If You’re Raising Money Outside The Valley, You Need to Read This
3 really important mistakes to avoid making
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As seen on Huffington Post, Mattermark Daily, and Mattermark Weekend Edition: Top Featured Posts
Last week, I jumped at the opportunity to download Mike Belsito’s book Startup Seed Funding For the Rest of Us. I guess he likes open sourcing knowledge, or is just a really cool guy, but he made the book free for its first few days on Amazon. I wasn’t surprised to see it jump to the top of the list of free startup books — it is that good. If you’ve ever tried raising money outside the valley, especially in an area without a well-developed startup culture with an appetite for risk, then you know what it feels like to be “the rest of us.”
A few years ago, I spent a lot of time working on an app called Flutter with my co-founder Michael Mitrakos (he’s since gone on to better things at the late-stage startup Gigya). We had some pretty new-for-the-time ideas about a social app focused on things to do and places to go out with your friends. Those ideas are pretty much now features in Swarm or entire apps like WiGo.
At the time neither of us knew a thing about mobile development or designing. Looking back, it might not have been the right startup for us even if our ideas might have made an interesting product. Having never built an app of any kind, this probably wasn’t the right thing for us to try on our first go.
Tristan Walker said that when you’re building a startup, it needs to be authentic to you. I now think that includes having the right skills to either build it or lead others in building it.
So we went out recruiting and built a pretty awesome team: a designer from BBC in New York and two developers outside the country to work for equity. To this day, I have no idea why they followed me into a venture with such odds against us, but I’m still thankful for that experience. In fact, I think it was the only thing I was really good at: articulating and selling a vision that was compelling enough to bring talent to the table when I had nothing material to offer in return.
Next we decided to go find some money. And here’s where Mike Belsito’s book comes in. Nearly everything I learned the hard way over the course of months seeking funding, reading Mike’s book would have saved me from. What follows are three key lessons any entrepreneur outside the valley should keep in mind, that Mike explains much better in his book. Here, I’ll use my experiences.
1: Build Your Team First
Looking back, if we’d done this first then we probably would have been at least slightly more successful in seeking funding (if you measure success as not getting a no right away…baby steps). Yet, without it our chances were probably 0%.
When we set out to raise money, we figured we were raising money on the strength of our ideas and we didn’t realize that many investors are thinking equally if not mostly about the team.
We thought we’d have trouble attracting talent as first-time founders with no financing, and that was probably true. Yet, it would turn out to also be very hard to fundraise without a “million dollar team” in place, as Mike calls it. We eventually got that million dollar team in my opinion, and that was only after we stopped spending time chasing money and started recruiting full time. It was my first time trying something like this, and so I didn’t realize that as a founder/“CEO” without a technical background, my number one job was building the right team.
I think this was especially true in the generally risk-averse investing climate in Ohio. There is of course some risk investors take on all the time out here, but when you’re nose-deep reading about what kinds of startups investors in Silicon Valley are investing in, it’s a rude awakening when you try pitching out here. Doing that pitch without a team the investors can believe in means your pitch is dead before you even get to the meeting. By working hard and networking I was able to land opportunities to actually meet with investors or investment groups and give them a full pitch, but those ultimately fell flat because I was doing these before I had a development team or even a prototype. A part of that was because it was a very risky startup outside of the kind they normally invest in, and most crucially:
There wasn’t a team behind it that they had reason to believe could pull it off.
Mike talks in his book about the different things you should look for in your team. One key thing I think we got right with Flutter was that our team was very diverse, both in terms of familiar things we think about when we think of “diverse” like our ethnicities, but also in our backgrounds and experiences. I almost never won the day right away on a product question. There were always other competing ideas, and a large part of my role was just saying “no” to a ton of great ideas that didn’t fit the vision. As a pre-launch founder/CEO, once you’ve built your team a part of your job is simply to guard the vision and continually use it to guide the product. After awhile, you find that the team starts doing the same gaurding and guiding on those terms. That’s a bit of an “aha” moment and you realize you’ve done your job right as a CEO.
2: Know Why Your Startup Exists
This one is kind of hard to get until you’ve done it the wrong way a few times. Usually, you walk into a pitch or you’re applying to some accelerator, and you’re asked some variation of: Tell us about your startup, what do you do?
The way it’s phrased makes you think you should go ahead and tell them what you’re making. The short version is: you’re doing it wrong. Mike says his company eFuneral struggled with this at first, and I know we did (and ultimately never got it right).
We certainly had passion for what we were building, but we were pitching the “what” instead of the “why.” In doing so, even though we were certainly inspired, we failed to inspire those whose money we were seeking.
Leading with the what instead of the why is a solid way to sink your pitch you worked so hard to get in the first place. Mike says:
“Getting the investor to believe in the problem you’re solving is half the battle… Even the most successful companies have solutions that change and evolve over time. Investors understand this, and know that their role is helping startups as they navigate the evolution of their solution… [but] the problem they’re solving for often remains the same.”
A big part of your job in that pitch is just convincing them there’s a problem worth solving. If you forget to do that, you’ll find yourself mired in the kind of pitch where the investor spends more time picking apart the market opportunity than asking any substantial questions.
Never assume they know your problem is worth solving.
