Where to Focus Before Raising Capital

July 30th, 2015   |    By: Wil Schroter

Raising capital isn’t easy.

Don’t be fooled by the blog hype and sensational headlines – it’s still a game where less than 1% of new businesses will get funded by storied VCs and angels.

So for the rest of us, the non-one percenters, we need a more reliable playbook to invest our precious cycles in.

Busting the Startup Bubble

Let me get this party started with a big shot of sobriety.

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Over 500,000 companies will be started this month in the U.S. alone. Venture capitalists will write less than 100 checks to them in the next 30 days. Angel investors will add just over 4,000. We’re still around 495,000 checks short of everyone getting a piece.

I share this math for two reasons.

1.  To point out that if you’re going to bank your future solely on an investor check, you’re banking on painfully bad odds.

2.  To tell you that if you insist on betting on those odds, you had better make sure you’re doing everything humanly possible to stack those odds in your favor.

The good news is there is a fairly repeatable formula for making sure you’re approaching this challenge appropriately. You’ve got limited cycles as a startup Founder so you need to make sure those cycles are spent as efficiently as possible.

TL;DR Version

Startup cycles are best spent in 3 successive phases:

1. Add More Customers, Not More Product. Whatever you can do to test customer demand first, you should be doing. Basically don’t spend any cycles in hopes that “if you build it, they will come.”

2. Make Revenue a Priority. Your goal should be to get your business to a point where it’s self-sustaining as quickly as possible, even if it means not being able to make payroll just yet. Even a little bit of revenue can buy you the time you need to make critical decisions later.

3. Raise on Metrics, Not Story. Prove your metrics – then raise capital. Don’t try to hit the investor trail with nothing but an idea and expect things to go well. You typically get one shot at raising capital, so make sure you stack the odds in your favor.

Given the fact that your most valuable resource is your focus, you’ll want to spend that focus in the areas that will have the highest return. Whether you raise capital or bootstrap, aligning customer demand, generating some revenue and proving a few key metrics will always be incredibly valuable.

#1 Add More Customers, Not More Product

Building a new product is fun. I know I love it, and I’m sure you do to. But at some point we have to put this thing in front of a customer to find out if anyone else cares!

We estimate that about half of the 15,000 startups we see each month at Startups.co have yet to show their product to a customer. Sometimes it’s for good reason, but more often than not they are preventing themselves from talking to their single most important constituent.

4 Phases of Customer Validation

  1. Survey Potential Customers. Long before you build a thing, ask real customers if they want exactly what you’re buying. Find people who are real potential customers (not your friends) and ask hard questions. The best thing you can do early on is to avoid building things no one wants. I can’t stress this enough.
  2. Give a Taste Test. Once you’ve figured out what your customers (probably) want, spend the fewest number of cycles possible trying to get them something they can taste test. It doesn’t matter if it’s a mobile app that only 20 people download or a cookie recipe that 20 people try. Your focus should be on improving the product based on real feedback from actual users.
  3. Get Paid Anything. The delta between giving something away and getting paid even a dollar is monumental. As soon as you can possibly make your product available for sale, make it available. Even if customers get 99% of the product for free, always test some version of a paid product. Don’t worry about how much they pay – worry about whether they’ll pay.

  4. Test Elasticity. Once you’ve found out that someone will pay for your product, now test every conceivable price point for that product. Try different models (paying as a subscription, paying in payments, paying more the first month). Imagine what would happen if you were to find out that you could have just gotten paid 3 times as much for your product if you actually tested the price!

If you can’t prove that customers want your product, then your metrics, revenue or any other aspect of the business won’t matter. So proving that demand should be your first priority before even thinking about anything else.

#2 Make Revenue a Priority

If you completely ignore every other aspect of this article, I ask that you at least consider this: make revenue a priority. Think of revenue—at almost any level—as being the only insurance policy that you have that your business will survive long enough to be successful.

The probability that you’ll look back and say “I’m so glad we never made any money” is incredibly, ridiculously low.

For every Facebook that shunned revenue there are countless startups that ran over the cliff like Wile E. Coyote thinking revenue wasn’t important.

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Don’t be them.

I like to break these targets up into three successive milestones that help you to figure out which boss battle you need to beat next at each level (yes, I love video games).

