This is how the story starts … the entrepreneur has a moment of brilliance and suddenly an idea for a new product or service pops into his mind. This is it; the idea that will be the basis for his new start-up. The concept is so magnificent that it should be obvious to everyone – investors, customers, and partners alike – why they should become involved with this project immediately. The entrepreneur is giddy with euphoria. Quickly, his second thought turns to obtaining funding from investors so he can make his idea a reality.
The entrepreneur takes his idea to some investors, and they aren’t as enthusiastic as the entrepreneur hoped. Investors are all from Missouri, the show-me state. Not to be daunted, the entrepreneur builds a prototype to demonstrate his wondrous gizmo. He goes back to investors and shows off the gadget. The response from investors is lackluster. The entrepreneur doesn’t get it, what went wrong?
Rule #1 – It’s Not About The Product
This is the most common mistake made by entrepreneurs, who mostly come from technically skilled backgrounds. They focus on the product. Investors focus on the business of the product, not the product itself. When investors evaluate a business proposal, the product is only about 10% of the overall evaluation, the rest is the business.
Rule #2 – Investors Aren’t Asking for a Product Demo
When investors ask for proof of concept, they aren’t asking the entrepreneur to build them the product and show it to them. Investors are looking for evidence that the business works. They want to know that there really are customers who are willing to pay for the product. Investors want to see the rudimentary beginnings of a marketing effort that creates demand, the inklings of a repeatable and predictable sales process, and at least a roadmap for how to scale distributions and build channels. Investors become interested in a start-up at around the $2 million in annual sales.
Rules #3 – Start-Ups Are Not Do-It-Yourself Projects
It’s not unusual to see a single founder with no staff looking for funding. You can’t do it alone or by yourself. It takes a team and a team is not a random collection of individuals who were simply willing to work on the project. A team works towards common goals and different members have roles dedicated to performing different functions. A start-up team is more than just the employees and staff. Investors view a founder’s ability to attract a team as an early indication of sales skills. If an entrepreneur can’t convince others of the worthiness of his project – one which he should have a great passion for – what is the possibility that he’ll be able to convince customers who have a desire to buy but are skeptical.
Rule #4 – Raising Funding Is Never Ending
If the founder is having difficulties convincing these investors, what’s the possibility he’ll be able to convince later ones? The current trend of Y-Combinator, TechStars, Mass Challenge, and a plethora of similar micro-financing programs has given many entrepreneurs the misconception that start-ups only need $25,000 in funding. Those start-ups succeeding under these programs are raising millions to bring the initial stage of these portfolio companies to fruition. Investors look at a founder and think, “Will this guy be able raise ten times what his asking me for today in six months?” Most CEOs and founders say they spend 80% of their time looking for funding to keep the company afloat.
Rule #5 – The Start-Up Is The Investor’s Product
Entrepreneurs need to keep in mind that investors make their money when the start-up is sold through an IPO or acquisition. To an investor, the company itself is the product. Entrepreneurs often focus too much on building the product, agonizing over every feature and benefit of the product, and perfecting every bell and whistle incorporated into the design. While the business of the product is often an afterthought with pieces such as marketing, sales, human resources, and manufacturing to be thrown together thoughtless and without a big picture plan. If an entrepreneur wants investors then the company must be created, built, and grown with as much deliberation and intent as the brilliant product concept.
If a start-up is to succeed, it must make its customers’ problems their problems as well. Likewise, if a start-up is to get funded, it must understand the investors’ perspective.