Venture Capital seeks opportunity, not a sales pitch. The mindset to have is that you don’t want to have to seek VC, you want investors to seek you. Of course, that doesn’t mean you won’t have to do the work and start the conversation; it’s a mindset – what are you doing to build the kind of company they’ll want and find?
Some popular discussion sparked a checklist to consider…
- Two notions are complete nonsense
- You have to have revenue. No, you don’t. Read that perspective. Seek out advisors who understand how that isn’t the case if all you’re hearing is that it is.
- You have to be a unicorn. Society’s fixation with unicorns is fascinating to watch. Venture Capitalists aren’t looking for the next billion dollar company; but they are seeking work that can achieve far greater value than the capital they invest.
- What isn’t nonsense?
- You must be capable of and willing to deliver a return on their investment. Venture Capital is not a loan and it’s not a business partnership; if that’s what you want, seek those sources of capital. Venture Capital is investment in innovative ventures that are more likely to deliver out-sized exits. If you aren’t willing to exit, or capable of doing so, don’t bother.
- All capital comes at a cost!
- Customers aren’t “better,” startups fail all the time that have customers and the cost of being wrong is expensive
- Convertible notes aren’t “better,” the terms and obligations *can* be a problem
- Bootstrapping isn’t “better,” it is a burden to do it yourself and you’d hate to lose to competitors better capitalized
- Venture Capital isn’t better either! VCs take ownership and rightly expect to have a voice
- Venture Capitalists generally alleviate their risk by focusing on your team.
- Get to know them. I’m much more inclined to invest in you, knowing you, than I am because you have solid business metrics
- You alone are NOT capable of being successful and competing; no matter how confident and capable you are. Have you filled your gaps and built a team that is?
- Traction != Customers. That’s some annoying advice right there.
- Do you have co-founders?
- Do you have Advisors?
- Do you have Letters of Intent?
- Have you surveyed hundreds of people?
- Can you show me consistent traffic growth?
- “Startup” means a venture in search of a business model. Meaning…
- You will fail along the way, it’s expected
- Your numbers will be wrong, it’s presumed
- You will pivot; you’d better
- You should not have to prove anything through customers. When you create value, customers will manifest. Peter Drucker, “businesses exist for only one reason: “to create a customer.” How? Here’s how.
- “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”
IMO VC are needed for companies and startups that need to scale at a very rapid pace. Imagine being on the brink of springing the first mobile medical marijuana company in a state that just passed the bill? This is a very necessary KPI that many people overlook – TIMING of a product requires FUNDS QUICKLY.
Great share Paul O’Brien!
fantastic insight! thanks for sharing Paul O’Brien
ike good marketing it’s framed as “controversial” but good common sense advice.
I would say this aligns well with my North Star ? and having this roadmap is an advantage when everyone else is running in a slightly different direction…
Most helpful for me is “traction != customers” … one of those things I know, but can slip from my mind…
Obsessive, “fanatical” customer service can still create myopic tendencies…
Generally what I prize as a founder is what I call “elasticity” of perspective—
Being able to obsess over fanatical customer service, for example, and then being able to detach from that obsession to keep customers framed in the appropriate context but not to let them own you… or monopolize KPIs / traction metrics.
To move from sincere passion/ obsession to objective detachment is a bizarre skill, but one helpful to keeping calm and carrying on with good strategy.
You’ve sparked a topic: The Obsessions of Entrepreneurs.
For some it’s customer service, for others it’s the insatiable need to code and build, speaking for myself, thinking about this, it’s analytics and teaching.
I’m curious if there is a correlation between such obsessions and success as a founder. Not that any one obsession is right/better, rather than an obsession is necessary and the secret it figuring out how to accomplish all the *other* things in which one doesn’t obsess: building the team or resources for everything else.
I’ve long wanted to brainstorm too the notion of a founder personality test… Doesn’t seem that Myers Briggs and the like actually nail the founders.
Bootstrapping, bank loan or VC. The word “capital” is the only thing they share. As a “traditional” banker, “you don’t have to have revenue” and “traction not equal to customers” spook me. But I agree VC is not a traditional loan nor a partnership. It’s a business looking for valuable exits. Exit means giving up ownership, in the journey and the goal. And as for startup, it’s definitely a journey, a “search to create customers”. Failure and pivoting are expected. Help, marketing and financial, also expected, at a price you are willing to pay
Paul O’Brien and even more audacious I try to hold multiple obsessions and (attempt to) simply release them when they’re not convenient…
I guess what I consider my positive obsession because it’s a great motivator are the people who depend on me… whenever someone is actively “expecting” something of me…
For my Team that’s hourly, daily…
For my customers that’s ~weekly…
For my investors that’s monthly, quarterly…
Paul, great perspective here especially your point on traction. I agree. One thing I consistently notice when working with successful startups is not that they have a load of customers that ultimately do not settle into their desired product-market fit but rather that they are keen on accurate opportunity validation from the get-go. The second attribute I have noted is a growth mindset that takes long-term, sustainable growth into account from the beginning. Keep the insights coming.
