As an advisor to many new venture founders, I often hear their frustration at being told by investors “I love your idea, but come back when you have more traction.” As a member of an angel investment group, I have to admit this is probably the most common rejection we issue. The intent is to indicate that founder passion is not a substitute for real customers buying the product.
The challenge is to convince investors that your business will attract real customers, before you have a revenue stream that exceeds your expenses. Even if you are funding the project yourself (bootstrapping), you should be asking yourself the same question before you have burned all your resources. Pivoting early, based on real customer feedback, is always cheaper than later.
I learned this the hard way a few years ago in a startup where customers loved our idea and the free prototype, but we couldn’t sell one for the full price needed to meet our financial projections. We simply hadn’t tested the price sensitivity in the market segment and geography that needed the features we offered. In fact, no founder can predict all the variables in today’s marketplace.
So what should a new venture founder do to convince themselves, as well as potential investors, that they have a viable business before the results are conclusive? Here are some strategies that I recommend from my own experience, to improve your odds of business success, as well as build traction points with your investors:
- Quote market research and input from outside experts. No matter how passionate you and your friends are about your solution, it doesn’t mean that if you build it, they will come. Seek evidence from recognized sources, like Gartner Group, and spend time with industry experts and real customers, before quantifying your opportunity and prices.
- Start selling it on social media before you build it. Marketing is everything these days. On the average, it takes as long to build marketing momentum as it does to build the solution. Really listen to the feedback you are getting. If you wait to begin marketing until your product is final, you will find it very expensive to pivot to meet real world input.
- Build a realistic revenue model and price, based on cost. The free model, with an implied intent to monetize later, doesn’t work with investors anymore. It takes real money to sustain a business, with a margin in the 50 percent range, and some realistic milestones and metrics. Sell at least one at full price to a real customer to show traction.
- Document and initiate a multi-faceted marketing plan. Word of mouth and viral marketing alone are not adequate, and a website is not all you need for credibility. To get the visibility and distribution for scaling, plan on one or two levels of partner relationships, as well as real events and promotions early. Traction is marketing and sales results.
- Gather early customer testimonials and commitments. Great customer experience expectations these days span the range from shopping, closing, delivery, usability, to support. If you don’t have real customers yet, focus on the size of the pipeline, letters of intent, and penetration into recognized retail and distribution outlets.
- Show team organization and preparation for scale up. New ventures requesting funding without credible operational and financial leadership will likely be declined. Don’t assume that customer-facing employees can be hired and trained at the last minute. Your plan targets and milestones in these areas are key to achieving the results you expect.
I’m not suggesting that all these business elements need to be perfect before you ask for funding or open doors for business. As an active angel investor, I do expect founders to be able to communicate a plan and progress toward these elements, just as I expect them to understand and communicate all the elements of their technology and their solution.
There is no magic indicator in business, just results. The more evidence that you can provide of customers in hand, or waiting impatiently outside the door, the more likely and timely it is that you will be able to achieve the next step. Your passion and personal conviction are necessary, but not sufficient, to turn a great idea into a scalable business.