It’s a classic Catch-22. One of the toughest questions consumer product entrepreneurs face is whether to raise money in order to manufacture the product, or manufacture the product in order to raise more money.
A small business owner recently posed this question to our co-founder, Will Davis. As an MBA graduate of Harvard Business School and co-founder of several companies, Will has first-hand experience with this “chicken or the egg” situation.
According to Will, it’s always best to raise money with a product — or a semblance of a product — than raising equity without a product in hand.
This is because without a minimal viable product (MVP), you’re only working off of a theory. Theories are bad for raising equity for two reasons:
- You don’t know how customers will react to a product until it’s built, and thus won’t ever truly know if you’re building the right product.
- Without a tangible product to share, you may have to discount the valuation of the company dramatically. When you raise equity at a very low valuation, the money is very expensive.
One of the most common mistakes small business owners make is developing a product or service without enough input. When you have an MVP, you’re able to ask for feedback on your differentiation or competition.
Most entrepreneurs are strapped for time and resources, so initial outreach to customers can feel daunting. In fact, these constraints are all the more reason to engage potential customers early, so you can validate the demand for your product and be sure you’re on the right path before spending more time and energy.
The same goes for novelty. There are reasons to guard new inventions, but ideas need to get messy in the real world to determine their actual viability. When you do raise equity and get into the manufacturing phase, you’ll have a clearer sense of what your initial demand will look like.
Great hacks to funding before manufacturing are the following:
- You can use debt again, but with additional cash from your sales.
- You can order more product, which reduces manufacturing costs and makes your margins larger. It’s a virtuous cycle.
Words to the wise on prototypes:
In order to vet and prove your product on the market without long periods of investment or expensive production runs, there are a couple things to keep in mind.
First, build a fraction of what you think you need to build. Most features, options, buttons and settings simply aren’t crucial to success or failure.
With that said, do not underestimate the importance of Minimum Viable Design. Your first product will likely be a little bit ugly, and that’s okay. It’s part of getting to market quickly and testing your idea in front of live customers. But don’t underestimate the importance of achieving a basic threshold for your product looking good and reputable. Otherwise, people may be embarrassed to share it.
Focus on developing prototypes to show what works and what doesn’t, to generate customer feedback, and to help investors understand your vision. This will allow you to raise equity more easily — and at a better valuation.
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