Situation: A company is transitioning from a service model to a product model. A major challenge is meeting funding needs during the transition. Funding sources perceive the current service model as heavy on cost of sales vs. implementation and this hinders acquisition of funds. The CEO sees this as a short-term problem as the company will quickly start to generate more cash through the product model. How do you transition from service to product?
Advice from the CEOs:
- In a competitive funding environment, it is important that the offering be credible. While others may be offering similar solutions, believability will prove to be a strong differentiator.
- Where to focus over the short term?
- Create a hybrid model as a transition between the current service offering and the planned product offering. Demonstrate that current customers have responded favorably to the product/hybrid opportunity.
- Test this concept with an investor. The story is that the company needs funding to get to a saleable product model.
- What is the message to investors?
- Helping the company to achieve a short-term and very feasible objective gives the investor the following advantages: purchasing at a lower valuation, getting a larger share of the company for less, and at a low risk.
- As the valuation of the company increases, the earliest investors will get the best deal!
- During meetings with investors, ask them for advice on the current and following rounds and financing, and what they will find most appealing.
- How do you mitigate the risk to the first investor?
- Have a solid business plan and projections that have been vetted by others.
- Have a list of referenceable clients.
- Utilize the current service model and demonstrate the product/hybrid Package. Build a case on the advantages of the hybrid model including the financial case. The company is always there to provide back-up assistance to meet customer needs in the hybrid model.
- Demonstrate flexibility – the customer can always choose the service model or convert to this if they wish.
- A Key Point: You are selling yourself as the trustable resource, not the product or service.
- Reference previous investment including founders’ investments. The founders did not invest to fail!