Raising Capital

Ideas and Equity: A Tenuous Relationship

One of the early challenges faced by any startup founder is “What is my idea worth?”

Valuing a business that may have little or no revenue, let alone any profit is a difficult task and far from an exact science. But an idea is not a business, and evaluating an idea is a far easier task than you may think!

If you are the ideas guy (or girl), and believe you have discovered the best thing since sliced bread, it may be very hard to be told that your idea is worthless. It may be even more difficult to actually accept that what you are being told is true – the truth often hurts. But why is it worthless?

People don’t buy ideas

Of course they don’t. People buy products and services, an idea is nothing more than an intangible concept that exists in your own head, and maybe on a few scraps of paper.

Your idea is wrong

This may seem like a bold statement, but time and time again, startups quickly discover that what they believe people want and what people actually want are rarely the same thing. Until you start engaging with potential customers, validate through testing, iterate upon designs and ideas, and generally take positive actions upon feedback, you will not truly know what your customers want. Do this successfully and the chances that your original idea was bang on the money will be close to zero.

Your idea isn’t as good as you think

The human psyche is great at deluding itself – we have a natural ability to be optimistic about things that have little chance of materialising. There is a real possibility that what you think is a great idea, really isn’t.

Until you start talking to others about your idea you are really not going to know. Avoid friends and family – they will likely tell you what you want to hear. Speak with people who you would want to buy your product and see what they think.

All the value is in the execution

You might have a really great idea, but it takes a successful business to turn a profit. Unless you have what it takes to turn that idea into a successful business, you could simply be causing yourself a whole heap of pain and losing a lot of money along the way. An average idea, well executed is a better proposition for investors than a great idea managed by a poor team.

Your idea isn’t original

There are no new ideas, at best we can hope to iterate on something someone else is already doing. Do some research, and if you cannot find any competitors then you aren’t looking hard enough. Chances are that someone is already doing what you are doing – and doing it BETTER!

Now this isn’t a show stopper as ‘first to market’ opportunities are few and far between. There were dozens of search engines before Google came along, and they were not an overnight success. If your idea now looks like an ‘also ran’, you need to try and find some differentiators – how does your product differ from theirs, and why is that important?

Ensure that such differences are defensible. For example, you might decide how much better Facebook would be with a dislike button, and based upon that you set about building a competitor to Facebook with that extra feature. Overnight, Facebook implements the same feature and your unique selling proposition disappears in an instant – you are dead in the water!

Your idea seems great, but no-one will buy it

You may have a great product and a team that can build it, but maybe it’s not something people are willing to pay for. You may have this grandiose plan than once you have 1 million users, you’ll be able to rake in advertising commission.

If this is the plan, you probably need to go back to the drawing board. For every product that attracts millions of users, there are hundreds of others that fall short and fail. This sort of approach is so unlikely to succeed, it will not attain any real interest from potential investors.

Ideas are ‘ten a penny’

Attend any startup event, hackathon, or speak to any accelerator and you will quickly discover there is an abundance of ideas (some of them good!) There is an oversupply of ideas and an undersupply of teams that can deliver them – so where do you think the value is?

In summary

Hopefully you can see from this short selection of reasons that ideas alone are worthless. If you have nothing more than an idea, trying to raise investment is folly. Instead, focus on building a great team who can turn that idea into reality, and remember, when negotiating on equity, you shouldn’t be expecting anything for your idea.

Instead, be certain about how you are an important factor in the team, the skills that you can provide, and what your worth to that team will be. You’ll then be taking your first few steps into the world of entrepreneurship.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.