I know, I don’t even know you.
Here’s the thing. Let’s say Melanie is an early stage investor. If she placed a bet blindly for every startup that thinks they’re ready to raise, her chips would fall on the “not ready to raise” words written in fancy script on the soft green felt of the betting table. And she’d win. A lot.
My goal here isn’t to blindly tell you you’re not ready, but to help you figure out if you are (as quickly and painlessly as possible). You see, I thought I was ready to raise money for my last company. Three times.
Raising money takes 110% of your time, and it might take you 2-3 months to wrap up. This is time you can’t spend on your company. If you’re raising when you’re not ready, you might also tarnish the reputation of you or your company as not being self-aware enough to realize you shouldn’t be trying. Not to mention, even for a startup founder with the thickest of skins, it can take a toll on your motivation and ego.
Thankfully, I didn’t actually try to raise money the first two times so I didn’t waste a lot of time, hurt my reputation, nor bruise my ego. Yet, I still managed to figure out pretty quickly if I was ready or not. There are some subtle tricks to tip-toeing into the capital-raising waters without getting the waders out.
Do you have a network of angels and VCs you’re already talking to?
No? You’re not ready.
Understand this: Early stage investors aren’t investing in your idea. They’re not investing in your (lack of) traction. They’re investing in you. Plain and simple. Why? Whether they’ll admit it or not, you and your team are the only thing they can get a really good feel for. And more importantly, your idea is probably as wrong as your financial model (yes, we all know that’s wrong too). Whatever you’re pitching now has flaws. Likely some pretty serious ones. The question is, are you and your team the ones that are going to be able to figure it out and make this company work? THAT is what they’re betting heavily on at this stage.
Knowing this, do you think they’re going to hand over cash on the first, second, third, or even fourth date? Would you get married in four dates? Of course not. Much like finding a co-founder, finding an investor is similar to getting married. There is a dating process.
So why haven’t you started meeting investors yet? You should be dating now, when you’re not actually raising money. Haven’t we all heard the quote in the side-bar by now?
You should be out there, talking, getting advice, and letting people know what’s going on with you and your company. You should be adding these kind folks to a list that you update with your progress every month (or more frequently to really impress). Tell them what you’re going to do in the next month. Then do it, and tell them what you’re going to do next. Then do that. Repeat this enough and voila, you’re building a relationship. You’re dating. You and your potential investors are getting to know each other, and they’re learning that you are a hell of an executor. You get things done. You figure things out.
At some point along that journey, raising money is going to come up (and you might not have to be the one to bring it up!) They’ll already know you and be comfortable with you, so you can skip that part and get right to the meat of raising money with a friendly investor that’s already on your side.
Leverage these relationships, through advice and conversation, to get a feel for whether or not you’re actually ready to raise money. Best case scenario, when they start bringing up the topic you know you’re getting close.
Do you have momentum?
No? Guess what? You’re not ready.
Momentum is defined as:
“The quantity of motion of a moving body, measured as a product of its mass and velocity.”
Momentum is a measure that comes from the world of physics. If I were to translate this to the startup dimension it might read something like this, “Does your company have substance and is it moving?” Translating back to the physical world, if your company hit me in the gut would it take my breath away or would it make me unconsciously scratch my belly?
Substance can come in many forms:
- traction and early adoption
- partnerships that are valuable to both parties
- a functional product, with actual paying customers
- a team that’s off the charts
- a great technology that works
- a compelling solution to a troublesome problem
Movement can come in many forms as well:
- consistent or rapid growth in multiple meaningful metrics
- trusted people, media, or organizations saying great things about you
- consistently hitting difficult to achieve milestones
- graduation from a top-tier accelerator
- a killer go-to-market strategy that you’ve tested and works
- a repeatable formula for success
Obviously, this is not any kind of definitive list. But you’ve got to have a lot of both of these, or you’re just not ready. The tricky part is understanding whether or not the substance and momentum you think you have is really, truly, product-market fit.
In today’s environment you’re not going to raise money to “get some customers” or “figure out a go to market strategy” or “find a cofounder” or “build an MVP” or “get some publicity”. You’ve got to prove you can do that on your own. You’ve got to come to the table with a tested theory and a formula for success that investors can buy into. They’ve got to believe that $1 in means $2 out, and that their money is going to create value in a measurable way and ultimately get your business to the next stage.
Give yourself enough time
When I ask founders what they think kills most startups, they say “they run out of money”.
Well, yeah… But why did they run out of money? Did they not build the right product? Did a partnership fail? Did they spend too much time on the wrong thing?
<insert 17 other excuses here>
The correct answer? They ran out of time. Time is what kills every startup. And most of us severely underestimate how much time it will take to figure things out. You’re going to want to triple your estimates. At a minimum!
Remember when I said the one thing an angel or VC can bet on with confidence is the team, and whether or not that team will be able to figure things out? Regardless of how cool the product is, or how amazing the technology is, or how great your prospects are, there are things wrong with your company that you’ll need to figure out. To figure some of these things out, it’s going to take you making a wrong decision and going deep down a wrong path. You will spend a lot of effort on this before you realize you need to change direction. This will unexpectedly chew up enormous amounts of your runway. Your time.
It’s up to you as a founder to make sure you don’t run out of this one critical resource.
In my previous company we made substantial direction changes (pivots) three times in about five years. That’s a lot of changes. But we did some things along the way to make sure we never ran out of time. In the early stages, maybe that means you…
- …work a consulting gig to pay the bills while you figure out your company or product.
- …pivot to a services business to pay some bills as you’re building out your technologies.
- …attack a customer base that is easier money but might not serve a long-term vision.
- …get better mentors and advisers to help point out when you’re not focused properly.
- …become more coachable so you actually listen to them.
The point is, do whatever it takes to extend your runway. Because it doesn’t matter how good you are, how great your technology is, or how amazing your potential is if you run out of time to prove it.
So let’s repeat for clarity…
- Build your network
- Ask for advice
- Date along the way
- Let the money come to you
- Build measurable momentum
- Hypothesize your theories
- Test them
- Create a formula for success
- Don’t run out of time
Article also posted on Xconomy.