As a venture capitalist I receive requests for capital every day. This is a tremendous privilege because I get to see the passion of others expressed as a business. The founders are all different and while the ideas may have been done before there is always a unique flavor to them. All too often I find myself having to let the founder know that they just are not ready to receive capital. I then need to walk them through the steps of “Getting to Investable”. Over the next few weeks I will highlight some of the trends that I have seen with first time founders.
“Needing Money versus Raising Money”
On the surface it may seem like the two situations are the same. If you need money then you raise it, RIGHT? WRONG! Every business requires some sort of capital contribution to get off the ground. This need for capital never goes away- no matter what stage your business is in. When you are just starting out your best source of money is yourself, friends, and family. Not a venture capital firm. So how do you know when you are ready to raise money? Here are a few tips to know whether you need more or if you are raising money.
Do you have a revenue model? Have you figured out how you are going to make this a business? If the answer is kind of— you are not ready to raise money. Your revenue model has to support the business and be sustainable. If you are unsure if people will pay for your product or service a good place to start is market research. Do not assume that because you have identified a problem people will be willing to pay for your solution. Remember there is a difference between a product and business.
Traction- Traction can be measured in a few ways. The easiest way is how many people are signed up or currently using your service. While this is the easiest way of showing traction do not mistake your free users for paying customers, EVEN IF THEY SAY THEY WOULD PAY. There is always attrition when converting free users to a paid structure. The next way to show traction is to have a small PAID pilot of your product or service. Pilot projects help to show your product or service in the field. The trick to having a paid pilot project is to ensure that those that are in the pilot phase know that you’ve already tested it and they are early adopter not the first guinea pigs.
MRR- Monthly Recurring Revenue- Don’t be afraid to say that you are only making a few hundred dollars. If the revenue is recurring on a monthly basis and growing, then investors will be willing to listen. Pre-sales count too so if you can show a purchase order investor will be very interested, as this shows the beginning of demand.
Burn Rate- Do you know what it takes to run the business monthly? No not if you had a fully staffed matrixed organization but what it takes today to keep the lights on and for you to maintain your current momentum. If you have no idea what your burn rate is you are not ready to raise money.
I NEED A SALARY- If your sole purpose for beginning to pitch is to just pay yourself—well then you just need money. I have told people to get a job or make the venture begin to pay them! Yes, it is completely reasonable to pay yourself. As a part of a reasonable growth strategy salaries are there, but it cannot be the only reason you are requesting money,
Whether you are speaking to an Angel or a Venture Capital firm always remember THEY WANT THEIR MONEY BACK AND THEN SOME! If you cannot answer how they will make a return, then you are not ready to raise money!
Dr. Shante Williams is a serial entrepreneur who started slow and in the shallow end of the business pool. She has worked in Biotech, Big Pharma, Green Energy, and Academia