I always say that getting funding for a startup is not a lottery, as many may think. Guys with money do not sit and wait for someone with another fascinating unique idea. Raising money is a game of being well-prepared and focused.
Here is a list from me of what you should do and what not to grab investors’ attention and eventually to win their money.
Do #1: Know your stage
In a few words, all startups go through the same life circles in their development: Formation, Validation, Growth. We discussed already in the article about starting a tech startup without a CTO.
Startup funding depends on its current life circle
You must judge realistically about what stage you are in. Where you should seek for your funding will be highly dependent on that.
If your idea is raw: you have just started to evaluate possibilities and potential markets, to form a co-founders team, probably you should use your own money as funding for a startup, 3F (Friends, Fools and Family) or some small angel investors and accelerators.
Do you have your MVP ready, not perfect, but working on getting the first customers’ feedback loop? Then you possibly can look for more serious business angels and early-stage seed firms.
Do you face a constant substantial growth and need some fuel to accelerate even more? So now, venture capital firms will be your target.
In practice, what we often see is that many startups start looking for funding too early. They don’t know if their idea will become a product and get accepted by the market.
Do #2: Check if you can sell it
For most startups, it is essential to be sure that people and companies are willing to pay for their creations. So do your best to validate that you can sell it. If you cannot show revenues, you have a Letter of Intent option.
We guided a few startups who sold their idea already before the product was launched due to a solid Letter of Intent. As soon as they have finished the initial version of the app or SaaS, their first customers were already onboard.
Summing up, these are your Dos to validate market fit:
- Perform early research, check if the idea is already there
- Focus on a specific audience, solve a particular problem
- Pitch your product as a reflection of your final product
Do #3: Be Lean
- If needed, be ready to pivot and change the path
- Have a backup plan
- Better to start coding later than sooner
Along the way, you might find out that something works better than expected, and something doesn’t work. You should be flexible enough to be willing to change.
We all know those famous examples:
- Instagram: was created with the first version to become more like Foursquare with check-in, etc.
- Slack: it started as a game, which contained a chat tool to communicate internally. When the game failed on the market, creators started to sell a chat.
- Shopify: started as its own e-commerce website before creators realized that they built a solid platform.
- Netflix: started as physically mailing tapes
- Youtube: was originally a dating site
Do #4: Be effective
- Be clear about how much money do you need
- Focus on the cashflow
- Find a co-founder with missing expertise
- Put in your own money
It is essential to be efficient with money. Sounds obvious, but I have seen so many beginning entrepreneurs that hire trademark lawyers, spend hours on NDA, and craft their logo for ages. However, in the early stages, those issues are “nice problems to have,” and not the most important.
Investors want to see their money is spent effectively on:
- proven marketing
- technical development
- hiring the right people
You must have product knowledge and industry expertise. If not, find a co-founder who has. This is where I would recommend spending most of the passion and effort.
And yes, it helps if you put in your own money. If you are not willing to risk yourself, why should an investor risk with his money?
Do #5: Get the necessary skills
Because in the beginning, you have to do everything yourself. To outline a few, you would most likely need to possess:
- Learning agility
- Domain knowledge/ experience
- (product) Vision
- Business development and growth hacking
- Starting small, thinking big
As you can see, tech skills are not per se here. Why? Because they are usually a supportive factor. The product-market fit validation is way more important.
Eventually, third-party vendors like Moqod can help you out with the tech skillset. But no one will make your product marketable and saleable. So focus on sales, market, and product, and become successful, like the startups whom we helped in the past.
#1: Don’t overestimate your idea
- Don’t go for a too broad audience
- Don’t go to the field you are not an expert in
- Don’t try to be unique
- Don’t force your NDA upon every investor you meet.
We see that most startups vastly overestimate their idea. But honestly, the majority of ideas are not unique, and somebody has tried that before. Proper execution is way more important.
#2: Don’t be a perfectionist
- Don’t develop for too long
- Don’t wait too long put it in customers hands
- Don’t get into too many details
Your product shouldn’t be perfect. Instead, it is best if you have an audience or customer trying it as soon as possible. Just let them for expectation’s sake that is probably it not the final version.
It’s better to launch and to test often an imperfect version than to develop for 1,5 years and launch something already obsolete.
#3: Don’t ignore financial stuff
- Don’t try to be the cheapest
- Don’t expect to get a high salary for a while
- Don’t give away stocks easily, no advisory shares
- Don’t be unclear about the cap-table
For any startup founder, it’s crucial to treat your housekeeping finance with prudence. You need to have a detailed understanding of who owns what at each stage, especially when you are in the middle of getting funding for a startup.
Also, when making money, do not try to be the cheapest. Only when your innovation is really unique, you will be able to lower your costs drastically. But in general, if you offer something that addresses a customer’s pain, let him pay for it.
Make sure that you are not giving out stakes easily, for example, do not give away advisory shares to people who don’t add any value. And if they do, also ask them to invest. Why should you listen to their advice if they don’t have skin in the game?
It’s about product-market fit. Is there a demand for your idea? And the other way around, is there some hidden need in the market? So get prepared well, and let’s change this world for the better.