Every time I remember my first meeting with an investor, I cannot avoid laughing a little bit. We were in the middle of 2015, two friends and I were creating our very first startup – Walkamole, a business that generated more than 80k€ in revenues in less than 6 months (feel free to read the story here) – when we decided that, out of curiosity, we could talk to an investor, you know, just to “see what we could work out”.
And we actually managed to pitch to this quite public and notorious Portuguese investor – he was one of the Shark Tank investors, and truth be told, he has a great humor and he’s really an outstanding person.
There we were, pitching Walkamole to an investment board with at least 7 persons, trying to see whether they could “offer” us something interesting to fund our business – yep, we had absolutely no idea what we were doing.
Everything was going great, we’ve pitched our business quite well, the investment board seemed interested – we had some good signals of traction, that’s why – and at a certain point, the investor asks us:
“So, what are you guys looking for?”
And here’s when I pick my brilliant 5-minute calculations made during the previous evening and tell him convincingly that we could work out an agreement in which the investor would give us 30k€ in exchange for…
Royalties for 5 to 10 years until the investor had generated a 10% return on his investment!
… seriously, royalties?… and a 10% return on investment?…
I know, it was terrible by me, but hey!, it seemed like a plan. I mean, interest rates are low nowadays, perhaps a 10% return on investment was already good for the investor – I feel embarrassed writing this. And that way we wouldn’t open any equity while funding the business, which was something important to us.
Well, this is basically when the investor tells me – and I’m literally quoting here:
“Oh, now you’re shoving a guacamole up our … 🙂” – he literally used the word guacamole on purpose.
You see, we’ve done some of the coolest mistakes you can possibly do when you’re funding your business for the first time:
- We’ve addressed an investor in the wrong timing, as we thought we had to grab this opportunity.
- We had no idea what investors are looking for and how the whole funding process actually works.
- We didn’t want to open any equity of the business because we were absolutely convinced of our own greatness, as so many entrepreneurs typically are too.
Now, fast forwarding 1 year, I’ve started working in a Corporate Venture Capital firm and my role was interviewing and evaluating early stage startups to scout potential investment opportunities. Some of these entrepreneurs were still in the idea stage – 2 guys and 1 PowerPoint – and others were already presenting some healthy signals of traction.
So, as you can imagine, not only I know exactly what us – the investors – were looking for, I’ve also seen all the mistakes that entrepreneurs usually do – and many of them are shared with the mistakes I had done in the past, while I was running Walkamole.
Now, I’m not writing this article to lecture you on what to do to fund your business; my goal here is merely to share some thoughts and try to add as much value as possible on what’s stopping the bulk of entrepreneurs that dream of creating the next Uber from raising the capital to kick-start their operation.
At the end of the day, I am and I think I’ll always be an entrepreneur, and nothing gives me more pleasure than actually seeing other guys that are doing their best to create something outstanding, accomplishing the results they seek.
So, let’s focus specifically on all those entrepreneurs out there that are dreaming of creating something huge that requires capital to scale fast.
Some of the questions about funding that might cross your mind at this stage are:
- Is it even possible to raise money? How could you ever be sure that you have what it takes?
- How can you find investors? For sure they don’t pop out of trees, right?
- What’s the funding process like? I mean, step by step?
- And how do investors think? What are they looking for?
Are these some of the questions that have been holding you back? Do you feel like you’re blocked in the next stage of your startup because you don’t know how to get funding?
Well, first of all, let me tell you that I understand all of these doubts, and it sort of pisses me off to see the type of overwhelming advice you can find out there.
How are you supposed to feel more comfortable and confident about funding your brand new startup if some of the best advice you can find online, for example, are recommendations like:
- Hire great advisors! You need to learn from the best!
- Appoint experienced directors on the right seats!
- Get the right lead investor!
My question is: what sort of brand new startup has the money to hire great advisors? Or appointing experienced directors? If you’re not even making money, how can you expect to pay salaries to experienced directors? And third, getting the right lead investor? But what’s a lead investor, in the first place?
I could go on, and on. The truth is, these are important advice for guys looking to raise capital in later stages, when you already have a running operation, you’re generating sales and traction, and when you’ve already been in the game for a while.
