The money isn't disappearing anytime soon.
The Entrepreneur Insider network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question “What’s something you wish you knew before starting your business?” is written by Lisa Wang, cofounder of SheWorx.
The biggest myth of fundraising is that a great idea should and will be funded. The truth is, millions of people have ideas, and an idea executed incorrectly without the right metrics, the right team, or the right market has a significantly lower chance of receiving funding.
Think of investing as a spectrum. On one end of the spectrum is your family. These are the people who will give you money regardless of what you’re selling, and the only things that matter are you and your idea. Unfortunately, that’s not how investors think. On the total opposite end of the spectrum, imagine you’re a publicly traded company on the New York Stock Exchange, the number of people who truly know you are close to zero, and the only things shareholders care about are your quarterly financials.
The difference between these two ends of the spectrum is the quantifiable metrics of your business vs. the idea of simply investing in you for the sake of being you. So what can you do to ensure a successful, substantive first investor meeting?
- Start running small experiments as early as possible
In the early stages of your business, you won’t have the necessary metrics to fundraise, so you need to start collecting data in any way possible. These tests may be as simple as gathering a group of friends and gauging their willingness to pay for your product or service, or setting up a landing page to see if people sign up for your company’s mailing list. Make your tests simulate reality as closely as possible and include real conversations with potential customers. Your goal is to step into an investor meeting and be able to say, “I know exactly what these 100 people need, I know who they are, here are the top four things I’ve learned, and here is the result.”
- You need a real product, but until then, fake it till you make it
Is it really possible to take nothing and prove out demand for your idea? Absolutely. In the early days of Zappos, the founder went into a local shoe store and bargained with the shoe owner to take pictures of the store’s shoes. He put the pictures on his website and promised to come back and buy them if people expressed interest online. Sure enough, orders started coming in and the founder kept coming back to buy the shoes. Soon, he started slapping on Zappos labels and shipping out the purchases. Moral of the story? Not only did he not have a store, he didn’t have any shoes when he started selling. He managed to validate demand in his market with almost no inventory risk.
- Can you build what you sell? If you can’t, you better be thinking of something else
Think about the DNA of your company. Do you truly have deep domain expertise in what your company is building? Just as the most successful restaurants in the world are run by chefs, the most successful tech companies must be run by people who understand the technology inside and out. Why? It’s the obsession, the knowledge, the ingrained muscle memory, and the know-how to do something. A restaurant’s DNA is chef-centric, and a mobile startup is tech-centric. If you can’t build what you sell, you can’t be in the game.
- “But I’m a non-technical founder with a part-time CTO”
A big red flag is a CTO who promises to come on once your company is funded. Over 75% of the time, the CTO never comes on. If the person who is building what you’re selling is unwilling to commit, then you have a problem. Getting commitment from someone who is critical to the future of your business and in high demand by others is not easy. The solution? See above.
- Go after a market you’ll have success in
How many people need what you have? Contrary to popular perception, you don’t need to go after the biggest market. You need to go after the first market where you’ll have success. Start in a smaller niche market where you can understand the ins and outs of what customers want and need, but with a view toward the potential of a larger market in the longer term. Just remember, “It’s better to have 100 people love you than 1,000 people kind of like you.”
- Show quantifiable proof points—both angels and VCs want to see this
Angel investors are increasingly looking for the same proof points that VCs require. As a business, you need to show enough proof points that you can demonstrate there is a repeatable need for your product/service in the market. What qualifies as enough proof? In a consumer business, it’s about showing high engagement, high retention, and low churn. In enterprise software, you may just need a few proof points. For example, having four to five committed large beta customers who are using your software and integrating it into their workflow is no small feat, and may be more than enough to get you a follow-up meeting.
- Find a warm introduction to the investor
If you are just starting out, go on AngelList, search for your competitors, and create an organized list of their investors. If they put money into your competitors, then they likely will have an easy time understanding your business. Ask other founders, scour your LinkedIn, and make sure you can find a connection to introduce you to the investor. It’s all about your network. Owen Davis, founder of AlphaPrime Ventures and managing director of NYC Seed, acknowledged that of the 50 deals he has invested in, not a single one stemmed from a cold email. Remember, it’s all about your network.
- Be aware of who you’re talking to, and make sure your interests are aligned
Certain investors like to invest in the same set of things, so no matter how impressive your data is, they could simply not be interested in your domain. Just as investors are vetting out your company and your team, it is your job to make sure the person who is giving you money actually has an interest and expertise in this area of investment. For example, Union Square Ventures’ thesis is that they only invest in companies with a large network of users. As a result, they are more attracted to large marketplaces and community platforms like SkillShare, Kickstarter, Foursquare, and Soundcloud, rather than enterprise software startups that may be equally impressive, but do not have the same potential for scale.
Ultimately, it doesn’t matter whether you’re on the West Coast or East Coast, nor does it matter that there might be speculation about a “funding crunch.” There are dozens of new firms and angel groups that have formed over the last five years, and the money isn’t disappearing anytime soon. What you do as an entrepreneur doesn’t change: Find an opportunity within your area of expertise, validate your target market, show your proof points, and find a super effective team that can build and execute.
Lisa Wang is the cofounder of SheWorx, a collective of ambitious female entrepreneurs and changemakers redefining a new wave of leadership. She is a U.S. Hall of Fame gymnast, former hedge fund analyst, and consultant helping people in corporate roles transition into entrepreneurship. Lisa is a graduate of Yale University.