I have had the luxury of meeting over 500 startups at Red Rocket over the last 3 years. And, typically, most of them approach me at the same point in their startup development. They have just finished building their new product, whether it be a website or mobile app or whatever, and they are seeking venture capital to assist them with sales and marketing to bring in new users. It is typically then, when I ask them “do you have any current users and how quickly are you growing” to point to a proof-of-concept around your startup. Which is typically followed by, “I don’t have a material user base yet, that is why I need the venture capital“. Then I shrug, and have to be the “bad guy” when telling them they are not ready to raise professional venture capital. A sad and familiar story, as without this round of capital, the startup will most likely go out of business, as they lack other sources.
But, why is this the same old story? In my opinion, it is because entrepreneurs are so focused on their product, with their heads down coding away on some cool technology feature or functionality, that they don’t think far enough ahead to what will keep their business funded. Yes, many product-driven disciples will say, “if you build a great product, users will come”. And, they are right. But, the question is: by when?
Startups are on a very short timeline to success, typically raising a small amount of seed capital from friends and family or angel investors. And, because these investors are not typically flush with cash, the entrepreneur simply raises enough money to build and launch their product. It was in that fatal decision, in my opinion, where most startups have placed the noose around their necks without even knowing it.
Before even investing 1 penny in their product, they should have set a budget for their product AND their proof-of-concept marketing. Because without some dollars to seed users for your product from Google, Facebook or other targeted and affordable advertising channels, it will be very difficult to build and grow an audience large enough that will satisfy the proof-of-concept requirements of most venture capitalists.
So, what are some key lessons here?
- Never lose sight of the forest through the trees. Make sure you are clear on the end goal of building a successful long-term business, which may require capital down the road. And, learn the requirements of those investors, right from the start.
- From day 1 of your startup, set aside a proof-of-concept marketing budget with which to drive initial users to your product.
- Proof-of-concept is typically dictated by the quantity of users you have attracted and how quickly you are growing month-over-month. So, raise enough marketing dollars to build a large enough initial user base (e.g., 100,000 app downloads), doubling in size month over month.
- And, most investors will want to learn your marketing metrics around a profitable cost of acquisition per user. So, you can’t just waste your marketing budget, you have to test and tinker with it until you find the profitable relationship between marketing spend and revenues per user.
- If you don’t raise this money upfront, it will be near impossible to raise it later, given the proof-of-concept requirement of the venture investors.
- If you proceed in raising enough capital for your product only, you are walking down a very slippery slope towards startup failure, before you even had a reasonable chance for success. This is the reason 9 in 10 startups fail: they didn’t plan far enough ahead, because they didn’t know any better.
No surprises here, you can probably guess where I am heading. In my opinion, proof-of-concept is materially more important than the product for any startups desiring to raise venture capital down the road. As without it, there will be no capital to save your business from running over the cliff. Look at CraigsList and Wikipedia as examples: they aren’t very pretty sites, but they were functional enough to attract a huge user base.
So, everyone stop what you are doing with your products, take some time to understand what will be required of you from a proof-of-concept perspective with new investors down the road, and align all of your immediate efforts around those clearly defined goals and metrics. To help you here, check out this companion Red Rocket post on how to budget and test your proof-of-concept marketing.
This article was originally published on the Red Rocket VC blog, a consulting and financial advisory firm with expertise in serving the startup, digital and venture community.
Image Credit: CC by Ben K Adams