You don’t just have to solve a big enough problem, you also have to a solution that enough people are going to pay real money for.  The question is, “are the dogs going to eat the dog food?”

This solution is the follow-on from the problem, but it is not the one you spend most of your time articulating. As a rule of thumb, you need to spend twice as much time explaining the problem than you do explaining your solution.  Investors and buyers have to understand the problem fully before they see a need for your solution.  If they can’t see that your problem is worth solving, they don’t care how elegant your solution is.

You also have to convince investors and buyers that that market for your solution is favourable. One of the best ways of doing this is pointing to a change in the air.  Where there is change, and you are taking advantage of that change, you are better placed to be of interest.  The “change” should be significant rather than incremental.  It can be in:

• Technology
• Community values
• Legislation
• Business conditions
• Demographics, or
• A new way of thinking championed by your business.

If there is data supporting the existence of the change and there is no currently available alternative solution, you are in a strong position. If, however, your solution is the same as every other business in your sector, then you will ultimately be forced to compete on price.  At this point, you have little chance of investment or sale at high multiples.

So the solution investors and buyers are looking for has to incorporate an innovation in:

• Product
• Process, or
• Business concept.

Your innovation also has to be matched to a clear and compelling customer need.  The best need is one that is that is urgent and one that they must have right now.  Just being a desirable solution or one that they can put off deciding on is not going to produce a high valuation.

Those customers have to reachable and identifiable.  If there is a mailing list or a database of these customers, all the better.  A strategy of selling “to every registered accountant in every English speaking country” is better than a strategy of selling to “1% of all the people in China.” The accountants are identifiable because they are registered and they are reachable because their names and addresses are on databases.

Case Study: The Problem that Airbnb Solves and How it Solves It

Airbnb has achieved stratospheric valuations because it takes advantage of a new way of thinking championed by that business (collaborative consumption) and an innovation in process (social vetting) to solve two problems:

• Trust
• Inventory.

Trust: People are afraid to have strangers in their house.  We have spent years buying alarms, locks and burglar proof screen doors for our homes to keep strangers out.  Airbnb, however, has convinced us that it is now safe to trust strangers in our house – even whilst we are there.  It has done this by vetting both host and guest online.  It verifies their email address, LinkedIn or Facebook profile, driver’s licence or passport and home address.  So if a guest nicks your silverware, you can tell the police exactly who it was and where to find them.  Since the guest knows that you know this, they refrain from nicking the silverware.

Inventory: Many of us have spare rooms in a house that just sit there earning no money.  Some of us have apartments or holiday houses sitting vacant earning no money.  Admittedly, usually we did not characterise a spare room in our house as saleable “inventory” because we thought there were civic regulations preventing us renting it out.  There actually are such regulations, it is just that Airbnb has scaled so fast that most councils have not yet addressed the issue.

In the case of Airbnb:

• The customer need is relatively high on Maslow’s hierarchy of needs: people need shelter.
• The urgency is relatively high: they need shelter tonight or on a specified date in the future.
• The customers are reachable and identifiable: they are all registered on the Airbnb website database.

Conclusion

Articulating the problem you solve and having a solution that people will buy is essential in both capital raising and business exits.  The bigger the problem and the bigger the market for your solution, the bigger your business valuation.