Getting your start-up funded; the most important factors
One of the most challenging facts for any startup business is funding, especially if the startup requires a large capital base to invest in a product and taking the product to market.
If you decide to pursue venture capital investment for your fledgling business they will primarily be looking at three things: founding team, product and market.
Understanding the importance of these three things will help you overcome a major obstacle in getting funded.
How important is the founding team?
If you ask venture capitalists which of team, product, or market is most important many will say team. In fact the highly esteemed startup investor Paul Graham recently wrote: “The most important ingredient is formidable founders. Most investors decide in the first few minutes whether you seem like a winner or a loser, and once their opinion is set it's hard to change.”
I think there is much to this, but is it really the most important factor before you get the VC’s money?
Being a formidable founding team will get you to the next step, as the VC will clearly be looking at your ability to execute on the opportunity you have identified for your business.
When legendary investor Warren Buffett is investing in a business he likes to look for a ‘moat.’ A moat is a protective ring around your business in a captive market. As a startup you have not had the chance to create the moat yet, indeed the market may not even exist yet. Apple created the market for iTunes, just as Google created the market for AdSense.
Paul Graham says: “Your target market has to be big, and it also has to be capturable by you. But the market doesn't have to be big yet, nor do you necessarily have to be in it yet.”
Your product should solve some big pain for your customer or greatly increase their experience. The iPod revolutionized the user experience of MP3 players and knocked the Sony CD player out of business. Tesla motors created a car that has been ranked the best car made by auto magazines and it is electric! Plus they are building ‘the moat’ by putting in place a huge network of charging stations.
These are winning products – a VC will be looking at the product and considering how easy is the product to use? How feature rich is it? How fast is it? How extensible is it? How polished is it? How many (or rather, how few) bugs does it have? And most importantly how disruptive is it to the status quo?
A lousy product may help you get some initial sales but unless it transforms peoples’ lives it is highly unlikely you will get funded.
What is most important, people, market or product?
A formidable founder and team will you get you across the threshold of the VC’s office door and into serious contention but it is NOT the most important factor.
The most important factor in any investment evaluation is likely to be the market.
Neither an outstanding team nor a fantastic product will do well in a bad market.
And this is where so many startups fail. They are overconfident in their own ability and in the product but do not sufficiently understand the psychology of the market – in fact they may even overestimate the market and what it takes to capture a dominant market share.
Marc Andreesen, one of the most successful modern day entrepreneurs and venture capitalists wrote: “You see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30" monitors for all the programmers, top tier VCs on the board -- heading straight off a cliff due to not ever finding product/market fit.”
So if you want to convince a VC to invest in you show them the size of the market and a thorough understanding of it and then convince them why your product will build a moat.
Have you had experiences with VC investors where the people or product comes before market?