September 17, 2018
So You Have a Great Business Idea but No Money. Now What?
Picture this: you and your buddies are out having drinks in the evening, complaining about working for the man, and discussing if you ran the business, how that business would be different. As you talk, you share business ideas you want to try. Suddenly, everyone gets excited about your idea and you start writing down your business idea on a cocktail napkin. My business started with my best friend, a large jug of cheap white wine and a yellow legal pad. We wanted to start an events business. As we started working through the details, we realized that it was actually a very simple piece of software that consisted of three pages – a category page, a list page, and a details page. We then discovered that this architecture could work for just about anything – memberships, job listings, events, company team pages, etc. We eagerly found ourselves bootstrapping our company to one of Crain’s top 50 web design firms in Chicago in 2001. We never went for funding for this firm, but having done so prior to that and for years after, listening to pitches, here is my advice on how to start once you find that big idea and have figured out what you want to do once you have funding.
Have you validated your business idea with potential customers? Do you know who your target audience is and do you have access to a select number of them in order to ask them what they think about your idea? Does it solve a problem they have? How valuable would it be to have that product or service for them? How much would they be willing to pay for it? How many of their friends/colleagues would also need your product/service?
If all signs point to yes, it may be time to build out a minimally viable prototype (MVP). For software and SaaS, these can be simple sites with the bare minimum of features that work to produce the end result. You may want to look at crowdsourcing or showing up at a local Startup Weekend, BarCamp or Tech Cocktail to find people willing to provide the assistance you need. If your idea is a product, seek out a CAD designer who can assist you in developing your prototype and find a 3D printer near you to create a few different versions to show to your target audience. Ask the the same questions again and add a few more, such as, “What other features/components/colors/options would you like added to convince you to recommend this to others?”, “What differentiates this product/service from others you’ve seen in the market?”, “Who else has a product similar to this and what do you like about it/them?” Hopefully these answers will help you with the rest of this process. You’ll need at least seven people. This will give you approximately 98% of the issues/opinions you would see as trends in a larger sample.
Are you able to articulate the precise positioning of your solution? Now it is time to really double down on your competitor research. You want to know exactly who’s out there, what they offer, what they charge, how they’re paid, how they distribute (if applicable), how they market their product/service, and to whom. Look also at peripheral companies as well.
You need to do a lot of research on your competition. No investor wants to hear, “there’s no one in our space,” because it’s absolutely untrue. You just haven’t found them yet. Maybe they aren’t on line. Maybe they’re regional. Maybe they are in academia or the R&D department of a multinational with deep pockets. But, they may also be looking to expand/commercialize, and are seeking funding to take their financially solid, mature and proven product/service to a larger market. If the investor can name even one company in your space, you haven’t listed, you could easily blow the pitch up right there.
For example, maybe you have a cool new shoelace idea. Don’t look at just shoelace manufacturers, but sneakers and other shoe manufacturers. Another example was when I was advising a client making high end computer-aided design software and hardware for the textile industry, and the price point was way too high for most people making printed fabrics, but I suggested looking at other manufacturers such as vinyl flooring, wallpapers, carpeting and other manufacturers of products that require large repeatable designs. This greatly expanded their market opportunity with large commercial manufacturers with big volumes that were in dire need of more modern design processes.
How do you generate revenue? For all ideas, understanding what the market will bear is the first step in designing a diversified business model. “Diversified” and “recurring” are very attractive words to investors. Investigate all the ways you can monetize your product/service. Perhaps you have a web site where you can build in banner advertising. If you use Facebook, consider using instant articles and get an additional bit of income. Are you looking at all possible target audiences for your product/service? Have you explored different ways your product/service can be used? Are there add-ons you can create for those who love your basic product to customize or add features? Can you sell through associations or groups to their members with bulk discount rates? Are there companies that could sell your product/service as part of a suite of products they’re already selling? For example, some of the shoe manufacturers might be very interested in your innovative shoelaces to sell as impulse buys on high margins at their store cash registers.
4. Size of Market Opportunity
This determines your financing and go-to-market (GTM) strategy in a significant way. Investors want a big piece of the pie. If your market is defined as the entire US consumer market, that’s a big market. If you state you are confident you can achieve 5% market share within two years, that’s not thinking nearly big enough for most investors. They want to see 55% and your GTM strategy should illustrate that.
