The talk was titled “Tips to make your startup attractive for investors”. Here’s an embedded copy:
Note that the tips refer mainly to web ventures. Below are some of the comments to go along with the nice pictures:
1. Know your competition
Even if there aren’t any products out there doing exactly what you do, it doesn’t mean that you have no competition. For example, you may point out that there is a company with similar technology, but different application/market. List all your competitors and explain how are you going to be different or better than them.
2. Articulate your idea
If you can’t explain your idea in 2 sentences, your customers probably won’t either. Test it on five people that would be your target audience – do they get it right away? Zappos is a great example of a company with a clear ‘big idea’ (and there are many more). Decide what problem you are there to solve or what service you are looking to provide and make it clear to everyone else. Many times, I struggle to understand what companies do when I’m reading their ‘about us’ page. It should be crisp and clear from the start!
Also, make sure you practice your elevator pitch. As much as it may sound cliche, you’ll need to use it quite a bit.
3. Sell your team, not your advisers
Many startups tend to emphasise their impressive line-up of advisers. Having advisers is GREAT, but over-emphasis on them may suggest a problem with the team.
On a separate note, leave any tension in the team out of the meeting room with the investor. He will smell it from miles and you won’t accomplish what you are there to do. Clearly define the roles within the team, leave egos out of it and don’t worry about splitting the number of slides each of you will present…
4. Get feedback from your customers
We all know about “Antenagate”. Big issues will mean big problems for users. Ask customers how they would use your product – friends and family don’t count for this purpose. Get out there and talk to potential customers. Collectively, they know much more than you do. It doesn’t mean that you should change your business model because one person suggested it, but listed to the feedback and if you see similar patterns over and over again, make changes.
5. Patented Technology?
Patents are nice but… in a consumer Internet business, it’s most likely that you aren’t re-inventing the wheel. It’s nice to have protected IP, but that will mostly matter later on in the event of an acquisition. Technology also depends on the investor – some would really care about it, others will prefer to see traction. Unless you’re ready to chase patent violators and pay for legal fees, don’t worry about patents so much at this point.
Dave McClure would say here that VCs like unfair advantages. So if you think that you’re way ahead of the market and have technology that will revolutionise your space… patent away and explore the “poor man’s patent
6. Know your market
Whether you are targeting a small/medium/large market, pick your niche and show how you’re going to grow usage bottom up. You start with 0 users – how do you get to 100, 1000 and one million? How long will it take? Remember, everyone wants to sell to 1% of China…
It’s hard to exactly know your niche in the beginning, so Pivot if you have to. Steve Blank
has some really good insights on how and when you should consider pivoting.
7. Open the kimono
NDAs are useless most of the time. Investors don’t like signing them and many startups get to a point of paralysis early on because they are afraid that someone might steal their ideas. Generally speaking, there are more benefits than detriments in sharing your idea (Chris Dixon has a good post about being the opposite of secretive
). You’ll get feedback on your product and people may even be able to help you along the way. That said, it’s your responsibility to do proper due diligence on the investors you are about to meet. If they invested in a competitor, there’s a chance that you’re business plan will end up on the competitor’s lap. If you’re afraid that you’re investor might steal your idea, he’s not the best person to talk to probably…
8. Be a salesman
I’ve learned this first hand from Mark Gerson, the founder of Gerson Lehrman Group. As the founder, you’re the number one sales person of the company and it is not a function you can outsource right away. Show yourknowledge and passion when speaking to an investor and don’t say you need money to recruit a sales force. You’re it for the time being, and your ability and energy is what people are investing in, and buying.
If you’re not good in sales, either get training or get a co-founder/advisor who is. You can ask them to come along with you to the first meetings till you get the hang of it. I’ve written a post
about the need to “Always be closing” whether it is fundraising, employee/partner recruitment and new customer sales. Mrinal Desai
, founder of CrossLoop, recently shared the same advice on PeHub
. You also don’t need a full fledged product to start doing pitching – sell your vision first.
9. Business Plan
The bottom line is that you’ll need one. You need that pdf to send the investor as a follow up to your meeting and you need to do the research to really understand the problem you are solving and your value proposition. That said, it is important to talk to customers before you spend 6 months writing a plan. An investor would like to know that you can verify your assumptions.
Anecdote – WebVan, number 1 online flop during the bubble
, raised $400 million with a business plan that probably made perfect sense. They just didn’t have enough customers/sales volume to make the projected numbers work according to the plan…
10. Be honest
The entrepreneur-investor relationship is a bit like marriage. Don’t try to hide problems and weaknesses and keep your integrity high. Telling the investor that you’re team has strong technology people but could use some more business skills doesn’t mean that you get kicked out of the room – quite the opposite, the investor can also probably help.
The more risks you can identify (and hopefully also mitigate), the better you stand with the investor.
A word on When, Who and How Much?
The presentation didn’t touch these in depth but I think it’s worth mentioning some of the points.
When to raise?
As many entrepreneurs will agree, try to do as much as you can without external funding. Don’t raise just to get a salary or because you need to pay for servers. Get the servers you need today and see if you can postpone the payment (you’ll be surprised). A good rule of thumb is to raise money when you need to start hiring, but this really depends on the context of your startup.
For consumer web startups, the more traction you show, the better valuation you will get.
Who to raise from?
There are many sources of money and the fit once again depends on the context. To name a few:
FFF (Friends, Family and Fools), Angels and “super angels”, venture capital funds, government grants, incubators, corporate venture capital funds and more. In the US, Y Combinator, is a shining example of the rise of the incubators, as it successfully hatched dozens of high-quality startups. But don’t pack re-locate to California yet – while Y Combinator is not available in Europe yet, Seedcamp and a few other incubator programs (HackFwd
, The Difference Engine
), not only provide funding, but also give startups a high quality network of mentors and support from graduates of the program. Mike Butcher has a pretty good list here
How much to raise?
The answer is more than you’ll think you’re need. Again, this very much depends on context, but as a rule of thumb, the worst thing you can do is raise money to reach a certain milestone and go back to ask for more before you’ve accomplished that. It makes you look bad, and it reduces the confidence of the investor in your ability to execute. This could mean that the investor doesn’t pony up for the next round, or that your role will change if the investor feels there’s need for it. Success always takes longer than you think (about 20% longer), so you want to leave yourself some wiggle room. That said, the more you raise, the more equity you have to give, but a good investor will offer you a fair deal where incentives are aligned.
I’ve included two opinions from people I respect in the industry:
Chris Dixon, Founder Collective and Hunch.com, said:
Short answer: [raise] enough to get your startup to an accretive milestone plus some fudge factor
As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.
Overall, you should remember that raising money can be time consuming, so you’re better off doing it right and coming prepared – it could also save you some money. Even when you raise money, watch your cash closely and remember that even though you may have a few bucks in your account, it’s ok to keep taking the bus. Go forth and conquer!
*Special thanks to Mark Gerson and Jon Aizen for the feedback in putting together these tips.