Our team has come up with this fantastic idea. Even better, we know how to both build and sell it. The catch? In order to actually build it, we need more money than we currently have. In addition to this, we will need more money to set up the business, which would sell, deliver, and service it until we break even.
Since that’s a great idea and we have a great team committed to making it happen, finding funding should be easy, right?
Except it’s hard. It’s hard despite being an otherwise great time for startups in the early stage, with $6.8 billion dollars seed money invested in the first three quarters of 2020.
The good news is being at the very beginning makes it much easier to pivot. Changing is easy in the early stages. Altering the features of the product or service, changing the market segments we target, shifting the pitch to the investors are all less complicated if we’re just starting.
However, pivoting aside, what’s the first thing we should analyze when looking to create a company worth investing in? Well, naturally, the first thing we should look at is the idea itself. We know it is great, so we should first explore what prevents others from investing in it.
Seeing is believing
As the running joke goes, the fastest way to tell the difference between Machine Learning and AI is to look at what it is written in: if it’s written in Python, it’s probably Machine Learning. If it’s written in PowerPoint, it’s probably AI.
If we are to convince others to invest in our idea, we need to first invest ourselves in it. That means more than just taking the time to create a bunch of nice PowerPoint slides. Here is a 2-item checklist we should go through before we even consider pitching our idea to investors.
I. We have a product/service/software to show
Since what we show was developed without external funding it will miss lots of features. We will have to use our spare time, our savings, and money from family, friends, and whatever else we have as resources until we have something else to show, in addition to a PowerPoint.
II. The product/service/software does the right thing better than the existing alternatives
Since this iteration will be missing many, if not most, of its features, compared to the final version, we need to ensure the important ones are already present in the prototype.
On the one hand, the lack of resources at this crucial stage could be a blessing in disguise, for it could motivate us to focus on what matters. On the other hand, we might run the risk of spending those few resources on the “nice to have” instead of on the “must-have”.
Therefore, one excellent piece of advice is “fail fast, cheap, and often”.
What that means is:
- get the prototypes as fast as possible into the hands of the users;
- get feedback on what needs changing;
- implement the required changes as cheaply and quickly as possible;
- test the prototype again;
- repeat the process until the majority of the users are happy.
The merit of this approach is we get a prototype that we can confidently showcase to investors. We will also show footage of how happy the users are with the prototype. That works wonders convincing them to write us the checks.
Nonetheless, there are two critical challenges we must solve when taking this approach:
- It might take a lot of iterations
The first Dyson vacuum cleaner took 5,126 iterations before it was production-ready. All the venture capitalists refused to fund it, so Sir James Dyson had to mortgage his own house to cover the expenses.
In 1980, Edison stated he had made at least 3,000 iterations before finding a satisfactory material for the light bulb filament. However, unlike Sir James, Edison already had a successful business and a modern, well-staffed lab where he could carry out his experiments. So, he didn’t have to seek funding for the development stage.
Both Sir James and Edison were already experienced inventors by the time they managed to put together a finalized, working version of their product, yet they still had to refine it a lot before being investor-ready.
We should indeed fail fast, cheap, and often because we very seldom get it right from the first try. Furthermore, we need to do so in ways we can afford, which implies we need to innovate two things at the same time:
- our product/service/app;
- our way of iterating without running out of the initial resources. That’s usually something much more personal, like commitment, which can also be sapped by having to redo things again and again.
Joining the right accelerator helps with both. It provides us with the necessary guidance and creates the supportive environment we need in difficult times. Picking the right one can be tricky but not impossible. We simply have to look at what happens in the programs they run, and we’ll get a good idea of what’s in store for us.
Beyond this, we’ll also have to create a series of blog posts about making iterations more effective. That way, the teams working on these iterations can develop a better prototype before applying for an accelerator, increasing the chances of being accepted in the good ones.
- We may latch onto the wrong features when our tests show users loving our prototypes
There are several reasons why that might happen:
- The users who accept to test our prototypes might not be representative of the market we would be targeting;
- The idea might be so new that users are enthusiastic about our proposal only until a better one shows up.
While the seeds of our idea’s demise could have always been identified beforehand, experience shows they become “obvious” only after the fact. The initial success of the prototype masks them or makes them seem unimportant. On top of that, human brains are hard-wired by evolution to seek confirmation instead of rejection. “Think positively” and “see the glass-half-full instead of half-empty” ring a bell?
Experienced VCs have seen this happening many times before. As a result, they might be skeptical even when we show them both the working prototype and the testimonials of the happy first users.
We need to go the extra mile of showing how we have investigated what could go wrong and how we can adjust quickly in the future, should a competitor come up with a better approach or if hidden problems surface. Or better yet, we should do both of these things! If they feel secure about their investment, they will be more likely to fund us.
That’s where a good accelerator can help. The accelerating programs worth participating in help startups avoid the pitfall of choosing the wrong features (even if they show early signs of success) and create a very agile business that can adapt quickly when conditions change.
As we can see, coming up with a good idea and finding funding feels like cooking at rush hour – you have to be ready for anything your customers demand.
Summing it up, in order to be successful when seeking funding:
- We need to have a prototype to show;
- We need to have the prototype validated by a sample of everyday users;
- We need to have a convincing method for future-proofing the product/service/app;
- We need to have the three aspects mentioned above before drawing the business plan.