What early-stage investors want to hear
Investors want to give you their money. More than that: they have a duty to give you their money. It’s your job to give them a reason to choose your startup over the next.
The net amount of investments fluctuates, but overall the $75 trillions of dollars in the world means investors are armed, looking for an opportunity — instead of sitting in bank accounts earning paltry percentages. So what do you need to do to attract this money?
Well in the old days of the 1980s and 90s: investors wanted a business plan with a 10 year projection. As a former business analyst, I would spend months creating one of these lengthy documents that was out of date as soon as we created it. On top of that, if a plan had more than one revenue stream the investor would call us unfocused and show us out. Fast forward to today, I’m on the other side of the table and neither me nor any other tech investor will trawl through a 60+ page document, and with only one revenue stream we’ll most likely say it’s too high risk and show you out. So what do investors want to see?
In short, investors want to see a proven business model with a clear, accessible market and a team able to execute. That’s it. Here’s how to get it done.
Prove your business model
A business has to make money, that part may seem obvious. Recently, a lot of businesses have used alternative methods as a proxy for revenue, such as email addresses. So startups have been designed to gather large databases of highly defined users with individual metrics on each. Then, they hope to either convert that data into money by introducing a revenue model, or more likely in today’s trends, by selling to a bigger company (think Whatsapp’s $19 billion sale to Facebook). These types of investments have become all the rage in the last decade but fewer and farther between. However, no matter the revenue unit you use, show your potential investors how you intend to make it happen.
Note the most important word in the title: ‘proven’. You may ask ‘how can I prove a business model without actually building the business first?’, more so, ‘how can I do that without investment’? The classic entrepreneurial Catch 22. The image of the wheeling, dealing, fast-talking entrepreneur who can sell anything to anyone comes from imagining how to do this. As do more practical solutions like Kickstarter and Eric Ries’ Lean Startup.
Lean Startup teaches anyone with an idea how to test that idea in the real market using as little resource as the entrepreneur has available. These tests, using a simulation or a stripped down version of the service or product, mean to show that the business model works; that people will pay for the service. The extreme of these tests, came about through crowd-funding, where the enterprising soul would skip the simulation or a prototype, and cut straight to a video describing the idea to the public audience. If enough people become interested and invested, that would be enough.
Whatever the method, the idea is to prove that someone, somewhere has the need for your product and they will pay for it. You don’t need to show millions of people willing to pay for it, but only a few, this is enough to show that the model works and that you have fulfilled a need in a select group of people. Remember: people will always tell you what they want, the entrepreneur figures out what they actually need. Once you have sold your product to a number of people, you have the beginning of a compelling story to tell your potential investor. So, let’s see if we have enough of these people to matter.
Define a clear, accessible market
Your product means nothing unless you can show that a lot of people need it and, more importantly, that you can reach these people. Clearly define the people that will use your product and study them at a deep level. Don’t treat this as an intellectual exercise; go talk to these people and get to know them. Then, when investors ask you questions about your market and their lives, you will know the answers. Not only the specific problem you want to solve in their lives, but what motivates them as people.
For example, a great Los Angeles-based company called KaleCart delivers fresh, locally grown fruit and vegetables, produce and dairy right to your door. They do all the right things for their customers by providing organic, gluten-free or kosher products because they simply know their customer’s needs. Once they studied their market and realised their customers also have a deep desire to protect the planet, KaleCart decided to deliver everything by bicycle. They did not stop at collecting data on their customers’ food habits, but gained a deeper understanding of how these customers lead their lives. Dig deeper, not only for a better story to tell your investor, but for a more successful business.
Now that you have an identified audience that you understand and have estimated many of those people exist, here’s the most important question: how do you reach them? The answer isn’t Facebook. Social media and online ads provide a way of building awareness for your product, but has not been a proven method of engagement. A path to market needs to have a solid way of activating these people. Many tactics exist. My favourite: build virality into a product.
What killer feature of Uber’s made it catch fire? Many users will answer getting a coupon when recommending a friend; that provided the mechanism for virality. Seamless payments drove the growth. People used Uber just to show their friends that they could be dropped off and walk away as if they had a personal chauffeur — no need to tip. This simple feature made Uber spread like wildfire. Again, Uber knew their audience deeply.
Other paths to market include message testing, showing that for every dollar spent on marketing, x% will click on the ad, and for every ad clicked, x% will sign up. If you can do this repeatedly, without spending more than $20 per day, you’ve won. As long as this cost of acquisition is less than the lifetime value of the customer, you have a viable business. Show this to an investor and they can do the math. If you can also show some viral growth (i.e. customer acquisition through word of mouth with little to no marketing spend) then you really have a winner.
You can reach your market in many ways, the method is not as important as proving you have a way to get to them. A great tool for showing this is Dave McClure’s pirate metrics.
Create a team that can execute
This may see like the easiest thing to prove, however, being an early stage startup means you have not yet been through all the hardships; who knows whether you can actually create this product. Even if your team consists of people who have experienced a startup before, they did not do it with these people or in this way or on this product or in this market. It’s true that experience counts for a lot, but make it about forming a strong team with a tight culture who are ready to face the many challenges: business, technical and cultural.
When investors give pre-seed money, they give you a chance to prove these three things are in order: business model, accessible market and functional team. Once you get seed money, investors want to be sure you can scale the market and that your team can execute under new pressure. When they give you series A, they want to know that you can scale the business and that your bigger team can scale without falling apart. You see, at each level of investment your team is under scrutiny. The old adage remains true: investors invest in people. Choose your co-founders carefully (and study the ways to avoid founder fuckups).
Get to know tech investors
In short, investors want to know that you have a proven business model with a clear, accessible market and a team able to execute. Other details will become clear during due diligence, but when you go to pitch, state these 3 ideas clearly and you will be asked a lot of questions, which is exactly what you want.
Originally published at www.rhubarbstudios.co.