Business-to-Consumer (B2C) marketing is much more expensive than Business-to-Business (B2B) due to the heavy use of traditional print advertising and television commercials and infomercials. Reach out to a marketing expert who has experience in launching companies in your industry. They’ll know what it will cost to get you there and understand the pitfalls, the suppliers, the players, and future trends that may threaten your business, as well as consumer habits, pain points, price thresholds and more. That in-depth experience will more than pay for itself. Let’s say you can’t find someone with industry expertise. Find someone who at least has experience launching and growing small startups. Ensure they know how to get the research done internally.
Have you done enough bootstrapping before approaching investors? I fully and completely recommending bootstrapping for as long as you possibly can. Bootstrapping enables you to keep full control over where your company is going. Investors can pressure you into other options, such as ramping up quickly when the sales aren’t there to support it, significantly increasing your burn rate (amount of money you spend each month). This can lead to start pitching for additional funding and diluting your shares even more. The investors may want you to pivot or agree to be acquired, when you’re not ready or don’t want to. Only go to investors when you have the track record and have a significant need for funding to grow to the next level (it is never a good idea to seek funding when your company is about to close and you’re desperate to keep the doors open). Is your company fundable, or is it one that needs to be funded all the way to solvency? Making the decision to seek funding should not be taken lightly, and only when you see no other alternatives.
The caveat to this is “time”. If you need to ramp up quickly to get ahead of competition with a similar product/service, you’ll need a lot of money and as fast as possible. This is especially true of certain business models, such as jobs, travel, auctions, real estate, and other industries that require marketing for both buyers and sellers in a crowded market with established competition with deep pockets. Carefully consider whether your solution is radically different enough to engage industry media and disrupt the status quo. Your pitch to investors needs to demonstrate this very effectively or investors will pass.
Over 99% of the entrepreneurs who go out to raise money get rejected. So you have decided you really do need to raise money. Do you understand what it takes to raise money and what investors are looking for? Do you know how to assess what is fundable and what is not? Are you getting rejected by investors? Do you need to move to where the money is? Do you know what is the current valuation range for your company? Can you enhance the valuation? What are the levers? What are your different types of financing options and what are the mechanics of those? Before actually pitching investors, you might want to connect with a few through LinkedIn or Angelist that fund companies in your industry and ask for informational interviews to seek advice on how best to pitch investors (keep it generic). Connect with other entrepreneurs for the same advice. Network with entrepreneurs at local business networking events. They may be able to introduce you to investors they’ve pitched and give you advice on how to successfully pitch with them.
Investors are going to want to know why you need the money. It shouldn’t be to pay current outstanding bills but to take your company to the next level. Try to have a minimally viable product or service already launched and a few paying customers. You don’t have to be making a profit, but it helps. What you plan to do with the money is vital since VC’s are responsible for spending other people’s money and need to account for it. Have a clear plan on how the money will be spent and share the vision for what the company will look like once you’ve executed on your plan. Investors are incentivized by the number of positive exits they make, and the higher your pitch’s potential, the higher the likelihood they’ll fund you.
7. Customer Acquisition
What is your customer acquisition strategy, cost, conversion rate, channels, and costs per channel? Your customer acquisition cost can vary widely depending on your business model. You may have a variety of business models in place to diversify your revenue generation (a wise decision). Your go-to-market plan should clearly show your initial costs, but also consider the lifetime value of a client. Do you have mechanisms in place to extend the lifespan of a client beyond their initial purchase?
For example, that would be extremely hard if you were selling residential heating systems which are typically replaced once every 20 years. But you could sell annual preventive maintenance contracts and pre-sale equipment certifications before selling a home. Let’s say you sell HR software. Instead of one standalone software that does everything, porting it to a website as a SaaS software bundle of individual components enables you to sell individual components at lower price points and enables customers to add components as they grow or need additional services. Instead of selling the components once, enable then to rent the software for a small monthly fee based on a fixed set of features (basic, extended and premium) or number of users. This facilitates two things – recurring revenue with customers extending their lifetime value, and increased difficulty and cost to convert to a competitor. Once a customer invests their own time uploading all the information about their company and personnel, the likelihood of them moving elsewhere is significantly diminished. The only reasons they would move would be a significant increase in their costs using your software, poor quality software, or if they feel your customer service experience is poor.