The 3 Step Revenue Progression

1. Keep the lights on. What is the least amount of revenue you need to make just to keep the lights on? I’m not talking about paying yourself or your staff – just enough so that customers can still show up and buy something.

This is a critical target because it means that even if you have to get a side job to pay your bills, the business can still exist and grow without you.

This should be your absolute first goal in making revenue a priority. If you can hit this milestone you can at least be sure that if all else fails, the business will still exist long enough for you to capitalize it at a later date.

2. Pay your minimal bills. Paul Graham of Ycombinator famously called this being “Ramen Profitable.” He meant you’re generating the least amount of money necessary to pay your bills and eat – albeit lean.

I often say that startups don’t go out of business – Founders do.

That’s because if the Founder can keep the business up and running by themselves, even if it’s not growing, it buys them the time they often need to either grow revenue or find more capital. It usually doesn’t feel awesome at the time, but it’s a critical make or break position to achieve.

3. Staff paid. Long before you ever hit profitability, there’s the point when you can pay at least one person that isn’t you. This is a critical juncture because it usually means the business can function while you work on moving the ball forward.

Getting to this point often multiplies your options. You can find the time to raise capital, work on new revenue streams, or do some critical business development – all of which can grow the business, not just keep it alive.

By focusing your efforts around one particular milestone it allows you to think through what those efforts can achieve. Obviously you’d like to get to “Staff Paid” and beyond as quickly as possible, but try to understand that “Keeping the lights on” is a critical milestone that may affect how you spend your cycles.

You can always grow from there.

#3 Raise on Metrics, Not Story

At some point I’m guessing you’re going to want to raise capital – and that’s great. We see thousands of companies looking to raise on Fundable.com so we spend a lot of time explaining where and how to position their raise.

Stories Are for Children – Prove Metrics

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The first thing we encourage is to focus on proven metrics in your raise, not just a “good story.”

While it’s true that a good vision and story can get investors excited, it doesn’t mean that it also convinces them to write a check. Good stories are wonderful for children, but unless they have a giant checkbook, you’re going to need metrics to attract investors.

A Few Good Metrics

The obvious question is: what metrics do investors care about?

While the hot buttons for investors can vary based on the type of business, there are a few metrics that just about every investor gets hot and heavy about. I list these in order of how you’ll likely acquire them, from getting a customer to learning detailed acquisition costs.

Four Levels of Good Metrics

1. Traffic, Customers. If your business generates a high amount of demand (traffic, in-person customer visits) you can often explain how that could turn into a meaningful conversion rate. It’s still a bet that those customers will buy, but it’s better than not having any customers to begin with.

2. Conversion Rate. If 100 people visit your Web site, how many sign up and/or buy? A high conversion rate, even on small traffic numbers, shows that engagement and demand are legitimate, and it’s not just a bunch of tourists visiting.

3. Revenue. Show that someone is willing to pay something for the value you’ve created. Chances are it won’t be a ton of cumulative revenue, but proving that there is money to be made in your business, albeit small right now, is critical.

4. Cost Per Acquisition (CPA). If you sell a product for $10 and it only costs you $1 to acquire the customer, your CPA is $1. If your CPA is $15, you’re screwed. If you can show that you can acquire customers and generate profit, investors will be more willing to believe you can scale that.

Proving these metrics don’t necessarily guarantee you will get funded, but not being able to prove them is a pretty consistent recipe for failure.

Avoid Vanity Metrics

A word of caution: try to avoid “vanity metrics.” Vanity metrics are those metrics that don’t really drive the business, like how many social shares you got or how many times you were mentioned in popular media.

There’s nothing wrong with having this type of momentum, but unless it drives the core business, try not to put too much weight on them. Savvy investors will easily see through them anyway and it obstructs your true progress.

And Finally: Just Focus

The acts of starting a company and maintaining focus almost feel diametrically opposed.

What you want to avoid is putting all of your focus on raising capital as the only possible outcome. The process always takes much longer than you expect and it rarely pans out if it’s your “end game.” Raising capital should accelerate your business, not provide life support.

Each of the items we’ve covered—generating revenue, acquiring customers, and focusing on important metrics are not only a facet of attracting investors—they are the cornerstones to building a viable startup for the long haul.

About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

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