On the way to work this morning, I had a call with a fellow entrepreneur (we’ll call John for the purposes of this post) that is getting his tech startup off the ground. I’ve been very impressed with the vision of his company and his approach to validating the idea in the market. During a lunch meeting he had yesterday, a wealthy friend of his liked his company so much that he offered to invest $100k to help him finish product development and get the idea into market. While John was excited about the offer, he was filled with nervousness because he didn’t know how to respond. He wasn’t sure if his friend was his first choice for a new investment partner, but didn’t want to dismiss the offer either.
Funny enough, as I got to my desk and opened my email, I also found the following email from another friend of mine:
‘I’ve been building _______ for a couple years now, and am ready to raise a seed round. I’m a rookie at fundraising, so if you’re willing, would love the chance to get any advice and guidance you can provide.’
I figured that if 2 of my friends were asking the question, it’s probably relevant to other entrepreneurs out there, so… here we go.
1. Customer Validation & Traction
Before you ever consider talking to potential investors about seed capital, get out and meet with potential customers. When I say ‘potential customers,’ I don’t mean your friends, family, and neighbors. You can guarantee that they will tell you exactly what you want to hear. ”A restaurant that serves cold cereal?! Sounds like a great idea! In fact, I eat cold cereal every day for breakfast!” That type of ‘validation’ doesn’t do anyone any good.
Customer validation means spending as little resources as possible to be able to show a prototype. Then, I would encourage you take a good month meeting with as many as 20-30 potential customers that are not friendlies. The best validation is to get the potential customer to sign a Letter of Intent. If that’s not possible, try to get some type of commitment from them (e.g. they agree to be an alpha customer, they agree to buy when it’s ready, etc.). During these meetings, take detailed notes on their comments and feedback. Ask them what they like and don’t like, and what you are missing or where you’ve gone wrong. Most people enjoy helping other entrepreneurs, so take advantage of this opportunity to get as much candid advice as you can.
By the way , the best customer validation is paying customers. So, if you can get to revenue before approaching investors, it will significantly increase your chances of raising capital.
2. Show that You Can Bootstrap
Bootstrapping is not a type of funding… it’s a way of life. Bootstrapping is the mentality that you are going to be scrappy. Bootstrapping means that you can figure out how execute on very few resources. Potential investors will want to see that you have efficiently used as many of your own resources as possible so that when they offer capital, you can do the same with their investment. By gathering customer validation and showing that you can execute on the little resources you have, you give potential investors confidence and excitement about backing you. While, the opposite is also true. I’ve seen many deals die because the investors didn’t have confidence in the entrepreneur’s ability to manage resources effectively.
3. Be Prepared to Tell a Compelling Story
Before you start pitching, you need to be prepared to accurately portray how your business will scale. The best way to be prepared is to have customer validation and traction. No business plan, executive summary, financial model, or pitch deck will compare to the story that your results will tell — the best predictor of future success is past performance. Once you feel like you have enough customer validation, then take the time to prepare all of the materials that will back up your results. In my opinion, the 2 most important items that you can have prepared are:
- A strong financial model that accurately forecasts how the business will scale, and
- A compelling and well-prepared presentation (PowerPoint, keynote, whiteboard, video, etc.)
4. Pitch to as Many Potential Investors as Needed and Create Urgency
Raising capital is like sales: most people need to pitch to 50 potential investors, to get 20 2nd meetings, to get 10 interested, to get 5 completing due diligence, to get 2-3 term sheets. Obviously, start with as many ‘friendlies’ as you can, but don’t be afraid to network and connect with other investors that you don’t know.
While it sounds trite, many investors are motivated by others investors that are interested or committed to the deal. If you have a lot of interest, you can leverage the interest from one group to create urgency with another group. This is a delicate balance — you don’t want the potential investor to feel like you are pitting them against each other, but you definitely want the investors to know if you already have terms on the table or verbal commitments.
As a result, don’t ever turn an interested investor away until you have signed commitments from someone else. While the committed investor may not be your first choice, ‘a bird in the hand is worth two in the bush.’ Leverage the commitment that you have received to try and get your preferred investor to commit.
Finally, once you have an investor interested in participating, you’ll need to become familiar with all of the verbiage and vocabulary of seed stage term sheets and valuations.
Date: 13 Nov 2013
Author: Brock Blake