But if you’re just starting out with the development of your idea, you’ve just assembled your team, and you aren’t even incorporated, what you’re looking for is mentorship on which steps to take to disproportionally increase the odds of successfully funding your project, so you can, then, move forward with your business in a consistent and sustainable way.
I’ve met a lot of people that are just starting out – I’ve been there myself, and in a certain way, I still am -, guys with a tremendous mindset who are incredibly determined to succeeding, and who are looking to take smart and important decisions that will help them avoid feeling like they’ve been rejected by the investors and that their products will never thrive. And, unfortunately, these are typically the people that suffer the most with the type of advice they find online because after jumping from blog to blog, you’ll only get confused with the terms used in the industry and you won’t ever realize what really moves the needle and what doesn’t.
You know, the Pareto Principle: 20% of the things impact 80% of the outcome.
In my humble opinion, I feel like the big chunk of advice we see out there, and especially in the online world, is pointed at entrepreneurs with some sort of experience raising Seed, Series A or even later rounds, typically the guys that are already highly involved in the tech startup scene, that don’t represent at all the interests of first-time entrepreneurs who are trying to figure it all out. The type of terminology used tends to be very specific of the whole industry, and the advice is more often than not presumptuous, like 99% of entrepreneurs are just “too dumb” to understand what’s needed to fund a business and those who get it are “Gods”.
We have to be honest with ourselves, not everyone has access to entrepreneurial environments in which you have seminars with investors where you can perfectly understand what they’re looking for, the type of terminology they use, and ultimately where you can educate yourself about the subject of seeking investment.
And for a lot of entrepreneurs, raising money is THE major bottleneck separating them from their dream lifestyle. So, if you can’t access investors, if you can’t ask them to help you or to evaluate your pitch, if you can’t have a mentor guiding you on the right and critical things to find investment, how can you get educated about the subject?
You know, it’s absolutely natural that you and so many people have no idea how to raise money, and worst, that you feel blocked, in the first place, simply because you cannot see yourself funding your business through investor’s capital. Because you think they’re unreachable and that the bureaucracy and accountability required are for other type of entrepreneurs in a completely different “league”.
It somehow makes me remember of what Ramit Sethi usually says: before him, every other personal finance advisor would recommend that you’d keep a budget, that you should cut on lattes, not being able to understand that that advice doesn’t work because people don’t want to keep a budget, they want to live a rich life.
And here, when it comes to raising money, it seems like the picture painted is sort of similar: we’re trying to teach people on how to structure their pitch decks, how to calculate their company valuation, how to structure their company board, how to set up their governance system, when, in the reality, we have millions of entrepreneurs every year just GIVING UP on their ambitions, aspirations and dreams because there’s no one mentoring them on what really are the critical steps not only to funding their businesses successfully and without getting burned out, but also to creating remarkable products that people are eager to pay for.
I don’t know if you have already talked to any investor or not, if you’ve felt along the way that you’ve been rejected, or even if you felt like a “loser” because you’ve heard someone telling you that your idea stinks, and even advising you on not wasting more of your time on it.
If any of those thoughts somehow crossed your mind, even once, let me tell you candidly that no one who’s trying to create something and have an impact on the society should ever feel like that, it’s simply not right, and for sure it isn’t fair. Believe me or not, we’re all dependent on the few and brave people that are willing to say out loud:
“This is who I am, and this is what I’m making”.
I’ll even quote myself (as someone liking his own Facebook post, I know…) to share with you what I’ve written in another post called “The Root of Entrepreneurship: Thinking Differently”:
“While the entire society will regularly kick these guys to be equal to everyone else, will criticize them, make fun and judge them, they will still be the ones who create the breakthroughs, and they’ll be the ones who push the human race forward.” – Because the people who are crazy enough to think they can change the world are the ones who do.
Very well, so now that we already know that it is perfectly OK and common not knowing how to fund a business, I’d like to share with you 4 thoughts about the subject that I hope will highly impact the way you see this process.
1#: Why I love bootstrapping and why you should too
Now, you’ll find curious to know that I’m currently launching a course on Raising Capital For Your Startup. So, your first and quite good question could be:
“Why are you telling us to bootstrap if you want to help with external funding?“
And I would say: “Good question! Here’s why:”
Because at the end of the day, my interest is that you’re able to accomplish what really matters: creating an outstanding business, doing something you love, earning more income to live a richer life, and having your dream lifestyle. That’s all that matters to me.
