Wait as Long as You Can to Raise Money

Quick Summary: Focus on minimizing the market and product risk before seeking investment.

Abstract:

The more you can externally validate facts that your opportunity is practical and serves a need that customers are willing to pay for now, the greater your chances of obtaining funding with reasonable terms.  Hold off approaching financial investors as long as you can to show that you have reduced the investment risk.

The idea is fresh; friends, family, and perhaps even some potential customers all agree you are on to something and that you need to “go for it”.  Of course you agree and you think now all that you have to do is raise some money to make this idea a reality.  Hold the bus!  As described in an article in this series; “You Can’t Raise Money With An Idea”, raising money requires far more than your passion and the enthusiastic support of others.  Only a small fraction of entrepreneurs with “great ideas” ever get funded and of those that do, only a small fraction are successful.  All financial investors clearly understand the odds.  Think about it for a second; do you think any of them would invest in companies that they know will fail?  Hardly. Instead, all of them consider the risk and the potential reward and choose to invest accordingly.  Angel investors and some early stage venture capital firms will invest in very early stage companies but at extremely low valuations to offset the very high risk they are taking.  An accepted axiom in early stage investment circles is that 90% of the returns come from 10% of the companies.  So, to offset these poor odds, investors demand to be compensated accordingly.  Who can blame them?

The key to raising money, any amount, from financial investors is to provide external validation that your opportunity has been (somewhat) de-risked and the upside opportunity is realizable.  The more positive proof you can demonstrate that the risk has been reduced and the upside potential is present, the better your chances become of raising money with favorable terms.  To do this, you need to delay raising money and fund the necessary expenses on your own or through friends and family or sources other than your targeted financial investors.  The article in this series; “Investor Categories: A Baker’s Dozen” provides an overview on the various categories of potential investors and their risk tolerance.

Use your initial funds to provide a product or service that clearly demonstrates your core idea.  Do not include all the bells and whistles that you could offer, make it scalable or even sellable across the entire market.  Follow the model that is currently referred to as “lean startup” and provide the minimum acceptable product.  Your fundamental mantra should be to do as little as acceptable but do it well, focusing on the customer’s experience.  While doing this keep in mind that what you are doing may have to be scrapped later to build a truly full featured, scalable product or service.  Also, be sure that what you intend to do is, in fact, scalable.  As an example of the opposite, a low cost consumer product that requires a significant amount of customization may fill a need but cannot be scaled.

You may have difficulty resolving spending your initial capital on “throw away code” or “throw away products” in order to de-risk your opportunity.  However, if these early demonstrations of your product or service result in de-risking your opportunity, you be well ahead of others in attracting investors with reasonable terms.  Although you will be anxious to get to market, think of your business as a marathon not a sprint.  You are in it for long run, plan your race carefully.

 

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