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Very early stage startups often seek angel or seed financing in order to gain initial traction on developing their product or technology, land initial customers, and make other progress. Angel or seed rounds typically range from $100,000 to $500,000 or more.
I have been an angel, seed, and venture capital investor in a number of technology companies. For me, there are always four key points I look for when reviewing an early stage seed or angel investment opportunity:
Has the Entrepreneur Been Referred to Me by a Trusted Colleague?
I get inundated with unsolicited executive summaries and pitch decks. Most of the time, I ignore these solicitations. The way to capture my attention is to get a warm introduction from someone I know and trust: an entrepreneur, a lawyer, an investment banker, an angel investor, or another venture capitalist.
Is There a Great Management Team in Place?
Many investors consider the team behind a startup more important than its business idea or product. I want to know that the management team has the right set of skills and has the drive, experience, and temperament to grow the business. Investors want to see a group that has all of this along with an obvious passion to do something truly great and unique.
Is the Market Opportunity Big Enough?
Most investors are looking for businesses that can scale and become successful, so make sure you spell out clearly why you believe your business has the potential to become really big. Don’t present small ideas. If your first product or service is small, perhaps you need to position your company as a “platform” business that will allow for the creation of multiple products over time. Investors want to know the actual addressable market and what percentage of it you plan to obtain over time.
For most investors, a “big” market opportunity is in excess of $1 billion in sales annually.
Has the Company Achieved Some Early Traction?
I don’t typically want to invest in an “idea”; I want to see early traction or customers. A company that has gotten some early traction is more likely to obtain financing and have a higher valuation.
Examples of early traction can include the following:
- The creation of a beta or minimally viable product
- Initial or pilot customers, especially brand-name customers
- Strategic partnerships
- Customer testimonials
- Admission into competitive programs such as Y Combinator or other technology accelerators or incubators
I asked a number of other early stage investors their tips for obtaining startup financing. Here’s the real-world advice they had to offer:
Show Me Your Dedication and Passion
“We want to see dedication and perseverance in founders, and that they are passionate about the business and will have the desire and ability to get through difficult times. Startups are hard, and an entrepreneur needs to understand that the roadblocks that they likely will encounter must be tackled. Of course, I care about the market opportunity and the technology, but I care more about working with a great dedicated founder who wants to build a great company.”
—Melissa Guzy, Managing Partner of Arbor Ventures (investment focus on early stage financial technology companies)
Define the Problem You Are Solving
“Good entrepreneurs begin their pitch with a well-articulated problem statement. This helps validate that they are building a product that customers need and are willing to pay for (it also validates that they know who their customers are). The problem should be a big pain point that is not addressed adequately by existing companies. This is, of course, followed by “The Solution,” which introduces the entrepreneur’s approach to the problem and explains why they specifically are best positioned to solve it in a way that has widespread appeal for customers.”
—Ellen Herlacher, Director, Tufts Health Ventures (investment focus on early to mid-stage healthcare services and healthcare IT companies)
“At the early stage, I typically look for certain attributes in a founder. One essential and often overlooked skill is storytelling, the uncanny ability to craft a compelling narrative on why you are building something unique. Storytelling serves as a wonderful proxy for many elements of company-building: it is great indicator of how you will sell your vision to customers, partners, recruits, investors, and ultimately an acquirer. It is also critical for founders to convey this narrative with utter conviction and authenticity; ideally, they have experienced firsthand the pain of the problem they are trying to solve. At the same time, I like founders who are coachable, as collaboration and alignment with investors is so important. Finally, it’s crucial to be flexible, iterate quickly, and make decisions fast—decision fatigue can paralyze company-building.”
