You’ve built what you think could be the next best thing—the product everyone needs, only they don’t know it yet. In order to take your company to the next level and bring your product to market, you need funding.
I've been at this juncture, learned lessons the hard way from past startups, and also helped oDesk raise four rounds of financing. How to raise funds is one of the main things entrepreneurs ask me, so with the advantage of hindsight I thought I'd share some tips on startup funding.
#1 Gut check whether you're ready and determine your best approach
You’re facing a critical decision: are you ready to raise capital? To make that decision, I recommend asking yourself: Do I really need the cash and if so, what am I going to do with it? Also, think about other available options—to protect some value for yourself, could you get where you need to be through Kickstarter or with help from friends and family? Or will you completely miss the opportunity without the cash? Only if the pros outweigh the cons are you ready to play ball in the fundraising tournament.
#2 Get a seat at the table
It's common practice for investors to partner up on investments with their peers. If you want your startup to get talked about in influential circles, it's imperative to get your foot in the door.
Think about who you know. Find out what they can do for you and what you can do for them. While it’s unlikely that your neighbor is a partner at a leading VC firm, it is possible that your neighbor or your yoga instructor or your college roommate have a workable connection to the investment community.
I could go on and on, and should perhaps write a post on the do’s and don’ts of networking, but the most important thing to remember is that relationships matter. Make sure you’re contributing equally and regularly to each of them. Be honest and fair because you never know who might be sitting across from you at the table in the future.
#3 Prove critical pain exists among many
You’ve worked your network and scored a meeting with someone interested enough to listen to you. Now what? You need to open with a bang and “show some leg right away” (thanks, David Cowan of Bessemer Ventures). Your job in the first few minutes of meeting with potential investors is to show that there are people in pain and that there are a lot of them. Then, only go in if you have a solution to an explicit need that absolutely must get fixed, versus an implied need, which is something that would be nice to get fixed.
When raising money at oDesk, I asked one question of the VCs in the room: how many of your startups are struggling to hire good people? Everyone at the table nodded and stared at me, waiting to hear the solution to the biggest problem early-stage startups are facing—lack of talent.
#4 Present a viable solution
Your solution needn’t be complicated or shocking. It simply needs to solve an explicit need. Airbnb began by offering travelers a safe and affordable alternative to hotels, Uber launched with an efficient transportation service, OpenTable helped make dinner reservations easier. The common thread is giving customers—ideally a large group of them—a product that will improve their lives and fix a common problem from the beginning.
In my post about lessons learned from startup failure, I highlighted the importance of product-market fit and careful focus. I believe that a company must choose one problem to solve and then solve it brilliantly, because a business will never be successful if it tries to be all things to all people.
#5 Show traction and early adoption
Any VC worth pitching knows that you are asking for funding to reach your next milestone. If you can provide some validation that customers actually agree with you, you’re ahead of the game. Showing market acceptance will lessen their risk of investing in your idea and help potential investors move beyond the biggest question they’re trying to answer: will this product work?
You don’t necessarily need paying customers yet (although it wouldn’t hurt!), but you do want to show that your product is being used. Take a look at Dropbox and Evernote. These two companies gained traction and ultimately pervasive adoption long before monetizing.
#6 Be lean
In a recent meeting with a young entrepreneur, he explained to me: “We’re starting a company. It’s me, a sales guy, and two business development guys.” He lost me right there. That is more than likely two BD guys too many, because until you’ve got a product, you don’t need BD. You don’t need marketing. You don’t need much. It is so much easier to bring a product to market in 2013 than it was 10 years ago. By leveraging collaboration tools like Skype, cloud-computing platforms like Amazon Web Services, and project hosting services like GitHub, you can launch a business with a very tight budget. Less is more in the beginning. Eric Ries, author of The Lean Startup, advises, “Don’t be in a rush to get big, be in a rush to have a great product.” Investors want to know that you are scrappy. They want to know that a half-million dollars will get you to the next milestone.
#7 Bring your A-Team
The fundraising process can be stressful. It takes thick skin and relentless perseverance. There will be lots of no’s, some rolled eyes and a few moments of doubt. When all is said and done, building a business requires trust—the kind of trust that takes years to develop and minutes to sabotage. I recommend doing your due diligence and being as certain as you can be that your team possesses strong moral character.
Early in my career, my team pitched a top Silicon Valley investment firm. Midway through our pitch, my colleague sensed that our idea was not resonating and in desperation he, how shall I put it...stretched the truth. Because the investment community is incredibly tight-knit and it’s well-known who is investing in what, this immediately took away our credibility. A few days later, one of the investors pulled me aside and said: “You should consider distancing yourself from people who exhibit this behavior.” He advised me to do this because he thought I was at risk of tarnishing my name by association. The company you keep informs your reputation for the long-haul, so make sure you’re alongside A-level players.
#8 Present with the long-term in mind
Investors are smart people. Don’t oversell. Don’t overstate. Don’t embellish. Instead, be as transparent, honest, and straight-forward as possible. Know that while your numbers might not be Google-sized right now, at this point they only need to have the potential to get there.
The story you’re telling isn’t about where you’ve been; it’s about where you plan to go and the roadmap for getting there. Above all, at this stage know that it’s more PowerPoint than Excel. Remember: VCs and angels are investing primarily in you.
Have you raised startup funding in your career? I’d love to hear about your experience and learnings from those meetings in the comments.