So, to guarantee that I’m sharing all I know and what I truly believe will help you achieving those end goals, I have to teach you the right “tricks” and practices for you to be successful.
And yes, the number one mistake that virtually all entrepreneurs do when raising capital is trying to raise it in the first place, when it isn’t even needed.
First of all, for my newbies out there, bootstrapping means you create and grow a business only through your own capital or asking some friends and family relatives (warm circle) for a modest loan to help you kick starting your business.
Now, bootstrapping is probably the best way to build any business, mostly for two reasons:
1. You will have all the time in the world to learn at your own pace, to experiment, to validate your concept and to get know-how about the startup and investments world, without having a rope around your neck. And this is so important, you know? You cannot forget that raising external capital means a relationship with an investor, it is like a marriage, hopefully from 3 to 5 years – it won’t be for life, don’t worry, because the investor will eventually want to sell his participation around the 5-year mark.
2. Secondly, because you won’t have much money, you’re forced to be creative and come up with a business model that is really Lean, which means that from the get-go you’re developing a hypothesis-driven mindset because you have to be rigorous on how you spend the capital you have. And I truly love this idea that you have to come up with non-expensive means to launch your business because it helps you focusing on what really matters: the 20% that move the needle, you see? You’ll only work out the core features of your product, and you’re going to focus on sales as fast as possible to be able to grow your operation.
For example, on my 4-step framework to funding your business, the second step is called Squeeze your Idea.
And, in summary, it means that you should find a way to start by the end “package” or layout of your product, instead of investing time and money on developing something that people don’t want. If you’re developing a new software, you should first design the mockups of the final version of the software and give them life, so you can, first, gain traction through some customers’ pre-orders or even by having your customers funding your whole business.
You see, when you have cash ready to invest, this type of process will never cross your mind. You won’t feel the need to be creative and to narrow down your focus.
By the way, did you know that the vast majority of Fortune 500 companies were created with less than 10k$? That’s because a successful business doesn’t arise from the amount of money that you or anyone else invest in your business. The money cannot speed up the most crucial ingredient of all businesses that also applies in our own relationships: Trust. And trust takes time to be built, it doesn’t appear overnight.
I would always recommend you to pick a good source of motivation, starting small and walking baby steps. Do things manually to guarantee that you’re adding value to someone and that you’re creating a product or a brand that will be missed, if all of a sudden you’re out of market.
And only then, when you already have customers trusting you, then you can think about scaling up. But if you do it before the right timing you’ll only focus on something that is really not your top priority and you can easily fall in the void between building a remarkable business and raising money.
And I definitely don’t want that to happen to you.
So, my humble advice: if you have money ready to invest, make sure you invest it in other financial applications and start a business with virtually no cash at all. Grow it organically, from the ground, customer by customer, as that’s definitely the right formula to creating something that is remarkable – worth of being noticed.
2#: Delaying fundraising doesn’t mean you won’t raise capital, it only means you’re doing it correctly
Now, if you recall what I’ve mentioned in the beginning of this article, I’ve told you that during my first startup we addressed this investor in the wrong timing. But what I didn’t told you is that we’ve done it because we had someone referring us and we felt highly obliged not to miss this huge opportunity to… well, who knows what… for sure we didn’t know what we were looking for.
And, you know, if you’re like me and you try to grab every single opportunity, from time to time you’ll face this dilemma of focusing on what you’re doing or shifting to something shiny and new that was thrown in your way.
And, honestly, one of the things might be raising money. Truth be told, getting funding is and will always be seen as an excellent way to kick start any business. You know why? Because you’re finally able to pay yourself a salary, and for months, sometimes years, the founders don’t receive a dime.
As soon as you raise money, it will be guaranteed that you have a business, right? You’ll finally be on your way to creating your dream company and appearing as an up and coming star CEO on TechCrunch.com.
However, what I’m trying to tell you is that each step has a timing, and the quality of a CEO will be dictated by your perception of what’s the perfect timing for each one of these steps. Doing things before the right time will only lead to dispersion of efforts, which ultimately generates inefficiency or the so-called “being stuck in the middle”.
