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Entrepreneur Office Hours - Issue #3
What's enough traction for a seed round? Can a cartoon poop inspire a $100 million dollar business? And more important questions...
Questions, questions, and more questions…
Lots of great questions about startups have been filling my inbox. I’m answering one of them below, and I’ll be answering more in the next few issues. Keep the questions coming! Reply to this email, @me on Twitter, or message me on LinkedIn.
Also in this issue, my favorite Web Masters episode yet with Emmy award winner Gregg Spiridellis, co-founder of JibJab, the $100 million company that was inspired by a cartoon of a dancing piece of poop.
Plus, are you accidentally scaring away customers? And are you pricing your product too cheaply? Keep reading to find out!
P.S. If you like this email, forward it to a friend. Or an enemy! Either is fine with me.
Entrepreneurs love building new, revolutionary things. But consumers crave familiarity. Are you presenting your revolutionary startup in a way that keeps your consumers comfortable?
Gregg Spiridellis: The Brothers Who Perfected Viral Videos
Gregg Spiridellis and his brother, Evan, launched their online animation studio -- JibJab -- in 1999. After five long years of hard work, their first massively successful viral video, This Land, spread to millions of people around the world. During the episode, Gregg shares his experiences about having one of the world’s first viral videos and explains how he turned it into 100+ person company and, ultimately, a successful exit. Find the latest episode on:
…or just search “Web Masters” wherever you listen to your favorite podcasts.
Entrepreneurs love to latch onto “cheapness” as a value proposition, but is making something cheap really the best way to win customers? Find out why pricing too low can end up costing you your biggest opportunities .
Office Hours Q&A
How much traction is required to close a seed round of funding?
ANSWER: Warning: Nobody is ever happy with answers to questions about what kinds of traction a startup needs in order to successfully fundraise because the correct answer is always: “It’s different for everyone.” Whether we like it or not, fundraising outcomes depend on more than just traction. They depend on things like what space you’re in, where you live, who you know, what you’ve done in the past, where you come from, time of year, global events, and, for all I know, the alignment of the planets.
I realize an answer of “It’s different for everyone” is frustrating because, presumably, you just want to know what boxes you need to check in order to raise capital. However, it’s the honest answer. And I hope you’ll agree that an honest answer is better than giving you bad advice just because it’s what you might want to hear and you’ll be more likely to share my articles on social media.
More importantly, accepting this answer -- frustrating though it may be -- is the first and most important step you can take toward successfully raising a seed round. Once you recognize that there’s no single, perfect metric or set of metrics, you’ll stop trying to search for them, and that frees you up to move onto the more productive task of understanding how to position yourself within the investor ecosystem.
Specifically, rather than trying to establish a certain amount of traction, it’s better to understand how different types of investors have different investment theses (here’s more info on understanding an investment thesis). For example, some investors will only invest in companies with a certain amount of revenue. Some investors will only invest in companies in certain locations. Some investors will only invest in companies targeting specific markets. And so on. In other words, rather than trying to reach some arbitrary stage of investment, ask yourself this question: “What have I built so far, and what kinds of investors are investing in startups that look like mine?”
Let’s imagine you’re running a SaaS company with $1 million in ARR. First, congrats! That’s a great achievement. Second, there’s a very specific category of investor (e.g. early stage, B2B-focused VCs) looking for a company with that kind of traction. Conversely, if you’re three friends with an “idea on the back of a napkin,” honestly, you shouldn’t be fundraising at all. However, if you are going to fundraise, then you’re probably going to need to convince friends and family to invest in you because they trust you, believe in you, and are too naive to fully understand what a risky decision they’re making.
In other words, your traction isn’t the only factor in successful fundraising. In fact, traction technically isn’t even a requirement because there are ways of finding investors for every type of company… even ones with no traction. So rather than focusing on reaching an arbitrary level of traction, ask yourself this question: “Do I really need to fundraise?”
If the answer is, “Yes, there’s no possible way I can continue working on this venture without more capital,” then start searching for investors with a history of investing in companies that look like yours.
Conversely, if the answer is, “No… I can keep growing without additional outside capital,” then keep focusing on growing your business and don’t worry about fundraising. If you can do it, this second option is always better because having more traction increases the number of potential investors you can target. And more investors means better odds of closing a round.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!