First and foremost, I anticipated that investors would want to know the total available market for products that I could create. As I wrote above, I envisioned a multi-billion-dollar annual market. I arrived at that number after reviewing published reports showing that state and federal governments spent in excess of $80 billion per year on corrections. Although I didn’t have any data, I estimated that at minimum, 5% of those budgets funded programs designed to reduce recidivism and to prepare offenders for successful lives upon release. Using those metrics, the total available market exceeded $4 billion each year.
Obviously, if I could put an organization together, we’d only receive a fraction of those resources. But if we implemented the program successfully, and we became an evidence-based program after three years, it would seem that the The Straight-A Guide could secure an average of at least 20 clients in each state, for a projected, estimated total of 1,000 clients. If each client placed an average order of $10,000 per year, we’d have a business that generated $10 million in annual revenues.
Again, I could only “project” into the future, or visualize prospects for success. I’d need to convince others that a market existed and that the potential for upside validated the risk associated with the investment. After all, anyone who put money into such a venture would have to wait three years before they would see a return on investment.
Would a return on investment warrant the risk? I continued to run the numbers.
Since we’d be creating digital products, gross profit margins would likely exceed 70%. After all, once I produced a product, the costs of production would drop significantly. Based on estimates of $10 million in revenues, the company should generate north of $7 million in annual profits after year three. With those numbers, it would seem that investors might be willing to provide $3 million in funding in exchange for 50% of a company we’d create. Such an equity split would return all investment capital within five years; the investors would still own 50% of a growing company.
Despite the promise that I saw, I suspected that investors would view the opportunity from a different perspective. An infinite number of opportunities competed for their attention and their capital. Although the Straight-A Guide offered a “social good” in that it would influence people in prison to begin preparing for success, and the business venture had the potential for generating lasting profits in a growing market that was poised to grow, investors would perceive risks. I anticipated their objections:
If you’re asking us to invest $3 million for a 50% stake in your company, you’re implying that your idea is worth $6 million. What experience do you have in overseeing ventures with this level of complexity?
If prison administrators resist buying from a convicted felon now, what makes you think that they’ll be more inclined to purchase products you create three years from now?
What track record do you have for returning capital to investors?
The more questions I asked, the more I realized that I wasn’t yet ready to seek venture capital from investors to fund my idea. I’d never run a business before, I’d never managed a group of professionals, and I didn’t have a track record for returning capital. Although I believed a growing market existed, and we’d validated the concept to some extent by receiving more than $100,000 worth of purchase orders from several government agencies, the realities were that I needed to learn more about the market before I could raise capital necessary to build a team.
Until then, I needed to approach the challenge differently—creatively.