Student entrepreneurs face an important obstacle in developing their ventures. They often lack the money to develop working prototypes.
It’s not surprising to see entrepreneurs seeking validation for their early stage ventures before they have developed a functional prototype.
Over the past three months, I have run four elevator pitch competitions on Northeast Ohio college campuses as part of the Burton D. Morgan Foundation’s PITCH U. None of the 12 entrepreneurs who took home prize money from the competition had a working prototype.
And these ideas were solid.
They ranged from an insert for helmets that offered better protection against concussions to a bracelet that shot mace to a collapsible heel for high-heel shoes to a foot pedal-powered mobile phone charger.
Regional angel investors who judged the competition thought the winning ideas were interesting. But since none of the business had a working prototype, they were all too early for the investors.
Most investors don’t want to bear technical risk – the risk that the entrepreneur can make the product work – so entrepreneurs generally need to self-finance the development of a working prototype.
For most company founders, this isn’t a big deal. They tap their savings or draw on personal credit to pay for prototype development.
However, most students don’t have savings or access to personal credit, making it tough for them to self-finance.
There are ways around this problem.
Student entrepreneurs can obtain non-dilutive capital by winning competitions and getting grants. But not as many people can get these sources of financing as can draw on savings and tapping personal credit.
They can tap friends and family for the money they need. But with the rising cost of higher education, few college students have family members with extra money, and fewer still have friends with any investing capital.
Student entrepreneurs can also try to enter accelerators, which will provide financing to companies without working prototypes in return for a small equity stake. But most accelerators accept only about one to two percent of the startups that apply to them.
In short, the lack of access to capital may keep young business founders from developing working prototypes of products for their new companies, hindering their entrepreneurial efforts. If that’s the case, then we are all worse off.
Seedlings Photo via Shutterstock