—Patrick Eggen, General Partner, Counterpart Ventures (investment focus on early and mid-stage SaaS, B2B marketplace, and mobility companies)
Show Me Customer Interest
“As a four-time entrepreneur, I spent well over a decade struggling through the brutality of building companies. During those years it became massively apparent to me that the only thing that matters in a startup is the delta between your product and the other solutions to market. That’s it. I like to say that you haven’t found product fit until you can cold call a customer, on their cell phone, at nine o’clock at night, as they are putting their kid to bed, and describe what you do in one sentence, and then have them take the call. That may seem like an impossibly high bar, but startups are impossibly hard and unless you have that, your chances of success are very low. The fastest way to get me to write a check is to be able to tell a story about that delta. Ideas are meaningless; validated ideas are priceless.”
—Zach Coelius, Managing Partner, Coelius Ventures (investment focus on early stage technology entrepreneurs)
Show Why You Care
“We want to hear why you care about the problem you are trying to solve. The desire to solve a problem you have encountered firsthand is a strong motivation for entrepreneurship. Did your battle with depression move you to build a mental health platform? Did your frustrations as a public servant push you to build a SaaS solution for government? These stories are part of your personal narrative; include them and your passion will shine through in your pitch. How did you come to discover the problem you are building a solution to? Why are you the right founder to solve this problem? We hear a lot about product-market fit, but at the very early stages, founder-market fit is just as important. Your product will dramatically change, but the founding team’s motivation is likely to remain a constant.”
—May Samali, Venture Partner, NextGen Venture Partners (investment focus on early stage U.S.-based technology companies across all industry verticals)
Leverage Your Customers
“One of the lesser-known secrets to fundraising is to leverage your own happy customers. If you’re in a business that sells to other startups, you may find that some of your customers are venture-funded themselves. A quick search on Crunchbasewill help you identify all of the key investors that have funded your customers. If they’re happy with your service, they may be willing to introduce you to their own investors, and these intros carry a lot of weight because they are from a highly trusted source.”
—Josh Breinlinger, Managing Partner, Jackson Square Ventures (investment focus on early stage SaaS and marketplace investments)
Tell Me What You Don’t Know
“So many unknowns remain at the angel and seed stages, so be upfront about that. Tell me what you have proven so far, and then what you want to prove next and why. Founders who present clear thinking about what they want to prove out with the funding they receive demonstrate a much greater level of understanding of the risks involved in the business they envision. It doesn’t matter if the future unfolds differently—in fact, it’s likely to!”
—Jennifer Savage, Partner, Illuminate Ventures (investment focus on seed stage enterprise software / SaaS applications)
“We have shifted from the Lean Startup to the Hyperscale Startup as the money has flowed into venture capital. Even Steve Blank, who popularized Lean, agrees: if you can, go for Hyperscale. The art is to know how to Hyperscale. Figure out the product/service at small scale, get the details right, hire ‘been there/done that execs,’ then go big when you know how to spend the big bucks wisely. It may start as a lean company, and usually should in order to figure it all out first; but once everything clicks and you know the playbook, raise big and go big.”
—Duncan Davidson, Founding Partner, Bullpen Capital (investment focus on growth seed technology companies)
Show Me Why the Team Is Uniquely Qualified
“At the very earliest stages of a startup’s life, people are by far the most important ingredient of success. With every meeting I’m asking myself two things: why is this team uniquely qualified to solve this problem, and why am I uniquely qualified to be an investor in this company? When you have a uniquely qualified team solving a problem, the team has a competitive advantage at the early stages of the business, and this can help fend off fast followers. I view early stage investors as early employees; they need to be grinding it out on the recruiting, customer, fundraising, and partnership fronts alongside the management team. Sometimes that can be with a few early customers and partners, or a few C-level hires for the business. If I can’t tell myself a compelling story there, I assume adverse selection and move on because presumably the team is also doing that same calculation.”
—Michael Gilroy, Partner at Canaan Partners (investment focus on seed through Series B rounds in enterprise software and fintech companies)
Here are some final tips to consider:
Copyright © Richard D. Harroch. All Rights Reserved.
March 16, 2019 at 12:19PM
Forbes – Entrepreneurs