My desire to you is that you have the capability to say NO we’re not going to raise capital YET because we’re still working on getting traction, and ONLY when we get our first 3 paying customers and we can clearly convey that our business has tremendous potential, THEN we’ll raise money to scale the operation.
I really know how hard it is to say NO to what seems like an excellent opportunity, our first thought tends to be “what if this never happens again?”. And even if that’s the case, – which typically is not – the fact is, perhaps this is not the best moment for you to shift the course of your company. Remember that each time you set a new course, there’s a learning curve, a small period of time in which everyone’s trying to figure out what exactly are they going to do before they can execute.
Frankly, it will be much easier for you to generate opportunities when you know it’s the right timing for it and when you focus all your efforts on that. Effectiveness comes from focus; multi-tasking will lead you nowhere.
So, back to raising capital, it is really common to think that if you don’t raise capital you cannot possibly build a specific business. And I understand it, perhaps you have a day job that takes a lot of time and you can’t find time to develop the product or sell it. But even in those cases when it seems virtually impossible to create a business without capital, just think about this: if you don’t present an investor with what he wants to see, you’ll never be able to find investment anyway, so you better do it right, step by step, and make sure you have all the ingredients prepared, than jumping directly to the investors and hearing the same old “come back when you have traction”.
Also, the reason why you might want to delay the fundraising as much as possible is related to the benefits of bootstrapping. Ideally, you want to delay as much as possible the pressure of growing until you’re sure you know some key points about your business:
- Knowing the target market: what’s your customer profile? What are his burning pains and concerns?
- Knowing your business model exhaustively: how do you make a profit, basically?
- What’s your big bottleneck: what’s stopping you from funding your business? What horses are you going to bet in?
And naturally, until you have what we love to call “Traction”.
Which now leads us to the third idea I’d like to share with you.
3#: And what are early stage investors looking for?
When it comes to this point, we can easily find hundreds of different opinions and I’m sure we could argue for years on which is the most important and decisive factor for an early stage startup on the idea stage to raise capital.
So, in the first place, have in mind that this is merely an opinion from someone who is naturally skewed toward the team traits because I truly believe that everything in life rises and falls on people.
But before we jump in the team traits, one thing we can be sure: you want to have traction.
And by traction we mean some sort of proof that your product is appealing to a lot of customers. You have multiple ways to show traction, from simple pre-orders intentions through 1-page websites and Google AdWords to having a customer funding your entire business. At the end of the day, and as a good rule of thumb you want to have customers paying you. Period. This is like the first metric you should definitely set for your business when it comes to reaching out to investors: if you do not have people paying you for your product, don’t shift the course to raising capital, keep focused on generating traction.
Note: I know that business angels and some sort of VC’s for pre-revenue stage can fund a business only with an idea but for that you’ll need the team traits we’re going to address now. Just have in mind that IMHO you should always guarantee, first, that you have traction because no one can argue with the results, while the team traits can be perceived in different manners.
But now, the team traits.
And here they are:
Commitment: first, you should only address investors when you’re sure that you’ve put all you have into that business for a while. And this typically happens through time or money. Investors want to see that you’re in it for the long cut and the big payoff. As a rule of thumb, if you’re just starting out, you should never reach out directly to an investor.
Great Attitude: here, investors typically look for the opposite of what you’d imagine as the typical entrepreneur. I’m not sure if this is great, I just know that it is what it is. They’re looking for humble people (but highly ambitious, don’t confuse humility with ambition) that are passionate by what they do and have the flexibility to challenge their own assumptions and adapt if needed. Investors don’t really like that much of stubborn and obtuse guys – which is interesting because that’s how we all tend to imagine entrepreneurs, right?
Sales skills: this is a must, selling is not only important externally but also internally. A company growth derives almost uniquely from the capability of the founders to sell and influence other decision makers. And, besides, people with selling traits tend to be more used to a denial, rejection and frustration, which is quite an important factor when growing a company because you’ll need resilience to keep pushing forward in the face of so many adversities and obstacles.
