By Anders Hoffmann
When I ask entrepreneurs about their biggest challenge, the most common response I get is “access to capital”. But why is that the case? Are bankers stupid and venture capitalists ignorant?
Well, maybe some are but most of them simply react to what they see: very committed and passionate entrepreneurs often with little understanding of the profit engine that fuels their venture. For example people in the field of social entrepreneurship often have a basic business model that says “please give me some money so I can do something good for somebody unrelated to you but in great need”. Friends, sorry to say but this is not entrepreneurship - it is aid.
Entrepreneurship is about creating value and capturing some of the value as profit. The profits can then be reinvested in the venture so it can expand. Profits are good in this respect. It is what you do with the profit that should be judged on the moral scale.
What about creative entrepreneurs are they similar to social entrepreneurs? I challenge you to ask yourself three seemingly simple but actually quite difficult questions:
Does your company solve an unsolved problem or solve a problem in a better way then other firms?
How much are people willing to pay to get the problem solved (or how much value do you create for each customer)?
Which customers are willing to pay the most for getting a problem solved?
I am often surprised that many entrepreneurs fail to answer the first question in a meaningful way. You know what you do, but not what problem you solve for your customers. The ability to answer this first question brings you closer to understanding your business.
The answer to the second question will tell you whether your business can survive in the long run. If you create less value than your cost, or you need to get 1% of the world market within one year to break even, then…
The answer to the third question optimises your business and is really important for scaling. In the beginning you often serve all types of customers but if for example you want to export you need to know which segments of the market you should target first. You cannot serve all.
Putting the answers of all three questions together creates your profit engine and will help with getting access to capital. But remember, you make the most profit from customers so start selling as early as possible.