Entrepreneurs need to prove your product sells first before asking investors to fund your business. That means you need to get creative to build enough start-up capital to prove your model.  The last thing investors want to get stuck with is your inventory that didn’t sell.

Proving your product sells first also includes proving that you can make a profit on each unit sold. That means you need to know what your cost is in the product and then know what industry standard margins are so you are meeting those numbers. Smart investors will ask for those numbers and if you don’t know, they’re walking out the door.

I recently received a business plan where the Entrepreneur is negotiating placement with a company that has a huge list and sell products and services at a discount. I’m sure you know what the company is, but I’m not naming them. The deal is to offer 10,000 units of a product through their list.

I haven’t asked, but I already know the answer. The company with the list is not buying or guaranteeing the sale of the products so the investor would have to take the financial risk. What makes this deal even worse is the discounted prices that destroy product margin.

To make this type of deal work, you’d need to have a place to sell the inventory if it doesn’t sell through this channel. This Entrepreneur needs to anticipate unsold units and calculate carrying costs into the margin.

This Entrepreneur is seeking investors to fund the launch and at terms that are not favorable to investors. This deal won’t fly without major changes to the executive summary, the offering and most importantly, documented proof that this product will sell at a healthy margin.

This Entrepreneur Needs to:

  • Manufacture a small run, say 20 to 100 units and then prove that these units can sell with a strong margin based off the larger runs.
  • Forget the deal with the list company. They are a discount offer and the margins are too thin. This could bankrupt the company before it even gets off the ground.

Tomorrow, I will write more on the same deal.