Entrepreneur Office Hours - Issue #79
Can companies raise VC pre-revenue? Yes! Should they? Umm...
Since I spend lots of time telling entrepreneurs they need traction in order to fundraise, I get lots of questions from entrepreneurs asking how to raise money if they’re building the type of company that needs funding before it can have traction.
In general, I’m skeptical of any company that says it can’t get traction before raising capital, but that doesn’t mean it’s impossible. So, in this issue, I’ve decided to take a closer look at when it actually might be appropriate to raise VC pre-revenue.
Also in this issue, I write about the importance of hating myself. Yes, you read that sentence correctly. But you’ll have to read the article to understand why. When you’re done with that article, check out the Q&A where I help an entrepreneur figure out how to stop talking about his product with investors and instead pitch them his business.
Yes, some companies raise VC pre-revenue, but how do you know whether your startup should be one of them?
Sure, the self-help gurus of the world want you to love yourself, but is that really the best thing for entrepreneurs? As I explain in this article, a little personal dissatisfaction can go a long way...
Office Hours Q&A
I just read your article about The Huge Mistake Entrepreneurs Make in Their Fundraising Pitches. It was literally life-changing! I’ve been pitching my product to investors every time and now I totally get why it doesn’t make sense to do that.
But now I have another question. In the article you say we should be pitching them our business instead of our product? What, exactly, does that include? If I’m not spending my pitch describing my product, what should I be talking about?
Thanks for the awesome advice!
Glad the article was helpful! And don’t feel too badly for making that mistake. Lots of entrepreneurs do, including me. I literally spent years pitching investors my product instead of my business.
As for your question – what does it mean to pitch a business? – try to think, again, from an Investor’s perspective.
Investors are primarily concerned about: A) whether or not your company can generate revenue; and B) how much your revenue generation can scale. That means you need to show them how your startup does those things. This breaks down to four different issues:
How many potential customers does your product have?
How do you get customers?
How do you retain customers?
How much will customers pay you?
To be clear, a lot goes into each of those issues. For example, how you get customers and retain customers will include things like your costs and your competition. In other words, the above list is a gross simplification, but hopefully it gets you thinking along the lines of the kinds of questions you’re trying to answer for investors. You want to include info that helps answer those questions and leave out info that doesn’t.
By the way, do you see how what your product does isn’t particularly useful in helping answer those questions?
The other thing investors need to understand is how their money is going to help you scale. Don’t forget this part because it’s very important. I’ve seen entrepreneurs take my advice to stop talking about their product and then lean too heavily in the direction of pitching what I’d describe as a “perfect business.” In fact, they start pitching a business that’s too perfect. They have tons of potential customers that pay lots of money and the business is on track to scale incredibly. That might sound great, but if you have an amazing pitch showing how many potential customers you have, how great you are at getting them, and how much money they’re making you, why would an investor want to invest? Their money doesn’t won’t like it can help you.
Instead, you need to pitch an imperfect business with a hole that’s clearly able to be filled with investor capital. In other words, the story you want to tell is: “We’re on a trajectory that looks OK now… but if we only had X, Y, Z additional resources (that your investment would help us procure), then we’d be on an alternate, amazing trajectory.”
Paint that picture for an investor, and you’re more likely to get an investment.
Oh… and one last thing. This should go without saying, but the picture you paint should also be TRUE. Don’t lie to tell the story investors want to hear. Make sure you’re still telling the actual story of your startup and business.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!