I’ve been told I need “proof of concept”. What is this exactly?
Monday, July 25, 2011/
I’ve been told a few times that I need “proof of concept” for my business before an investor will provide me with capital. What, exactly, constitutes proof of concept and how do I know if I’ve attained it?
I can’t know exactly what each of your potential investors had in mind when they asked for a “proof of concept” (POC), but I’ve asked for many POCs and I can certainly tell you what I am thinking.
In a nutshell, having a POC is about risk mitigation.
When an entrepreneur pitches an opportunity there are always a number of premises that underpin the rosy outcome.
Premises are often in the areas of:
- Customer acquisition.
- And/or business model.
Each premise generally constitutes a risk factor. The point of a POC is to reduce or eliminate the risk that the premise is not actually true.
And by risk, I mean risk as perceived by the investor. Everyone comes to the table with a different set of experiences and knowledge base; they would each assess the risks around those premises differently.
When I ask for a POC, generally I am asking to see a demonstration of an aspect of the business to reduce my perceived risk around one or more premises.
Most often a POC will centre on a technological risk. So for example, if your pitch was to start a business that would solve the world’s energy problems through a cold fusion reactor, then I might ask to see a POC around generating a small amount of energy from a cold fusion reaction, such that the energy input was less than the energy output.
If you could show this, I would be willing to accept the risks around the premises that (a) there would be market demand for such a product, and (b) it can be done on a large scale.
But sometimes a POC might focus on the business model. An investor might still ask for a POC that illustrates the value of the long tail for a given business in a particular sector.
In this case the POC might be to run the business on a very small scale – say just within one suburb – and show the revenue potential justifies investing in growth.
Coming full circle, if a potential investor asks you to demonstrate a POC, then your first order of business is simply to ask what particular concerns the investor has (if they haven’t already told you), and think of a POC or trial or pilot program that would mitigate that risk, including defining end points.
Most savvy investors will share the same concerns, so a well-constructed POC will be paramount to your fund-raising, and, you never know, you as the entrepreneur may learn something that improves your offering too.