“The bigger the problem, the bigger the hero.”  If you solve a big problem for a lot of people, then investors and acquirers are far more interested in your business.

Investors and acquirers want to know:

• What problem you are addressing
• Who currently suffers from this problem, and the nature of their “pain”
• The market potential for solving this problem.

I use a number of tests when I ask clients how serious the problem is that they are solving.  One of them is:

• “Will people die or go to jail if they don’t use your product or service?”

Initially, some people think I am being dramatic, but it is not as silly as it sounds.  I use “go to jail” as shorthand for committing any offence.  You might just get a large fine, or you might actually go to jail if it is serious enough.  For example, you “go to jail” if you:

• Don’t pay your employees at the proper rate
• Fail to pay the correct taxes
• Fail to lodge accounts by the due date.

To solve this problem, every business must have an accounting system.  You just have to. The companies that solve this problem in Australia are MYOB and Xero.  They keep people out of “jail.”   They also have sky high valuations as a result:

• Archer Capital sold MYOB to Bain for a reported $1.2b in 2011, nearly four times what it paid for it four years earlier.
• Xero was valued at NZ$2.38b in 2013 after a capital raising to expand internationally.

A less dramatic way of putting it is, “are you solving a problem worth solving?”

A new type of tissue box cover that updates old tissue box covers does not address a problem worth solving in the eyes of most investors or acquirers.  They consider the problem of whether or not your tissue box cover is up-to-date as a “first world problem” – one not worth solving.  

Here’s the nub of it: if your product or service has many competitive and substitutable offerings, or is highly discretionary or optional for the customer, then finding investors will be difficult and there will rarely be a premium on sale of such business.  I am being kind here.  Professional investors actually describe these sorts of problems as “delusional” or “scuba gear for dogs.”

On the other hand, investors and acquirers will be interested if there is a compelling need amongst a large number of consumers to buy your product or service to:

• Avoid a high degree of physical or even psychological pain,
• Avoid severe penalties or costs, or
• Obtain or maintain a competitive advantage.

It is even better if they must have your product or service right now.

One question that seems to arise on this test is “how do you explain the success of luxury brands?”  The “problem” of a another new handbag may be a first world problem, but I would answer this by saying trusted and established brands with repeat purchase attributes (i.e.: changing fashions) produce a compelling need to buy for a certain market segment. 

Conclusion

I would spend twice as much time articulating the problem you solve as pitching your solution.  The problem should be backed up with independent data and evidence of sales.  If you cannot articulate a big enough problem, either adjust your valuation expectations, or pivot and do something else.