A few months back, a very nice young lady contacted me. She had an idea for a software product and wanted me to hear it.
I had to think of a very polite way of explaining that…
Venture Capitalists Don’t Invest in Ideas.
Many people think that angels and VC’s spend their days evaluating ideas. When they find an interesting and original concept, they shake hands and write a big check.
This isn’t how it works.
There are countless ideas, but only a skilled and determined founder can turn her concept into a real product. And then it takes even more perseverance to find customers who need the product and get their money.
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Traction Over Everything
So rather than attempting to read the tea leaves and find out which idea will work, most investors look for evidence that it’s already working. That evidence is called “traction.”
If you have several thousand dollars a month in revenue coming in the door, growing 30% month over month, there is clearly a very strong demand for your product. You’ve proven its value in the market.
If you can show an investor traction like that rather than just a deck or even an MVP, your odds of getting funded skyrocket.
Why are investors so stingy? Because they know that most startups will never even get to dollar 1 of revenue.
If investors dump cash on too many companies that don’t succeed in the market, they will soon have no more money left to invest. And then, even the best startups won’t be able to raise capital.
Venture Capital Is to Help You Scale, Not to Help You Start
Venture capital is really for scaling a business, not starting one. If you clearly have strong demand for your product in the market, we can help you staff up and meet that demand.
But few investors, if any, want to give you money to build a product.
What we’re trying to avoid is a team that raises money, works on the product, but misses their launch date. The date is postponed, and they miss it again.
Soon, they’re back asking for more money with no real progress to show.
But What About Pre-Seed?
Even for pre-seed deals, most investors want to see a Minimum Viable Product (MVP) built. Without that, it’s difficult to tell what you’re even investing in.
It’s also hard to say if the founders will ever be able to deliver on their plans.
Even the Best Bring More Than an Idea
Last year, I got a deal memo in my inbox for Callin, a social audio app co-founded by David Sacks.
Sacks is part of the famed PayPal Mafia and served as the company’s COO. After that, he founded Yammer and sold it to Microsoft for $1.2 billion in 2012.
He has a stronger track record than almost anyone. But even he didn’t show up with just an idea.
Sacks and his team had a nicely functioning app in private beta available for iOS. Numerous users were already creating podcasts on the platform.
Alas, the round was massively oversubscribed and I never got my allocation. But I did come away with an interesting lesson.
If you want to raise money, show up with more than an idea. Show up with an MVP you can show investors.
Better yet, come with a couple of customers and a little money coming in the door. Nothing impresses investors like real customers and real revenue.
Building an MVP with minimal resources and finding customers on your own is very hard. But so is contacting investor after investor with little chance of success.
What misconceptions have you seen about fundraising? What still mystifies you about the process?
Leave a comment at the bottom and let me know!
Have a wonderful weekend everyone! 👋
More on tech:
Inside Today’s Early Stage Venture Market
What the Best Founders I Know Have in Common
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Photo: “Startup” by Skley is marked with CC BY-ND 2.0.
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