Precisely Ronnie! Those early customers on which many founders will focus and attempt to scale, being wrong, are the leading cause of misdirection. Putting it nicely, we can refer to it as “confirmation bias,” – that is, something is happening that I expect and want to be happening; therefore we must be right. Startups aren’t right until they’ve established a sustainable and competitive business model that scales; acquiring some customers neither that nor evidence of it. Are customers an indicator? Absolutely, but having them doesn’t prove anything until it does 😉
Great post! I always tell people that you have a real business once marketing generates consistent and steadily increasing demand.
We need more early stage/seasoned founders who are willing to share the battle scars, war, and horror stories regarding their path to raising or failing to raise funds. What I have experienced is the startup theatre effect which raised quite a few wantreprenuers on a mission to pitch ideas rather than focus on problem/solution, revenue/growth generation and founding team needs.
This is excellent
This article lead me down a path of articles that has offered me the epiphany I needed this week.
Damn Russell, thank you! That input is more valuable to me personally than anything. All we can really leave behind on this world is a positive impact that changes the lives of others in a way that our spirit lives on.
I try to pour myself, perhaps too much for my sake, into helping others; because it’s personally rewarding and I think morally what we’re all called to do.
What we have to be careful of is claiming or conveying, in sharing/teaching/advising, that we know best. That we know what’s right. All we can do is share experiences and lead others to explore and learn more down those paths that hopefully lead to their self discovery and definition of success.
You made by day, and I hope it ends up a valuable path for you.
Investors are great and can absolutely give a company the push they need to be highly successful. However; way to many startups spend all their time chasing them instead of customers. I’ve seen a lot of companies tailor their business model & products to sell investors and end up making things customers don’t want.
My learning is; you’re not ready for investors until they are selling you. The startups I know that made it, had investors chasing them. When you’re on to something special and you have a team that can execute on it, it’s pretty obvious.
The other thing is to really understand how different types of investment strategies work. So many great lifestyle businesses (pays a bunch of money to small group of people but can’t scale) are destroyed because the investors need to hit a specific multiplier for their strategy to work. You really need to be in alignment from the very begining.
Yep, that’s my very first point. “what are you doing to build the kind of company they’ll want and find?”
Love this. Nice perspectives.
Paul O’Brien while I agree with you, it is still rough. We have assembled astonishing team, we have amazing advisors, we have large # of LOIs, and the interest from potential customers is there. We can generate traffic immediately. We even have revenue albeit minimal, yet early VCs want to see more in revenue constantly. It is incredibly frustrating. We can’t get consistent rate of revenue growth without funding. We have a market that is asking us for out product yet that does not matter to VCs. Any thoughts?
I am tired of “moving the goal post” strategy that VCs keep doing.
I suspect, given what I know of what you’re doing…
1. What is the proposed use of funds? Why do need investors?
2. Share with me more “we can’ts” rather than we can. For example, you have some revenue, so why not more? Why can’t you get to a consistent growth rate?
There are only two reasons investors move the goal posts of revenue:
1. They’re actually ignorant and don’t have anything better to advise. Yes, I said it. Countless investors don’t have a clue and the last they most want to do is admit that. So, advising “more revenue” is both reasonable and pragmatic; even if unfounded.
2. They know what they’re talking about. Given what you’ve said, can/can’t do, or what you’re asking for, “revenue” isn’t a moving goal post, it’s a soft “no.” They see/hear something that signals that you in fact *should* have more revenue.
So let’s unpack which of those scenarios you’re facing ??
I don’t think you are aware but we have significantly pivoted from when you and I last spoke. We are focusing on providing storage as an amenity to multifamily operators.
Not enough storage space is in the top #3 concerns of every tenant. Multifamily properties currently don’t have a great solution; either build storage into units (=less units build), or build your own which comes with its own drawbacks (liability, costs, etc). So we went to a tradeshow for apartment owners/operators a couple of weeks back and their only question was “when can you get it into my complexes”. We now have 400 apartment complexes on LOI and 3 that want to redraw building plans for 2023 with Valet Closet in mind. We also ran a pilot to get idea of conversion rates.
We developed a computer vision tech that allows users to pay for what they consume and maintain 50% profit margins with every quote.
