Shark Tank perpetuated this terribly wrong notion that raising money is a simple and linear process that can be done in a 20-mins session. Who would imagine that you can go on a TV show to raise money?
The problem with this?
People actually believe that’s how things work in reality
And this is why we tend to see so many young entrepreneurs who are rightfully trying to launch themselves into a life full of accomplishment and end up quite frustrated because they can never raise the capital they think they need to create the next Uber.
A little side-note: I have never raised money. Yet, I do have the experience of pitching as a startup founder to investment boards and screwing up badly, and of working as a corporate venture capital analyst and having evaluated more than 100 startups, from which a few were actually recommended for investment.
Now, the point is I believe what I’m about to tell you goes way beyond any personal opinion. We will talk specifically about what 99% of entrepreneurs are missing and that is absolutely unquestionable when raising money.
We will also discuss the strategy that entrepreneurs must follow to disproportionally increase the odds in fundraising.
So, let’s get started; here’s our agenda:
- What 99% of entrepreneurs miss when raising money
- A new strategy to fundraising
What 99% of entrepreneurs miss when raising money
Let me tell you what I see every single day: the questions that I received when I was still working in corporate venture capital, and the ones I often receive from you, guys, or in social media platforms such as Quora or Reddit.
Most entrepreneurs don’t notice that there’s a huge gap between having an idea or a minimum viable product (MVP) and actually raising money.
Let’s imagine the following scenario:
You have this amazing idea for new software that will easily reduce the time IT companies spend in fixing bugs.
So, you talk about it with a close colleague in your corporate job, and because he seems really enthusiastic about the idea, you invite him to join you as a partner.
Then, you guys start performing some calculations about what you need to continuously develop the technology and also about your revenue estimations, and quickly you notice that you’ll need capital to get started, mostly for 1 reason:
You and your friend have a full-time job that you cannot quit because both of you have bills to pay.
So you cannot dedicate all your time to your new and exciting startup, which also means that it will take like 6 months to have your first version or an MPV ready.
Now, what do you do?
You start researching online and you talk with all those ”really experienced” guys that tell you that you must raise capital. Otherwise, you will never be able to get your business running.
And, because of this, you jump immediately to the last stage: you go talk to investors.
So, you create your 3 versions of pitch decks, your 60-page business plan, an exhaustive financial plan, you talk with a lawyer to prepare a non-disclosure agreement (NDA) for you.
Time to raise some money, right?
Now, here’s a tiny issue:
Let’s even imagine that you actually manage to get a meeting with a potential investor, ok?
The answer founders would here in 99 out of 100 cases:
“Well, your idea sounds great, but come back when you have traction.”
Not to mention that if both founders are still having regular jobs, it is impossible to show such level of commitment.
A quick side note: personally, I get a little bit pissed off every time I see a typical situation in which someone has a full-time job and is trying to raise 2M $ from scratch to pay his humble salary for the next 36 months. And they say entrepreneurship is risky, huh?
So, you receive this same “come back when you have traction” reply from 2 or 3 investors and all of a sudden, you’re wondering why the hell nobody invests in your idea.
“How’s it even possible that nobody sees the potential of this technology? This is a 15B$ industry!”
Ultimately, you end up really frustrated and mentally exhausted, thinking that perhaps you’re not made to being an entrepreneur and you decide to give up.
You might think this is not for you. And this is a problem, you see, because we’re wasting outstanding talent and remarkable capabilities down the drain just because you don’t know the right strategy to fundraising – and that’s actually quite normal, it’s not trivial to understand everything you need to do.
The problem is the programs such as Shark Tank that make it look easy when it’s not.
Now, this is not the only example: in this case, we have the typical “day job constraint”, but you can also find a lot of other cases.
For example, there are guys who have already have a developed platform, so they decide to approach investors, and the answer is also the same.
Ok, so, where’s the problem? What’s happening here?
The problem is that 99% of entrepreneurs don’t understand that investors don’t put money on ideas or products that are not validated. I know this word isn’t sexy, every entrepreneur deeply believes his idea is more than “validated”.
It’s obvious that there is a clear market opportunity, right?
Well, it’s not that straightforward. You know, they’ve been lying to you in the management school. They tell you that marketing is all about solving customers problems, but they’re missing a tiny but important step:
Marketing is all about solving customers problems that these are, IN FACT, willing to pay for
It’s a huge difference. There are a lot of problems that simply aren’t appealing enough for people to spend their money on them. It might be the timing as well.
Perhaps, in 1 year or so everyone will be eager to buy a product, but even if that’s the case, it doesn’t solve the problem that your company will be off the market in less than 1 year.
