The first issue we see nascent entrepreneurs almost universally attempt to address is the perceived need for working capital. When we ask how much investment they believe is required to get their product to market, they never can justify what they identify as their magic number. I have yet to read a business plan that can justify the assumptions that are utilized to support the capital investment being sought, ever, and I read dozens of business plans each month.
My consulting firm reviews hundreds of new product ideas every year. Many have wonderful commercial prospects. However, almost none of the entrepreneurs offering these opportunities for funding have considered all of the possible avenues available to launch their idea. Funding is the “Holy Grail" in the eye of most entrepreneurs, and yet, a capital raise is the single hardest route they can attempt to utilize.
Investors, unless family or friends, demand a very high level of due diligence before they will stage a capital investment. Strong management, a clearly identifiable Unique Selling Proposition (USP), first mover advantage and a 35% return on invested capital kicking in between months 24 and 36 of operation are the basic guidelines typically utilized when underwriting opportunities. These are standards that very few entrepreneurs and inventors can achieve.
There are many ways to “bootstrap" new products or services before seeking a financing round. They are not glamorous, more like the old parable of the tortoise and hare. These strategies require the oldest trait known to inventive man: simple hard work!
Here is an example of a product that we recently “bootstrapped" to a successful market launch, and subsequent funding relationship. I received a call from a gentleman who owned a construction business. After initial platitudes, he advised me that he had created the world's greatest barbecue sauce. We receive a lot of food products for review, and every single one is accompanied by the old bromide, " it's the best in the world". I was wary.
Mr. Barbecue Sauce sent me a box of his three sauces to sample. They were very tasty. I advised him that the taste was surely excellent and potentially commercial but that he would have to utilize more of a “guerilla" marketing strategy than his hoped for investor funding round. We wrangled for several months. He approached other consultants and food industry experts before finally coming back to us and agreeing that he needed to utilize a “plan B".
We contracted to write and execute a business plan for the launch of the sauces. We engaged the services of a dietician, a licensed food product private label source, a graphic designer and a packaging resource. We perfected the label statements and content values of the product. Then we conducted a focus group, obtained testimonials for attribution, and prepared sales collateral.
When the product, packaging and sales materials were market-ready we approached independent and regional purveyors of high-end gourmet food products. These types of retailers are much easier to work with, barriers to obtaining shelf space are small and they are keen to enjoy exclusive distribution of select items. Each door that was initially opened agreed to a schedule of product samplings. We set up a table on an aisle end cap, cooked top quality sausages and asked shoppers to choose which of the three styles of sauce they would prefer on their taste sample. We had an inventory of product on the end cap gondola with a special introductory price.
The results were gratifying and confirmed our assumptions that the barbecue sauces were truly commercial and consumer acceptance would be strong. The samplings lead to strong initial sales, but much more importantly, in subsequent weeks repeat sales began to grow without the aid of sampling.
Geographically, the client fanned out to the nearest markets and repeated the same limited, controlled roll out strategy. The results were always the same, a bit of a cult product was beginning to germinate.
For most of the first year of distribution we utilized the “tortoise and hare" approach. We then identified a gourmet product trade show in Orlando, took a stand and sampled the sauces just as we had in the first local gourmet products stores in the owners hometown. The difference is this instance, was that we were sampling, and taking orders from retailers from all over the United States and internationally, key decision makers in the gourmet product industry. Also, because the product was positioned as a gourmet foodstuff, price points reflected the sauces higher perceived value and the products were not buffeted by mass market discounting.
The entrepreneur had invested some reasonable amount of his own money, but this was mitigated by the go-slow approach we had undertaken. His initial sales funded the controlled rollout of the sauces to additional regional markets. He had not diluted a single percentage of his ownership by taking on investment partners. The growing order book from new retailers and repeat purchase orders were valued by his bank and he was introduced to the merchant bank division to establish a line of working capital.
Mr. Barbecue Sauce came to us with the notion that he needed $350,000 to fund the launch of his enterprise. As we initially quizzed him, he realized that he would really need to raise more like $1.2 million to realize his goal. By being open to alternative ideas, he avoided a huge pitfall that most entrepreneurs fall in too: raising $350,000 and failing is expensive, raising $1.2 million in order to insure success is cheap.
In this case, Mr. Barbecue Sauce was fortunate that there was an alternative strategy readily available to customize for his product. He mitigated risk, limited financial exposure, test marketed the product, extrapolated market potential based on real sales numbers and enjoyed the secure knowledge that the product was commercially viable without being at the mercy of investors demanding strict performance markers be constantly achieved.
Most entrepreneurs with truly commercial projects have many more options available to them than they ever consider. It is amazing how few projects are really fundable, and yet, investor funding is almost always the preferred route they choose to undertake. “Bootstrapping" is almost always the last alternative considered. Successful inventors, entrepreneurs and small businesses will always do whatever is legally necessary to achieve success. Anything less is the equivalent of dreaming.
Geoff Ficke has been a serial entrepreneur for almost 50 years. As a small boy, earning his spending money doing odd jobs in the neighborhood, he learned the value of selling himself, offering service and value for money.
After putting himself through the University of Kentucky (B. A. Broadcast Journalism, 1969) and serving in the United States Marine Corp, Mr. Ficke commenced a career in the cosmetic industry. After rising to National Sales Manager for Vidal Sassoon Hair Care at age 28, he then launched a number of ventures, including Rubigo Cosmetics, Parfums Pierre Wulff Paris, Le Bain Couture and Fashion Fragrance.
Geoff Ficke and his consulting firm, Duquesa Marketing, Inc. (http://www.duquesamarketing.com ) has assisted businesses large and small, domestic and international, entrepreneurs, inventors and students in new product development, capital formation, licensing, marketing, sales and business plans and successful implementation of his customized strategies. He is a Senior Fellow at the Page Center for Entrepreneurial Studies, Business School, Miami University, Oxford, Ohio.