1. The need for investors – to scale. We have proven conversion rates in the pilot, we have LOIs. We have two competitors in the market that raised a combined over $250M. They would have to SIGNIFICANTLY pivot and change their business model to execute as we are but I suspect this scares some and it is a threat.
2. I’ll be totally honest here so it can help others. More revenue is possible but I’ve been bootstrapping. And I am tired of bootstrapping. Burn out? No. Just exhausted because I’ve had the goal post moved so much on me over the years that it’s not even funny. Get LOIs. Done. Get a pilot. Done. Prove conversion rates. Done. Get revenue. Done. Prove the business model. Done.
So yes, I’ll say it, I am tired and I do feel betrayed by many VCs.
Tomas Louda so my suspicions are somewhat confirmed. FWIW and in support to help you.
I would say, get more customers.
More importantly, here’s why:
“providing storage as an amenity to multifamily operators.” This is too technical and buzzwordy. Lose that in your brain. Give people answers that 10 year olds would understand.
I asked you two questions and I got long replies. In your audience’s brain, that turns people off. I just had it happen to me twice in the last 12 hours, I asked a simply question and the founder went on for 15 minutes about why they were right.
You need investment to “scale” isn’t an answer. For what? Why can’t you scale? You don’t know how? You want to spend it on advertising? You have demand you can’t fulfill?
And then your mention of competitors makes your audience think, “what did they do that you’re not? Why would we fund the start of something that already has two competitors that dominate the market?? That’s crazy risk – what ensures YOU will beat them?”
What you can’t do, can’t be answered by tired. We all burn out all the time, it’s part of the work. And no one would invest so you can keep trying, especially if it’s evident you’re burned out…
What can’t you do refers to what is the business incapable of doing? Why do you need money?
VC doesn’t fund growth or scale, it funds outcomes. What needs to get done, that you *can’t* thus it requires capital? And what will be the outcome of that of greater value?
So confirming my suspicions isn’t me saying you’re wrong, and I’m not being negative, I’m hopefully helping. Confirming my suspicions is that the way you answered would make me give you a soft “no” too. Which is going to cause ignorant investors to move the goal posts and most nice investors who don’t have time to advise you, to also just say, “get more customers”
You have revenue, so it works, you have LOIs so you have demand, you have competitors, so it’s proven, you have good conversion rates, and you have the platform ready to go
… So hopefully you can see how an investor is right to just say, “congratulations! Go! Do that ?” and then question why you need funding. “Do that, make more money, hire people to do more. Where’s the problem or opportunity for us?”
We’ve come to the conclusion that we need to reach profitability, then look for VC to accelerate our growth. VCs don’t understand the details and no matter how we explain it to them it seemingly falls on deaf ears.
Our business requires months to close large accounts. Good companies shouldn’t die because the founders cant speak VC when we clearly have customers lined up who can see our value prop.
Seeing as 8 out 10 VC-funded companies fail, there seems to be a clear problem with the way VCs are selecting their investments and missing opportunities.
John D. McDonald always love that question and discussion but also have come to learn that VC largely works, evident in how nothing else would take on a risk of 80% failure.
It’s easy to see the “what more it could do” angle but we can’t unfairly disregard the “if that didn’t exist, then what??” side too.
Incubated startups have closer to a 70% success rate. In my experience, it’s not the VCs fault, but that also isn’t saying they couldn’t do more – of course they could do more. It’s not that VC is wrong, it’s that expectations and effective early development of things usually mismatch. Many of us that have done this for decades share a sentiment, “we can’t pick the winners but we can pick the things that won’t work out, and that’s unfortunate because clearing up what won’t work out would save a ton of frustrations and create a ton of wealth.”
Paul O’Brien Thank you Paul for your great advice and time. I understand what you mean. To scale does mean for employees. There are many nuances that could lead to different conclusions/advice/answers, but this is not the platform on which to do it.
“Marketing is the distinguishing, unique function of business” ….and everyone is part of the marketing dept…especially the CEO.
I have a suspicion to study, that Engineers take the leap in great quantity, during recessions and Marketer oriented people tend to start more frequently when times are good.
Just a suspicion, but I can’t help but be struck by how good times have founders looking for technical co-founders and tougher times I see more engineers struggling to pitch well.
Paul O’Brien, thanks for another insightful article that gets right to the point! I especially love the comment about how VCs are not expecting every start up to be a unicorn! You better not be another follow on business that lacks real differentiation, but it’s about eventual profitability, not unicorn status
It is so true! I have a great team, without them I will not be able survived today. Team is so important and balances our weaknesses. Especially, when we hit the wall, we are least can comfort each other!
Thanks for sharing
Thanks for posting Paul O’Brien