12–18 months after raising some money from friends & family or a seed round, many of the founders I talk to shift from product/market fit questions to fundraising concerns. After trying to dissuade them from going this route (and failing most of the time) I point out the self-sabotaging actions that reduce their chances of raising venture capital. Why do I try to dissuade these founders? Because they lack the understanding that a venture backed firm serves several masters and the growth expectations (that help the VC determine return multiples) can distort the founders priorities to just build a great company. In other words, venture is a marriage that can often end in buyer’s remorse. Nevertheless, once they’ve decided it’s the path for them, I share the five lessons below:
- Ramping up sales when your startup is still in the customer development phase: This one is the trickiest mistakes I see from startups. The typical scenario is that the startup has a few clients, a couple are paying and probably using the product at a deceptively encouraging frequency. The founder starts to mistake customer development?—?the process of gaining customer insights to generate, test, and optimize ideas for products and services through interviews and structured experiment– for product/market fit. Product/Market fit means being in a good market with a product that can satisfy that market and at this point. While you’re constantly experimenting after product/market fit, the experiments are not to find a business model but to refine the one you’ve clearly identified after your customer development period. To ramp up sales, typically by hiring salespeople, during the customer development phase is to set yourself up for failure thinking that you can show VCs traction. The good VCs know the difference between your customer development phase results and when you’ve found product/market fit. You should too..
- Handing out titles to team members to fake ‘structure’: There is this fallacy that founders hold to be true when they are trying to raise their first round of VC funding (before they’re ready); it’s that, for the startup to be taken seriously, it requires a certain structure for it to look VC-investable. The founder believes the startup should have a COO, VP of Sales, CEO etc. I say fallacy because, while the team is supremely important, what is more important is what the team has managed to achieve. The titles don’t matter! You can all be titled Thing 1, Thing 2, Thing 3 etc and, if you’ve found product/market fit and selling at an impressive clip, you’ll raise your round with ‘relative’ ease.
- Using the hottest startup (e.g. Snap) in your space as the example: This one is also quite tricky. The problem with a founder showing a VC that there is a hot & fast growing startup in the opportunity space is that the VC sees a party that’s about to end. VCs believe in the Power Law and 2nd or 3rd or 4th place, which is the best you can possibly be at this point, is never good enough . If Snap is a similar company to yours, it won’t look good on your pitch deck if you have little to no differentiation from their product. You require at least 10X improvement over the current the hot startup’s product (in your space) to truly be VC fundable. If you have a me-too product, you’ll get a me-too VC. This might be OK for you and your VC but it’s unlikely to be a winning strategy in the VC space. You can run a lifestyle business and be fine (and there is nothing wrong with that), just don’t go looking for investors looking for game-changing power-law-adhering startups to invest in.
- Pivoting right before the beginning of the fundraise: VCs like to look at metrics. Charts that are trending up and to the right are (um) right. The problem with a pivot right before you start your fundraise is that now you have no metrics to show. You’re trying to convince VCs to invest in a new opportunity from the one you spent the last 18 months toiling at. You shouldn’t be surprised the VCs aren’t giving you money at this stage; VCs are not risk takers, they are risk mitigators. Their LPs did not give them money for them to turn around and lose it. Being unable to assess your startup risk profile is a definite ‘No’ for most VCs.
- Spending way too much time developing the pitch deck: Time and time again I remind founders that the most basic element of a pitch deck (10–15 slides) is all you need in the first version. The slides should show pain, solution, traction, team, product, go-to-market, TAM/Market Size, Financials, Competition, Why You Will Win and the Ask. And maybe a summary slide. Any modifications that you make to your slides, after the first version, should be based on the feedback you receive from targeted investors that you’ve engaged with. To spend 3 months working on a deck (yes, I’ve seen this) is a surefire way to waste time on fundraising. Time not spent building your business.
Note to first time founders: if you find a VC that gives you Series A funding in the customer development phase know that i) it’s probably a janky VC and ii) this VC will be on your case so much, due to mismatched expectations, you’ll wish you were building a lifestyle business.
Another piece of advice I share with these founders is that the VC path is not for everyone. Building a product is fairly cheap nowadays. The real work is in customer acquisition. And if you haven’t figured out customer acquisition, no amount of funding will save your startup. Whether it be a lifestyle or VC fundable startup…
originally published here.