And this is why investors only put their money on numbers, on what we usually call traction. If you cannot show investors traction, they won’t invest.
Now, there are some really rare exceptions, of course: if your founding team is composed of highly successful serial entrepreneurs, then you might find investors giving you money when you’re only in the idea stage.
If this not the case, then bear with me.
Between having an idea and reaching out to investors, there’s a whole strategic process that you’re missing, and that’s why you’ll never be able to raise money.
This might lead to a question:
“Ok, Pedro, but that’s the Egg and Chicken Paradox, how am I supposed to raise money through traction if I need money just to get the initial traction?”
And the answer is: you must follow a different path.
Let’s continue.
2. A new strategy
This is the strategy that will not only help you raising money for your business, but it will also prevent you from creating a product or service that no one is willing to pay for.
This is what virtually every entrepreneur misses, from brilliant engineers to young graduates who create a 60-page business plan. We all forget that ideas are supposed to be validated.
And here’s the thing: you don’t actually need to invest that much time and money on validating an idea, we’re just lacking the necessary creativity to get it done.
It’s easier to getting busy instead of being premeditated and cautious. But let me tell you that twice the time invested in this stage will bring you disproportional results down the road.
Not only will you be able to raise money, whether from investors or even from your customers, but you’ll also be able to create a tremendously successful business.
Step 1: Identify your target market
The very first thing you need to know, even before you start working on any given product is to know why you’re doing what you’re doing – I know, I know, such a cliché, so boring.. zzz.
But here’s the thing: if you really want to raise money or be successful in general, these are the foundations that you must have. And you’ll see how they help you.
Back to the point: what is the problem you’re trying to solve, in the first place?
Is it a burning pain? Does it help a customer to save money? Increasing sales? Doing something faster? Having a better experience? What is the story that you’re trying to tell with your product?
At the end of the day, you want to make sure you have enough information about the problem you’re trying to solve and which individuals or companies you are targeting at. What do they share in common?
Ideally, you even want to create an imaginary profile – the Avatar – for your most common and typical customer. Just imagine how he’d be like. Is it a company? Is it a man, a woman? What’s his age? What does he do in life? What does he do on Saturday mornings? What type of car does he drive?
If it’s a company, how big is it? What’s its industry? What type of service does it sell? What’s a typical day to day at this company and why would they care about the product you’re trying to develop?
Make sure you know the most you can about your target and the pain you’re solving.
Now, step number two.
Step 2: Squeeze your idea
Before you start any developments, you want to guarantee that you’re not spending time and money at all (if possible) on something that you’re not sure is going to sell.
Let’s imagine you’re developing a piece of software but you lack the time and technological resources to get it done.
The first thing you want to do is to talk with a designer who understands your user experience. Ask him to design all the main wireframes or mockups of your concept. You want to be able to see and demonstrate your final product before you even start the development.
There’s no need to be highly detailed, you don’t need to have every single tiny detail in the mockups, just need the core features.
This is crucial! I’ll repeat: start with the end version; make sure you’re able to show people what you’re going to develop.
By the way, today you have some outstanding online tools to design wireframes like Balsamiq or Mocking Bird that are very useful to have all your software scratched before you address a designer.
That way, you’ll be able to save some bucks. Oh, and if you want to avoid paid solutions at all, there are also some that are absolutely free.
So, why starting with the design of the final version?
You’ll have your final product ready to be shown, even before you’ve spent a dime on its development. And you know what? You don’t really need a fully operational version to show people your vision.
You can have a beautiful mockup that seems exactly like your software, website or mobile app, even though it has no code behind it.
I know it is only the package, the entire box is empty. But the first question you must ask yourself is:
“If no one likes my final version, why would I even invest my time and money in developing all the code? People won’t buy it anyway.”
In fact, this “Squeeze your idea” principle might be applied to pretty much any type of business (unless you’re trying to create some type of oil refinery).
You can always squeeze your product to a really basic and minimum version that is enough for a first demonstration. You see, 99% of entrepreneurs don’t do this. They want to jump right into the development so they get busy working on their “startup”. That’s what entrepreneurs do, right?
But, for the ones who know this strategy, here is where your leverage starts. Twice the time invested at the validation stage will bring you disproportional rewards much later down the road. Never forget it.
Step 3: Get your first customer or a pre-order
The next step is all about finding customers that are EAGER to pay for your product.
