As we discussed in the previous article, the best way to overcome investors’ concerns with the team, market, and every other challenge in your business is by demonstrating traction. I’ve been through countless pitches where I’ve noticed other angels in the room, bored expressions on their faces, playing with their phones in the middle of a pitch when the CEO put up the traction slide and said, “We did $100K in revenue last month and are growing 30% month over month.” All eyes lit up, phones set down on the tables. Oh, now this is something interesting said the expression on every face.
Entrepreneurs believe that angels and VCs are happy to throw money at great ideas. The truth is we only invest in a small number of companies each year. Though we examine your team and technology and market opportunity, the way to guess which of the thousands of companies that pitch us will be the one to succeed is if you’ve already proven that customers are excited enough about your product to pay real money for it. The likelihood of your pitch succeeding and getting into the due diligence is closely correlated to the amount of revenue you have.
If you already have significant revenue, especially if it’s growing quickly, be sure to make that the highlight of your pitch. If not, try to figure out how to get into revenue before raising. If that isn’t possible, there other types of traction you can show besides revenue—whatever validation you have of the value of your product, this is the place to show it.
Recurring sales: Even if you only have a few customers, if they’ve purchased not once but multiple times, it proves the sale was more than just a trial and that your product provides significant enough benefit to continue purchasing.
Purchase orders: Large purchase orders can be as good or even better than actual sales, if they demonstrate a customer’s firm commitment to purchase a significant volume of your product in the future.
Letters of Intent: For large ticket items that will take substantial time to deliver and evaluate, letters of intent provide investors some validation that customers are excited about the product. Investors will want to speak with those customers using due diligence to understand how firm this commitment really is. Letters of intent from manufacturers, distributors, and other partners are of negligible interest to investors even if they may be important for building the business, so focus on signing up end users.
Grants: Especially for highly technical products, grants can pay for a substantial portion of your development work. This not only provides non-dilutive funding which investors love, but because you’ve had to go through an intensive investigation by technical experts, it gives investors confidence that your technology is feasible and fits a known market need.
Awards: If you’ve got them, flaunt them. Anything that shows that others have selected your product, technology, or business is evidence you should point to.
Accelerators and incubators: Being selected to a well-known accelerator or incubator is kind of like graduating from a prestigious university. It’s not so much that you’ll learn more at Harvard or MIT than say, Ohio State, but that you were accepted into the program over all the other candidates. If you get invited to join Y-Combinator, investors will beg you to take their money even though you won’t learn anything in the program that you couldn’t pick up through their YC School that’s open to everyone online.
Other investors: Although investors often claim to be expert pickers of startups, we have a tendency to cheat. We look at who else is investing and assume they know more than us or have done the hard work of evaluating your business prospects. Get one big name investor to sign up first and the other investors will be easy.
None of these alternatives are as effective as simple revenue. So do everything you can to jump start your customer acquisition before you begin fundraising. But if that’s not feasible, point to whatever evidence you have that you’re on track to building revenues soon.
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