Investing in ideas

Adam Kalsey — Fri, 01 Jan 2010 20:14:05 +0000

I often hear would-be entrepreneurs who have an idea for a product or a company and are looking for investors. My advice is always the same. Build something before you start looking for money.

Ideas are cheap. Everyone has them, and most have more than one. The ability to make something work is a whole different matter.

An investor’s job is to balance risk and reward. The risk to an investor is that they’ll put in money and not see any reward down the line. The reward is some return on their investment. Institutional investors want a profit. Angel investors generally want a profit as well, but may also find their reward in non-monetary ways; the satisfaction from helping young entrepreneurs, for instance.

An investor mitigates risk by investing in things that have a great chance to succeed. All other things being equal, the farther along a company is, the greater their chance of being a success.

If you have a prototype to play with, you at least know that the entrepreneur is capable of building his idea.

If you have actual users using the prototype, you know the entrepreneur is capable of building something others want.

And if you have any paying users, even if they aren’t paying much, you you know the entrepreneur has been able to build something that people want bad enough to pay for.

Each of these steps is a reduction is risk.

The more risk an investor has, the less likely they are to invest. And if they do invest, the more expensive their money is going to be. Anyone willing to invest in just an idea is going to want a lot more of your company for their investment, because they’re absorbing a lot more risk than the entrepreneur.

Note that this isn’t a universal truth. The less sophisticated an investor is, the less this holds true. Your mom probably loves your idea and is easier to convince to invest than a VC at a top-tier firm. Friends and family money is usually invested on the basis of your personal relationship with the investor. They know you, they believe in you, they’ll invest with a lot less assurances than an outsider.

Before asking investors to commit to you, have something you can show them. Show that you’re willing and able to accept some risk. Show that you’re capable of executing on your idea. Show that they’re not committing their money to a dreamer, but committing it to a doer.

SacStarts - investing

Investing in ideas