I am looking for investment but it is the old chicken & egg problem of investors wanting to see early traction (which I get) but until I have a cash injection i can not advertise at the necessary level to attract customers. So my question is, for all the VC groups that proclaim "it's never too early for us" or "happy to write the first cheque" have you even seen this occur? How common is it, I'm guessing not very. I know I just need to find the right person who gets the idea
This is a common question. I just need the cash and then I can do X. Firstly as a general rule VC’s and angel investors like me only invest in scalable business and yes for the right business they do write early cheques - some more than others. I wrote a whole blog post here about what is a scalable business which is worth a read. There are possibly individuals who might resonate with a particular business and therefore invest but again that is just finding the person who really happens to care about the problem you are solving. Yep this is even harder.
The other challenges with some businesses is they have not identified why they are 10x better than the next best alternative. When I left Spreets I was constantly being pitched businesses that were doing group buying but just in this geographic region or in this particular niche. When you are in a market where there is an already established player who is doing well, you really need to have an insight into why you are better and not just a bit better 10x better. What insight on the problem do you have that nobody else does. How are you solving the problem better. How awesome is the team that is attacking this problem?
Here is a good test you can try. Most of the time I ask people what would you do with the investment. The answer is often 2 things. Market the business or hire person X to help me do Y. There is absolutely no excuse why anyone cant go and sell their service or product to 20 or 100 people you don’t need to advertise or market in the beginning- you need to sell and the feedback will be awesome. If you cant, maybe that feedback is telling you something about the product or the problem or the market.
“Oh but I need a developer to build the product I hear you say.” Firstly you dont you can sell the idea of what you are doing without a product or you can mock something up that conveys what you are doing. (Im not suggesting you scam people but you can get pre-orders or commitments of some kind). Secondly if you really do need somebody, you need to go and find a smart individual who can join you on your mission. If you cant pitch somebody else to give up their time and join you. That is also a pretty good indicator that maybe you need to look at what you are doing.
The other answer is don’t give up. Its the number 1 reason why people fail. Take feedback, make it better and eventually you will get there and don’t be afraid to throw everything away and start again if you aren’t getting traction and keep your head up and hang out with other founders who understand what its like. Sign up at TechSydney or a coworking space or just go for drinks with like minded people. Its like group therapy. It will help.
What's the first thing you are looking for when being approached for advice or investment?
How much of an expert is this person in their field? How rare is that knowledge? How valuable is that knowledge? Why do they really care about this project? Are they persistent and do they do what they say they are going to do and how do they take feedback. This is normally what I assess at the first impression stage. I have a few others but I cant give away all my secrets otherwise people will game the system.
When investing, when do you expect to see a return? For how much are you usually aiming for?
Investing in very early stage companies is very different than traditional businesses. Many startups think they a true high growth technology company, when they are really just a traditional business that is using technology. The opportunities VC’s and early stage tech investors like me are looking for are stepchange ideas but they must adhere to a particular formula. That formula is, could this investment actually pay back the entire fund one day?
So assume a VC has a $50million fund. A fund needs to make between 3x to 5x to be considered successful. So assume 5x - could whatever investment they own in your company make them $250M for the fund so assuming they owned 20% of your company at the time you exited- can your company be worth $1 billion one day. If you look at average revenue multiples which varies greatly for public vs private companies but its explained well here - say an average multiple of 10x revenue for a SAAS company. Thats telling a story of how you can get to $100m in revenue in a reasonable amount of time. If you cant tell a story in a credible way about how you get there in 3 -5 years. Then you wont be a great fit for a VC firm.
In the beginning its the right mix of self delusional vision vs practicality. You need to be able to see the summit of the mountain but be super focused on the path in front and next steps. Yes its hard, but if it was easy everyone would be raising $5 million rounds from the corner VC.
Is there anything founders often miss when looking for investment? (any tips on how to move forward and finding the right investor)
Dont start looking for investment. Start looking for smart people to give you feedback on your business. Look for people who have domain expertise in what you are doing. Find out what they dont like about your business. No selling its pure feedback. Then stay in touch with people. When you are ready to raise a round if you have done your job well you will have 50 or so people that have been following along with your progress and will either be interested or not. Asking 50 people for 50k and having 10 say yes is a lot easier this way.
Is there anything you'd wish to know when you first started out?
Your own self worth is not tied to the success or failure of your business. As soon as you can seperate your ego from your business you will be able to truly ask for feedback and learn about your business instead of always selling it. To truly be able to stand in somebody else’s shoes and see your business from their perspective and better yet understand why they DONT like it is the greatest skill as a founder or product manager.