Never assume your investors understand your market enough or understand the potential for monetization enough that you only need to give a perfunctory explanation of it. If you’re not planning to monetize right away then be clear about exactly why that would be so important not to do.
I’d argue that if you’re pitching investors who simply can’t understand why you may need to hold off on monetization then you’re pitching the wrong investors. And if you’re a consumer Internet startup, and you’re pitching investors who can’t see how you’d ever make money even if you got a large amount of users, then you’re definitely pitching the wrong investors. We pitched plenty of wrong investors. As Andrew Chen put it:
The consumer market has grown by so much that the upside opportunity is tremendous if you get a product exactly right. Given all the growth opportunity, and given the plug-in revenue models, the main bottleneck for building a great company doesn’t seem to be the business model at all.
In fact, the business model seems like a second or third order problem. So again, I argue, let’s stop asking about it.
The thing that makes the business model work is really about getting to the scale where the business model becomes trivial.
Let’s ask a more important question: Could this product engage and retain 100s of millions of active users?
However, Andrew has a number of wins under his belt and investors of that caliber are pretty hard to come by outside the valley. If you’ve got a startup that will take time to generate revenue then prepare to have to do extra work convincing investors. Don’t be turned off right away when you get the money question or the investor is skeptical. Have a compelling explanation of why you need to hold off. If you can tie that to your why, then you’ll be more credible. Trust me, saying “I’m not really worried about making money right away” (words that actually escaped my mouth during a pitch) is not going to be good enough.
Only in reading Belsito’s book have I recognized this huge mistake and had it articulated for me. For two different projects, Michael Mitrakos and I pitched in front of the Miami University Student Venture Fund (MUSVF; also, not Miami FL), among other investors and accelerators. Both times we made this mistake.
The problems we were solving with both of these projects were so obvious to us that we thought it was just as obvious to everyone else. We figured heck, if we got the meeting they must see that to. Plus they’re investors whose entire job exists to understand what ventures have the best potential, so of course they’re aware of the opportunity in X market right?
Both times my coufounder and I presented to MUSVF, almost every single question was about wondering whether there was even an opportunity to make money on it. And the reason was that we went in with hubris and assumed these investors understood the space already, and failed to articulate the why to convince them there was a problem worth solving. After failing to get our first company funded, which made an app called Flutter, we started a new project and went to MUSVF.
It was simply a startup innovating on the business model of food delivery startups but focusing on local markets VC-backed companies are overlooking (they’ve got big % growth targets to worry about and big fish to fry; being small and taking little funding would be an advantage here). We figured, huge VCs in Silicon Valley are funding these startups and obviously see huge market opportunity here worth writing million-dollar checks, so if we’re seeking a tiny seed of ~$10K to focus on local markets, it’s a bit of a no-brainer. In the Oxford market alone, a successful company in that space could make back a multiple of that investment in a single year. They weren’t familiar with the space, or the problems with restaurant delivery in Oxford. So when we pitched our what, there was a ton of skepticism that it was something that would make money or that the product was even legal (seriously, someone claimed our drivers and company would be liable if someone spilled hot tea from a restaurant on themselves). For the second time from that one investment group, we did not get funded. We were wrong in assuming how obvious the problem and market were, and paid for it with a failed pitch.
Even if you’re a non-technical founding team, and even if you’re not really great at pitching, and even if you don’t have the million dollar team ready to go, and you still insist on seeking money then you should probably do this before all else:
3. Build a Prototype
Seriously. Unless you’ve got a Steve Jobs-like reality-distortion field, save yourself a lot of frustration and build a prototype of whatever it is you want to build. Give people something to look at, and if you’ve got the chops make a prototype they can play with.
There are really great tools for this. Sketch or Invision can help you make a visual of what the product might be, and Origami can get you one that actually runs on a phone.
Doing this sends a great signal to investors. It shows you’re serious, first of all. If you’re a non-technical founding team and all you’ve got is a napkin of ideas, you’re not much better than a million other people out there who’ve got “great” ideas but no willingness to execute on them. So do yourself a favor and build something investors can look at. As Mike says, investors don’t invest in ideas. They need to know there’s an actual business there. So if it’s not possible to start taking money or users, show them there’s the potential to get those things by giving them a prototype to wrap their heads around.
Besides being a great signal to investors it can be also useful if you’ve taken the advice to start building a great team. They’re going to have a lot of questions that you can answer by showing them exactly what you’re envisioning (or a rough approximation). It’s especially easy to accidentally turn away talent if you’ve got a vision or product that’s hard to understand without a visual aid.
I’m not saying if you do all these things you’ll get funded. I’ve only seriously sought funding for one startup, and that didn’t happen so what do I know. These are just a few mistakes you can learn from me, and not have to repeat.
In Startup Seed Funding For the Rest of Us, Mike goes into way more detail and insights on more lessons than I put here. These were just things from my own experience that stuck out to me as I read his book.
P.S. I have no affiliation with Mike besides following him on Twitter. I wrote this because I’d always wanted to get some thoughts about my experience in this area down on paper, and reading his book hit so close to home that I decided to finally do so.
P.P.S. if this was useful, hit “Recommend” for me — it’s much appreciated.
