Building an Investable Product
It’s common to think of an investable company–in other words, a company worth investing in. But what about a product? Can a product be “investable?” Yes, definitely.
If you are seeking traditional VC or angel investment dollars, then you need to build a product that can be invested in. An investable product has four key characteristics:
- Positioned for a growth market or dramatic market share gain in a large but slow growing market
- Built with a business model in mind for recurring revenue
- Priced right with profit-friendly margins at some point down the line
An example of a “product” that is NOT investable is a traditional legal service provided by a law firm. A traditional legal service is not scalable; it’s whatever an overworked lawyer is limited to do. It operates conventionally in an overly saturated market of too many lawyers. There is not necessarily any recurring revenue, as most people use a lawyer once, get their issue resolved and then don’t want to hire a lawyer again anytime soon.
However, if your company is a software company that has built an automated legal service that can scale to tens of thousands of people, would save clients thousands of dollars in legal fees, redefine legal services for a generation frustrated with the traditional ways, integrate social media and legal services for desirable transparency, and rely on a subscription model that would generate double-digit profits every month from affordable, recurring fees, then you would have an investable product.
An investable product has a business model that works, generating revenue in a consistent way. It also is on a path to profitability. One way of thinking about profitability is that acquiring customers (the cost of marketing and sales) is lower than the cost of making the product or delivering the digital service.
An investable product also has scalability and growth. It can scale to thousands or millions of users, such as a social platform or a mobile app. In contrast, if there are only 1,000 possible users in a market segment–even if you can be profitable–the cap to revenue would not make the product investable. The revenue would not be worth it (unless perhaps you are selling $1 million scientific instruments with recurring revenue from consumables).
You did not create your company to be a novelty company that is a flash in the pan and then disappears. It is in your best interest in the long term to focus on developing investable products that will appeal to customers in growth markets, are priced right, can scale up and are rooted in an appropriate business model, so you make money.
As much as it may sound repetitive, this is what investors are single-mindedly seeking. The second thing they are looking for is speed–a startup fully operational within a year and profitable within three years, for example. Regarding all the companies in the market that are not profitable, the idea is that if they shifted away from growth and market share acquisition and focused on profits they can drive profits quickly. Therefore, investors will continue subsidizing the losses to capture more and more share/customers so that when the profit switch is flipped the profits come bigger and faster. Why would you ever spend time, investors’ money and your team’s immense effort to build a product that is not investable? If you are, go back to the drawing board and tweak your product development plan.Small scale investing to build recurring revenue businesses is a viable model. It is not VC investable. You’re looking for a different type of Angel, i.e. business partner, and maybe some debt once you can cover interest.