Be Our Guest is a new feature on the EC blog highlighting thought leadership from our community - advisors, entrepreneurs, members, and more.
Today's post is by Kris Kelso. Kris is an entrepreneur turned executive coach. He has founded multiple companies, is an advisor at the Nashville Entrepreneur Center, and is an Executive Advisor with The Alternative Board. You can learn more about him at https://www.kriskelso.com and https://www.linkedin.com/in/kriskelso.
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If you’ve ever raised money for a startup, you know there are a handful of important pieces of information to include in your investor presentation. You have to be clear on the problem you solve, who your customer is, and what makes your product unique. You also have to show that there is a clear market opportunity, and that money invested will generate returns.
At the most basic level, though, every business model and investor pitch in the world boils down to two core ingredients: Facts and Assumptions.
Over-simplification? Maybe - but it’s critical to recognize the difference between the two. There are elements of your pitch that you know and can prove to be true, but there are also many elements you simply believe to be true, but have not yet validated.
This can include everything from the market size and product feature set to whether you are the right person / team to execute on this vision. As you talk to a potential investor (or customer), the listener is subconsciously sorting the truths and assumptions. Essentially, they’re sizing up your story to determine how much of it is believable.
- Assumption: This is a huge problem, and people are willing to pay for a solution.
- Fact: We've personally interviewed over 300 prospective customers in the 18-35 year old, urban dwelling demographic. 80% confirmed that this is a pain point, and said they'd pay an average of $50 per year for our product once it’s built.
- Assumption: We will attract customers on-line through advertisements and social media.
- Fact: We ran tests on two channels, and found that $1,000 of spending produced a 24% conversion rate, resulting in $12,000 of potential revenue.
- Assumption: With funding, we’ll be able to attract top-notch talent to grow our team.
- Fact: Here are the profiles and experience of the advisors who have signed on and are excited about our project, and here are several candidates who are interested in senior positions when we are ready to scale our team.
Note that there is nothing inherently wrong with these assumptions. In fact, they are a critical component of entrepreneurship. Without those theories and deeply held beliefs, no one would put their time and money at risk in pursuit of a business idea. If we waited to act until we had proven every fact, nothing great would ever be accomplished. Business involves risk, and those risks are taken based on assumptions.
However, it’s a dangerous mistake to confuse assumptions and facts, or to misrepresent one as the other. Your primary job as an entrepreneur in an early-stage company is to continually and persistently convert assumptions to facts. In order to do that, you have to honestly distinguish one from the other.
You need to look at every single element of your business model and investor pitch, and ask yourself whether it is a verifiable fact or just an assumption (no matter how much you believe it to be true). For every assumption, you need to run some sort of experiment or research effort to test, validate, and/or adjust it.
The best measure of progress in an early-stage business (particularly one that is pre-revenue) is the strengthening of the business model and plan by converting assumptions to facts. As an entrepreneur, you should regularly ask yourself - “What is one thing about my business that I believed to be true a week ago, that I now know to be true?” If you can’t come up with an answer, you likely haven’t made real progress.
On the other hand, if you can answer that question each and every week, you are well on your way to having a solid business model, and potentially a great investment opportunity.