Track record or experience: this one is unfair for first time entrepreneurs, but it’s probably the most important trait if you’re looking to fund your business in the idea stage. I’d say close to 100% of all business angels and pre-seed investors (pre-revenue) only invest in guys with PowerPoints if these have some sort of valuable past experience related to entrepreneurship.
Know-how mix: and finally, the know-how mix. Here, there isn’t much more to say than the fact that you need someone with managerial capabilities – basically, charting the course of the startup and having the capability to say “NO” we’re not doing that -, you also need someone with the core technical skill that your business needs – investors don’t like to see companies outsourcing their core business -, and then, someone with sales skills, for the reasons above mentioned.
4#: How do you get started?
Alright, so now that we’ve talked about bootstrapping, delaying the fundraising as much as possible and the traits investors are looking for in any given business, I would like to wrap up by sharing with you some introductory hints when it comes to raising capital.
The first thing we need to understand is that raising capital, and specifically from investors (business angels, venture capital or corporate venture capital), should only be a priority when all these three conditions are met:
- The concept you’re trying to develop cannot be “squeezed” to a costless version
- You’re aiming at the world with a through-the-roof ambition
- You’ll only be able to generate a profit when a lot of people are using the product
Alright? So, first things first, look at your business and ask yourself if it really has all these 3 conditions. If it doesn’t have one or none of these characteristics, there are other possible avenues to fund a business, but we won’t be talking about venture capital anymore.
Having said this, let’s move forward assuming that you’re developing some sort of platform that shares these 3 features, for example, a new type of social media platform.
The first step you should always have in consideration – and we’ve already talked a little bit about it here – is to know your customers better than they know themselves. Now, this tends to be a highly repetitive point and can easily get boring, so let’s face the brutal facts: I’m not expecting you to getting out there and randomly asking people on the streets what they think about your product. What I’m expecting you to do is brainstorming, researching online on forums, amazon reviews, and essentially, thinking and discussing a lot with your partners, friends or whoever you think is the right person, about your customer profile. Until you know this, there’s no business, so there’s no reason to raise money either.
The second step is starting by the end version – seriously, I love this concept -, by Squeezing your Idea. This is a MVP (Minimum Viable Product) 2.0. Instead of prototyping something, just avoid doing anything at all that consumes money and time – if possible. Design the package, the layout of your future version, and show it to customers. That’s all it takes to start generating traction – also known as revenues.
The third step is – naturally – getting traction. Once again, you should tell to yourself “ok, here’s what I’m going to do: until I have someone paying me in advance for this product, or clearly giving me a good indication that he loves the product, I won’t spend 1 minute developing it”. This is the type of reasoning I’d like you to have, being strategic in your way of doing things and building your startup. Focus on validating the idea first, test it through 1-page website and Google AdWords, use Crowdfunding, get pre-orders, you name it. Do whatever it takes to have at least a few sound “YES!” before you start developing the product.
And fourth, imagining that you need a small amount of cash to getting started with your business and that it isn’t enough money to bother asking to an investor, you have several ways that I like to call “Shortcuts to Capital” that you can use to fund your startup for the initial months. For example, bootstrapping is typically one of the best, crowdfunding is also another way – either through donations or equity -, but definitely the best is the so-called Customer Funding. Basically, through subscription or drop shipping models, or even by in-person negotiation to have your own customers funding your business – read this article on this subject.
And that’s it, guys, that is how I would get started building my startup that will later on raise capital. I wouldn’t like you to be any overwhelmed with this, that’s why I’ve only mentioned the initial steps without diving in too much.
I know that some of the things mentioned here are not that appealing to the vast majority of us. Who likes to validate ideas? Who likes to talk to customers before getting busy developing the product? No one, right? I get it, definitely, it seems like instead going in front, we’re slowing down and focusing on two aspects that are really tough. Truth be told, typically, no one likes to sell, it’s not easy, no one likes to face rejection.
So, if you want my understanding, you got it. I understand that what I’m encouraging you to do here is not easy, I haven’t always been able to do so either, but if you’re really, seriously, deeply committed to being successful and if you’re looking to take the right steps, one at a time, to create something remarkable, this is the recipe you want to follow.
Remember, twice the time invested in this stage will bring you disproportional results much later down the road.
All my best,