September 26th, 2018
Where to Focus BEFORE Raising Capital
Startups.co | Wil Schroter | Jul 30, 2015
Raising capital isn’t easy.
Don’t be fooled by the blog hype and sensational headlines – it’s still a game where less than 1% of new businesses will get funded by storied VCs and angels.
So for the rest of us, the non-one percenters, we need a more reliable playbook to invest our precious cycles in.
Busting the Startup Bubble
Let me get this party started with a big shot of sobriety.
Over 500,000 companies will be started this month in the U.S. alone. Venture capitalists will write less than 100 checks to them in the next 30 days. Angel investors will add just over 4,000. We’re still around 495,000 checks short of everyone getting a piece.
I share this math for two reasons.
1. To point out that if you’re going to bank your future solely on an investor check, you’re banking on painfully bad odds.
2. To tell you that if you insist on betting on those odds, you had better make sure you’re doing everything humanly possible to stack those odds in your favor.
The good news is there is a fairly repeatable formula for making sure you’re approaching this challenge appropriately. You’ve got limited cycles as a startup Founder so you need to make sure those cycles are spent as efficiently as possible.
Startup cycles are best spent in 3 successive phases:
1. Add More Customers, Not More Product. Whatever you can do to test customer demand first, you should be doing. Basically don’t spend any cycles in hopes that “if you build it, they will come.”
2. Make Revenue a Priority. Your goal should be to get your business to a point where it’s self-sustaining as quickly as possible, even if it means not being able to make payroll just yet. Even a little bit of revenue can buy you the time you need to make critical decisions later.
3. Raise on Metrics, Not Story. Prove your metrics – then raise capital. Don’t try to hit the investor trail with nothing but an idea and expect things to go well. You typically get one shot at raising capital, so make sure you stack the odds in your favor.
Given the fact that your most valuable resource is your focus, you’ll want to spend that focus in the areas that will have the highest return. Whether you raise capital or bootstrap, aligning customer demand, generating some revenue and proving a few key metrics will always be incredibly valuable.
#1 Add More Customers, Not More Product
Building a new product is fun. I know I love it, and I’m sure you do to. But at some point we have to put this thing in front of a customer to find out if anyone else cares! We estimate that about half of the 15,000 startups we see each month at Startups.co have yet to show their product to a customer. Sometimes it’s for good reason, but more often than not they are preventing themselves from talking to their single most important constituent.
4 Phases of Customer Validation
- Survey Potential Customers. Long before you build a thing, ask real customers if they want exactly what you’re buying. Find people who are real potential customers (not your friends) and ask hard questions. The best thing you can do early on is to avoid building things no one wants. I can’t stress this enough.
- Give a Taste Test. Once you’ve figured out what your customers (probably) want, spend the fewest number of cycles possible trying to get them something they can taste test. It doesn’t matter if it’s a mobile app that only 20 people download or a cookie recipe that 20 people try. Your focus should be on improving the product based on real feedback from actual users.
- Get Paid Anything. The delta between giving something away and getting paid even a dollar is monumental. As soon as you can possibly make your product available for sale, make it available. Even if customers get 99% of the product for free, always test some version of a paid product. Don’t worry about how much they pay – worry about whether they’ll pay. Be certain that once you are in fact paid that you distribute said collected funds accordingly.
- Test Elasticity. Once you’ve found out that someone will pay for your product, now test every conceivable price point for that product. Try different models (paying as a subscription, paying in payments, paying more the first month). Imagine what would happen if you were to find out that you could have just gotten paid 3 times as much for your product if you actually tested the price!
If you can’t prove that customers want your product, then your metrics, revenue or any other aspect of the business won’t matter. So proving that demand should be your first priority before even thinking about anything else.
#2 Make Revenue a Priority
If you completely ignore every other aspect of this article, I ask that you at least consider this: make revenue a priority. Think of revenue—at almost any level—as being the only insurance policy that you have that your business will survive long enough to be successful.
The probability that you’ll look back and say “I’m so glad we never made any money” is incredibly, ridiculously low.
For every Facebook that shunned revenue there are countless startups that ran over the cliff like Wile E. Coyote thinking revenue wasn’t important. Don’t be them. I like to break these targets up into three successive milestones that help you to figure out which boss battle you need to beat next at each level (yes, I love video games).
The 3 Step Revenue Progression
1. Keep the lights on. What is the least amount of revenue you need to make just to keep the lights on? I’m not talking about paying yourself or your staff – just enough so that customers can still show up and buy something. This is a critical target because it means that even if you have to get a side job to pay your bills, the business can still exist and grow without you. This should be your absolute first goal in making revenue a priority. If you can hit this milestone you can at least be sure that if all else fails, the business will still exist long enough for you to capitalize it at a later date.
2. Pay your minimal bills. Paul Graham of Ycombinator famously called this being “Ramen Profitable.” He meant you’re generating the least amount of money necessary to pay your bills and eat – albeit lean. I often say that startups don’t go out of business – Founders do. That’s because if the Founder can keep the business up and running by themselves, even if it’s not growing, it buys them the time they often need to either grow revenue or find more capital. It usually doesn’t feel awesome at the time, but it’s a critical make or break position to achieve.
3. Staff paid. Long before you ever hit profitability, there’s the point when you can pay at least one person that isn’t you. This is a critical juncture because it usually means the business can function while you work on moving the ball forward. Getting to this point often multiplies your options. You can find the time to raise capital, work on new revenue streams, or do some critical business development – all of which can grow the business, not just keep it alive. By focusing your efforts around one particular milestone it allows you to think through what those efforts can achieve. Obviously you’d like to get to “Staff Paid” and beyond as quickly as possible, but try to understand that “Keeping the lights on” is a critical milestone that may affect how you spend your cycles.
You can always grow from there.
About Wil Schroter, Startups.co Founder & CEO
Wil is a serial entrepreneur who is just ridiculously passionate about startups. He is the Founder and CEO of Startups.co, the world’s largest startup launch platform, which includes Fundable.com, Clarity.fm, Launchrock.com, KillerStartups.com and Bizplan.com.
Wil began his career as a serial entrepreneur at 19 by founding Blue Diesel, one of the first interactive ad agencies. Blue Diesel joined forces with a small agency in Columbus to form what is now inVentiv – a global agency with $2 billion in annual sales and 13,000 employees worldwide. Wil went on to start 9 companies including Swapalease.com, Unsubscribe.com, Startups.co and Fundable.com.
Wil has been named Young Entrepreneur of the Year by the U.S. Small Business Association and has been recognized by the Ernst & Young Entrepreneur of the Year program as well as Business First’s Top 40 Under 40.
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