8. Hacking Team Growth
How do you balance between your need to keep costs down and getting things done, as well as presenting a reasonably complete team to potential investors, in case you are soliciting financing? I once worked as a team of two, and to keep costs down, we split the company down the middle. I focused on customer engagement, product development, and marketing. My partner handled sales, HR, and finances. We took turns taking out the trash and vacuuming the carpets. As we grew, we took the least likable parts of our jobs and wrote process documents and job descriptions, then hired for those positions. As we kept expanding, transferring more and more of the operational aspects of the company to other staff, we were able to stop working IN the business, to working ON the business. What were we leaving on the table when pitching clients? Where should we expand? Locations? Services? What could we leverage today to build more tomorrow? Before we started hiring full-time employees, we hired unpaid interns of very high caliber from very good graduate schools that were instrumental in building the business. They were heavily involved in the marketing and product development parts of the business and gained real-world experience launching real products for real customers. It also enabled us to try out potential hires before we brought them on board full time. Investors want to see a team that has the education and experience to make your business achieve its goals, for you and the investor.
9. Practice, Anticipate, and Practice Some More
Developing a pitch deck should be simple. Bear in mind though, that if you have ten slides and you are asking for 10 million dollars, each one is worth one million so chose your content carefully.
You need to answer a few basic questions:
- Title: Company name, descriptive tag line and perhaps imagery that encapsulates or represents what you do. This slide sets the tone for the entire pitch.
- Problem/Opportunity: What problems does your company solve? Who and what size is the market?
- Value Proposition: What is your solution?
- Technology: One or two images are better than a lot of text.
- Business Model(s): What is/are your business model(s)? How are you diversifying your revenue?
- Go-to-Market Plan: Explain how you will reach customers and how much it will cost.
- Competition: Complete view of the landscape with a lot of detail. What makes your product/service better than your competition? Have their logos come up on the slide and keep a cheat sheet on each one for reference. You should ALWAYS know what they’re up to.
- Management Team: What does your team look like and what are their qualifications? Limit this to critical team members and their accomplishments. If your team is weak, try to build a robust board of advisors.
- Financial Projections: How much revenue are you generating along with last year’s major clients; include this year’s revenue YTD, current major clients, and those in the pipeline. Try to state your financial outlook for three years and have a way to defend the upcoming years plan. Key metrics should also be included such as number and size of customers, and conversion rates as well. This is the most important slide in your deck.
- Summation: Finally, what is your current status, accomplishments, timeline and how you plan to use the investment.
There is always more information that can be added to a slide, but condense it down and leep your pitch to around twenty minutes or less. I know. This is hard. Questions may come up that you don’t have in your deck. Anticipate them. Other sides to have available will come up in practice runs with your team, mentors, advisors, friends, etc. If they’re asking questions that aren’t on your ten slides, either find a way to answer them without cluttering the pitch deck, or keep them separate if you require more detail. For example, financial data may require additional slides, especially if this isn’t your first round. You may need to disclose who owns how many shares and how many are still available. Your team, if not as strong as you like, may need a slide indicating coaches, consultants or advisors you regularly meet with to help grow your business. You may need a slide for partnerships who may be assisting in the sales cycle. Your Go-to-Market plan may require a schedule/calender of events or milestones. Keep these more detailed slides available for if and when the investors ask. No need to waste their time on that level of detail if they’re not interested in it at this point.
10. Finding Your Potential Investors
Once you’ve practiced your deck and feel confident presenting your idea, the hard part is getting in front of the VCs to pitch at all. Start with tech incubators and other pitch days and weekends local to you to get feedback on what’s working and what isn’t. You may end up with an angel investor or two in the audience who may be interested in investing or may be able to introduce you to the right people. Also, don’t look down at LinkedIn and Angelist and other investment portals to start conversations. Make those introductions personal, even if it’s just “I noticed that you’ve been investing in [your industry] and would love some advice on how to get a meeting with investors in my industry. ” After he/she accepts, you can then start asking about what to do, what not to do, etc. when asking for meetings, which people do they think would be interested, would they be interested is seeing your deck to give feedback, etc. After that, it’s really up you! Good luck.