#83 — Why you should first talk to your customers about fundraising
So you just read about how important is it to raise money: the right capital, from the right people, with the right timing, at the right terms. You’ve probably read how much value they add and how much you can learn… in some post written by them of course, or by some of their friends. Now, don’t get me wrong: there *are* awesome people out there that have been there and done that, and I do have a good-to-awesome relationship with my investors (which I deeply respect).
But let me also be very upfront: the problem is that it’s the top 3-5% of the cake. The vast majority? Random dudes with cash. Is that bad? Hell, no. The point though is that times have changed, and not so many founders realize it. Here is the typical scenario: you build a prototype that works, you get a few thousand users, they do love your product since they’re sticking with it (well some of them), if you are lucky you also have a bunch of them actually paying you. Wow, kudos!
Now, according to the mainstream thought, at this point you’re supposed to *stop* working on your product and talking to your customers to [wait for it] “raise money”… meaning that you’ll need to schedule tens, if not hundreds, of meetings and talk with random guys you don’t know and that don’t know you. To then follow-up with them and send whatever crazy sh*t they ask for because -hey!- they have the money, so you end up accepting whatever weird terms they ask for.
If you’re lucky enough or good enough (or both) it’s hours, days, weeks, months of work! Not for your customers, the ones who loves you and care about you, but for some guy whom at the end of the day (more often than not) cares about getting his money back. Period. If you’re not good enough or lucky enough, which is the majority of the cases, the deal will fall apart and you -alongside with the users that love you- will be screwed. It happened to EverPix the last week, right?
And this happens why? Because investors don’t understand the industry, or they don’t understand the product, or they don’t trust you, or they don’t get your big vision, or they have other 50 deals before yours, or they don’t like the terms, or they’re closing their own fund, or they’re in vacation the next week, or the market is down, or they want to see more traction. Or a combination of the above. Whatever the excuse, you name it. I’m sure you heard many more reasons.
To be clear: it’s perfectly fine for investors to actually say that and/or ask you all the crazy sh*t. It’s their money, or the money of their LPs after all. If you want their money you’ve to play by their own rules. Also, maybe you heard this: talking with investors, they often say “Hey! Let’s see if stars align”, like it’s some kind of weird cosmic event due to happen every 237 years. WTF right? You. Cannot. Wait. You are *not* talking to your customers or working on your product for this.
Now let’s go back to the ‘kudos’ moment: product, customers, maybe some revenue. And picture this instead : if you know what you’re doing, by now you *should* have the relationship with your customers: you should have talked to a bunch of them, maybe more than a couple times. They know you through your product, some of them are also paying for it. Why the hell shouldn’t they be the ones putting money to push the product they already know and love to the next level?
AngelList did it: in their latest $25M round a mind-blowing 70% came from their own customers. Phil Libin said more than once that EverNote was saved at the last second by a user in love with the product, and now they only talk to investors that know and use and love the product themselves. Why should you be doing any different? If you’re not there yet, well that’s a completely different issue to discuss, but if you *are* there, why would you consider anything else?
Today anyone can start something with $25k or less. If you have 1000 user’s among them there are 20 guys that can give you an average of $25k each and can refer you to their friends (maybe some of them already did it for the product). Go talk to them. Instead of saying to an investor: “Hey! We don’t know each other but I’m raising X of which 35% already committed/wired by Y and Z, want in?” isn’t it much more powerful “Hey! We don’t know each other but I’m raising X of which 70% already committed/wired by *my customers*, want in?”
Capital is commoditized these days but also crowd-sourcing platforms are inefficient, people have their own priorities and are busy. The average angel investor receives dozens of investment’s opportunities each month. So while access to capital isn’t an issue anymore, the scarcest resource now is attention. The average guys don’t have time and, at the end of the day, don’t care. You know who *does* care? Your users. And they have access to capital as well.