One of the best, if not the best, signal that you’re idea is tremendously healthy is having a customer actually paying for your product in advance, and giving you the time to develop it. There are multiple ways you can do this:
- Crowdfunding on platforms such as Kickstarter, GoFundMe, IndieGoGo, CrowdFunder, etc.;
- Subscription-based models in which the customer pays a monthly fee for a recurring delivery;
- Selling a product upfront because it really solves a burning pain;
- Agreeing on giving the product for free in perpetuity if the customer funds it.
And there are many other ways that we will detail in the future, but I’ll talk about that at the end of this article.
For all types of products, from books and services to software, you can definitely reach out to your potential target market and ask them if they’d be willing to pay in advance for your product, even though you still don’t have it.
And here’s where having a final version mockup really comes in hand. How can you possibly help your potential customers visualizing your final product if you cannot show them how it is going to work?
You know, we’re human beings; seeing something not only encourages us a lot more to trust that it is actually credible but will guarantee that you and your customer are on the same page when it comes to the end results, so there is no discrepancy between what you and your customer imagine the product will be.
So, let’s move on to the fourth step.
Step 4: Now, you’re ready to talk to investors
One of the things that differentiate highly successful entrepreneurs from the ones not-so-successful is their patience and discipline. As I like to say, entrepreneurship is a matter of character and discipline.
So, if you’re already generating money, perhaps, you want to keep doing things manually and small for a little while, so you have the time to learn how to handle all the struggles of running operations.
But for the purpose of this article, let’s imagine that your business really needs some scale in order to be profitable and you cannot sustain bootstrapping much longer.
In that case, after you have your first orders or you’re able to show some clear signals of traction such as having a pre-order, a customer funding your business, outstanding conversion rates, growth rates, amongst many other options, you’re, then, ready to address investors.
By the way, if you’re not familiar with the concept of bootstrapping, it means growing an operation only through your own capital and resources, usually with the aid of some friends and family relatives’ capital, too.
If you noticed, in this 4-step strategy, the first 3 steps are forgotten in 99% of the cases!
The vast majority of entrepreneurs pick an idea without even researching it and its potential customers. And, then, they jump directly to the 4th step – addressing the investors.
Now, nobody ever told me this, candidly.
Fortunately, I had the chance to notice that this was the mistake every entrepreneur was doing when I was working at my Corporate VC role in which I used to interview startups and evaluate them.
As soon as I entered the company, I immediately started understanding that even some great business ideas that I’d consider outstanding, in the first place, were not appealing to us – the investors.
And I used to wonder why the hell we were not interested in such a great concept.
Well, it all makes sense now: because we had no idea whatsoever if the market was really looking to pay for that product.
There’s one thing that you must understand. We tend to see the world as the reflection of our own image. But unfortunately or fortunately, that’s not how things work. The world is made of people with interests and impulses that you cannot possibly understand unless you test your assumptions.
That’s why when you start a business, you should always begin by validating assumptions. You create a product to solve a specific need that YOU BELIEVE really exists and is an interesting opportunity. You’re also making an assumption when it comes to your potential customer.
You THINK a typical guy is an investment banker who loves to eat donuts for breakfast and plays squash at the end of the day, but you have no way to be 100% sure or close to that if you do not test your assumptions! In fact, it can turn out to be exactly the opposite of what you expected.
You see, and investors know this. Usually, they have a considerable amount of experience and will definitely smell “risk” far, far away. If you’re not confirming your assumptions, they won’t give you the money.
Investors are mentally prepared to miss a lot of outstanding opportunities, that’s not a big deal. They know they’ll lose money most of the times and they know some unicorns might also slip through their fingers.
What matters is the moment in which you’re pitching to them and the evaluation they make out of your team traits, your business traction, your eventual cost structure, and a couple of other important attributes.
Now, one final note: I wouldn’t like you to be stuck at the validation stage forever either. Even if this is a crucial point for any business and to generate traction that can, then, be demonstrated to investors, you still want to make sure you don’t lose all your motivation to starting a company just because you cannot find a way to validate the idea.
I don’t want to sound like I’m contradicting myself, but not every business needs to raise money from investors, and there are a million versions of each type of business model.
Besides, your original idea will often mutate a lot until you finally launch the company, so I definitely believe it’s important to find the right balance: make sure you do all you can to validate but don’t be stuck at it for 6 months.
The main point is that it is crucial to develop the mindset of continuously coming up with assumptions and testing them before you invest your time and money.
It’s definitely the best advice I can give you to mitigate all the risk of starting a business, and that will definitely skyrocket the odds of raising money.
What is your experience with raising money? Have you got through all four steps? Let me know in the comment section below.
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