The biggest myth of fundraising is that a great idea should and will be funded. The truth is, millions of people have ideas, and an idea executed incorrectly, without the right metrics, the right team, or the right market has a significantly lower chance of receiving funding.
Let’s start off thinking of investing as a spectrum. “On one end of the spectrum is your mother,” Owen Davis, Managing Director of NYC Seed joked at a recent SheWorx breakfast, “this is the person who will give you money regardless of what you’re selling, this is where you and your idea are all it’s about… That’s not investors. On the total opposite end of the spectrum is that you’re a publicly traded company on the NYSE, the number of people who actually know you are close to zero and you are now responsible for providing financials to the market every quarter so as to potentially convince someone to buy shares of your company.”
The difference between these two ends of the spectrum is the quantifiable metrics of your business versus the idea of simply investing in you for the sake of being you. So what can you do to ensure a successful, substantive first investor meeting?
- Start running small experiments as early as possible.
Obviously in the very beginning stages of your business you won’t have the necessary metrics, so you need to get start gathering data in any way possible. These tests may be as simple as gathering a group of friends and gauging their willingness to pay for your product or service, or setting up a landing page to see if people sign up for your company’s mailing list. Make your tests simulate reality as closely as possible and include real conversations with potential customers. Your goal is to step into an investor meeting and be able to say, “I know exactly what these 100 people need, I know who they are, here are the top four things I’ve learned, and here is the result.”
- You need a real product. But until then, fake it till you make it.
Is it really possible to take nothing and prove out demand for your idea? Absolutely. In the early days of Zappos, the founder went into a local shoe store and bargained with the shoe owner to take pictures of the store’s shoes. He would put the pictures on his website and promised to come back and buy them if people expressed interest online. Sure enough, orders started coming in and the founder kept coming back to buy the shoes. He slapped on a Zappos label, and started shipping out the purchases. Moral of the story? Not only did he not have a store, he didn’t have any shoes when he started selling. He managed to validate demand in his market with almost no inventory risk.
- Can you build what you sell? If you can’t you better be thinking of something else.
Think about the DNA of your company. Do you truly have deep domain expertise in what your company is building? Just as the most successful in the restaurants in the world are run by chefs, the most successful tech companies must be run by people who understand the technology inside and out. Why? It’s the obsession, the knowledge, the ingrained muscle memory, and the know-how to do something. A restaurant’s DNA is chef-centric, a mobile startup is tech-centric. If you can’t build what you sell, you can’t be in the game.
- “But I’m a non-technical founder with a part-time CTO.”
A big red flag is the CTO who promises to come on when your company is funded. Over 75% of the time, the CTO never comes on. If the person who is building what you are selling is unwilling to commit, then you have a problem. Trying to get commitment from someone who is critical to the future of your business and in high demand by others is not easy. The solution? See above.
- Go after a market where you’ll have success in.
How many people need what you have? Contrary to popular perception, you don’t need to go after the biggest market, you need to go after the first market where you’ll have success in. Start in a smaller niche market where you can understand the ins and outs of what these people want and need, but with a view towards the potential of a larger market in the longer term. Just remember, “It’s better to have 100 people love you, than 1,000 people kind of like you.”
- Show quantifiable proof points. Both angels and VCs all similarly want to see this.
Angel investors are increasingly looking for the same proof points that VCs require. As a business, you need to show enough proof points that you can demonstrate there is a repeatable need for your product/service in the market. What qualifies as enough proof? In a consumer business, it’s about showing high engagement, high retention, and low churn. In enterprise software, you may just need a few proof points. For example, having 4–5 committed large beta customers who are using your software, integrating it into their workflow is no small feat, and may be more than enough to get you a follow-up meeting.
- Find a warm introduction to the investor.
Of the 50 deals that Owen has invested in, not a single one stemmed from a cold email. If you are just starting out, go on Angellist, search for your competitors, and create an organized list of their investors. If they put money into your competitors, then they likely will have an easier time understanding your business. Ask other founders, scour your LinkedIn, and make sure you can find a connection to introduce you to the investor. It’s all about your network.
- Be aware of who you’re talking to, and make sure your interests are aligned.
Certain investors like to invest in the same set of things, so no matter how impressive your data is, they could simply not be interested in your domain. Just as investors are vetting out your company and your team, it is your job to make sure the person who is giving you money actually has an interest and expertise in this area of investment. For example, Union Square Ventures’ thesis is that they only invest in companies with a large network of users. As a result, they are more naturally inclined towards large marketplaces and community platforms like SkillShare, Kickstarter, Foursquare, and Soundcloud, rather than enterprise software startups that may be equally impressive, but do not have the same potential for scale.
Ultimately, it doesn’t matter whether you’re on the West Coast or East Coast, it also doesn’t matter that there is speculation about a “funding crunch.” There are dozens of new firms and angel groups that have formed over the last 5 years, and the money isn’t disappearing any time soon. What you do as an entrepreneur doesn’t change: find an opportunity within your area of expertise, validate your target market, show your proof points, and find a super effective team that can build and execute.
Image Credit CC: by Gabriel Saldana