it out yourself, the lesson is much more valuable than if you just read about it…