For this month’s state of U Grok It, since we are getting focused on raising a seed round of funding, we thought it be more interesting to write down our approach to seed funding. This has come together from lots of reading blog posts and books and talking to people in the startup community. It is our synthesis of what we feel is right for us, but maybe it will be helpful to others…
Don’t go for funding until you need it for the next step
Getting funding takes time and effort that is somewhat separate from your core goal of building your product (see Prioritizing below for why we say “somewhat separate”). Self fund for as long as you can make forward progress. Jason Cohen (@asmartbear) gave us great advice early on when Carrie was on his “loveline for startups” show. Since we are creating hardware, we are going to need investment. We knew this, but the reality that we would need to go for funding early was good to keep in mind, still we have focused on getting as much done as we can on our own nickel. Not only have we made a lot of forward progress, but it also means we have more to show potential investors (prototype, user testing, etc.). The more you can show, the more data you have, the less risk there is to invest in you. Brad Feld (@bfeld) and Jason Mendelson (@jasonmendelson) discuss this in their book, Venture Deals, read it before you look for funding.
Three Types of Risk
Another friend of ours, Rob Seigel of X/Seed Capital, broke down risk for us in a way that is really easy to grasp. There are three types of risk – Technology, Execution and Market. Understand where your highest risks are and do what you can to address those. If you have execution risk because you don’t have a key member of your team, how are you going to hire that person? All startups have risks; you want investors to feel confident that you can handle them.
What are you going to prove (with their money) and how are you going to know that you have proven it?
This amazing question, courtesy of our friend, Rob Hays of First Round Capital (@robhayes) is a great touchstone not only for your investor pitch, but also for planning what you do while self funded and what you are going to do with your seed funding. It is not just about having a timeline or even about executing to that timeline, it is about the hypotheses that you are testing about your product/technology/company. Continue to ask yourself this question (and there is no reason to stop even after funding – seems like any company can ask this for any project).
Knowing that we need to go for seed funding early has helped us prioritize our activities, which can feel overwhelming where there are just three of you and everything needs to be done from scratch. ”Is this necessary for funding?” has become another question that we continually ask ourselves right now. Networking, check. Business planning, check. Working prototype, check. Better designed website, check. Facebook promotion, No. Messaging, check. Something to keep in mind here though is that there is really no activity for funding (except maybe setting up the actual pitch meetings) that you should not be able to leverage for product/company development. What we mean is that getting your pitch right is really just getting your company right. What a potential investor wants to know is that you have your act together, you understand your business, you have identified your risks and know how you are going to address them. This is all stuff you need to run your business anyway. So, prioritizing what you need to raise money is just a way of addressing some business needs that you will ultimately need anyway.
This leads us to Funding is not the end goal
Your successful product and your successful company is the end goal. Funding is tactical to reach that success. Look at your product, determine a path to success, break that into steps, look for funding for the next step or so, determine how much that will cost and ask for that amount. More funding is not necessarily better, it just means giving up more control of your company early on, and limiting your options. The earlier the money, the more expensive (i.e. the more equity you have to give away) it will be. You are not trying to win here, you are trying to get the capital you need to move towards success. And it is not just capital, it is also advice and connections – those that your funders bring. You need to choose them as carefully as they choose you. In the Deck heading below we mention product/market fit and founder/market fit, as the founders, you need to look for company/funder fit. We can learn so much about potential funders before we ever approach them. Do your homework and look for funders who fund the category your product is in, who fund companies that serve your same target market, who like the same activities you do. In our case, we need funders who fund consumer electronics devices, not exclusively, but at least have an interest and experience with them since they have their own issues and a knowledgeable funder is a much more helpful funder.
As we said in a previous post, it takes a village to raise a startup, and the village is out there, full of extremely helpful, knowledgeable, experienced people who willing to care about your baby. How awesome is that? But they don’t beat a path to your door; it is your responsibility to go find them. Twitter, LinkedIn, Facebook, blogs, Tech Crunch, friends, friends of friends, acquaintances of friends – seek them out, do your homework, ask questions and always think about what you can give (can you test someone else’s product? can you tweet about it? pass on an article that is appropriate to them?). If you can’t think of anything you can give back now, don’t worry, you will have your chance to give to others as the village is giving to you.
And now, The Pitch Deck
There are lots of great blog posts and slide shares available to help you create your pitch deck. Some of the ones that helped us a lot were from Dave McClure, Brendan Baker, Jason Cohen, and the Dress Rush Pitch Deck. All of these are good for form and also for identifying the key questions your pitch needs to address:
- What is the problem and who are we solving it for – no one loves our solution more than we do. We spend all our time on our solution, but investors need to know what problem our solution solves. Problems (also called pain) is 100% from the customer’s point of view. Keep pushing yourself to be able to talk about the problem without discussing your solution – your pitch, your product and your ability to communicate will improve because of it.
- Demo as early as possible and let investors play with stuff.
- Introduce the team with their relevant background. Adam D’Augelli (@adaugelli) of True Ventures says they are not just looking for product/market fit, but also for founder/market fit. You need to show them that your team knows your market.
- Size of the target Market
- How you are going to reach the target market?
- How you are going to make money (what is your business model)?
- Who is the competition and what are your key differentiators against them?
- How can you grow (or where can you pivot)?
- What is your timeline and how well have you executed on it so far. Jason Cohen gave us another great piece of advice here – if you just show up and pitch, you will be a dot, you want to be a line (trending upwards of course), so do what you can to show progression points. This blog is one way we are communicating our ‘line-ness.”
- Financial Projections – ones that look plausible and have the backup data and logic available to show. Look for comparables and how they grew. Investors don’t expect you to predict the future, but they expect you to be logical about your predictions and to show that you will be able to take new data as it comes and adjust your predictions accordingly.
- And finally, what funding are you seeking? Again, there should be logic here. Back to what you are going to prove but now you break it down with what tactics you are going to use to prove it and what resources you need to implement those tactics. You also want to ask for enough to keep you going if some of your hypothesis prove wrong and you need to pivot. That’s ok. Again back to Rob Hayes who says that ultimately funders want to invest in a machine that takes their nickels and turns them into quarters. What you need seed funding for is to create that machine. Let the funders know this and make sure to ask for enough to get there. Then your next round is all about showing how your machine does this and you just need capital to scale it.
And the last piece of wisdom we have learned in this process…Practice, Practice, Practice
Talk to everyone; talk to anyone; talk to each other; talk to the video camera – just practice your pitch and your message. Take advantage of great events like Tech Cocktail
and Beta Ltd
to stand in the firehose and explain your product again and again. We presented at tech cocktail before we even had a working prototype and it was a great way to test our messaging and start to really hone in our target market. For example, our practice has led us to see that women emotionally connect with our product more quickly than men do. This allows us to tailor our pitch better depending on the gender of who we are talking to. Think about the whole environment of your pitch from the first handshake to the last and practice it all. It will pay off.
Now to put all this to use…the pitch deck is almost finished, we have been building our relationships and we plan to seek our funding starting in mid January.