1. Get feedback from potential customers
If you want to give investors an accurate sense of your product’s value, it’s crucial that you get it in front of people who may actually wind up using it once it hits the market.
Doing so not only allows you to share positive user experiences with prospective investors; it’s also an opportunity to use constructive criticism to improve your product.
“Talk to as many people as you can,” says Trevor Phenix, managing partner at Broad Street Bulls, a Regina, Sask.-based venture capital firm that specializes in helping early-stage companies. (Full disclosure: Phenix is a distant relative of the author.)
“It's always difficult, because some people don't like negative feedback. But you need to go and get as much feedback as you can,” Phenix says.
“When we are looking at companies and evaluating them, we take a lot of time to understand the work they put into really validating what the customer needs, who their customers are and what the price point’s like.”
Alicia Soulier, another Saskatchewan-based entrepreneur, launched SalonScale, a tech solution for managing costs in hair salons, in 2018. A former salon owner herself, Soulier solicited the input of dozens of colleagues in the industry to determine SalonScale’s potential as a business.
“That was probably the major reason why we got investment,” Soulier says. “Right out of the gate, there were ... 30 names, 30 companies, 30 people they can go talk to, to see why SalonScale can make a difference in their business.”
Feedback can come in many forms. If a product isn’t ready to be demonstrated, Facebook polls and Reddit threads can be a source of brutal honesty.
“You have to do those things, or else you might find that out the hard way, six months from now, 10 months from now, that you didn't end up actually having a product market or product market fit,” Phenix says. “You can’t just leverage your own experience.”
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2. Approach the right investors
In his 1991 book Crossing the Chasm, Geoffrey A. Moore discusses a common problem facing tech entrepreneurs: bridging the gap between “early adopters,” who gravitate toward innovative ideas in their nascent, rough-around-the-edges stages, and the “early majority,” who tend to wait until later to buy in.
While Moore was talking about the adoption of new tech, the same divide exists among investors.
Those that can be considered early adopters will have a track record of betting on unproven new companies and shepherding them through the inevitable bumps in the road as they take a product to market.
Len Zapalowski, senior advisor at Vancouver-based investment bank Strategic Exits, describes these early adopters as investors who “can work with technology, no matter how bad it is, because he or she realizes that if they get it right, then they're going to have a huge head start over the marketplace.”
Those in the early majority are likely to be decidedly more conservative and risk-averse.
“If you go to the early majority, they basically won't touch [a new product] with a bargepole until somebody has proven that it works,” Zapalowski says. “They need spreadsheets, they need teams to evaluate it. They want a much, much less risky proposition.”
This is where strategy comes into your funding journey. Do your research and ensure that you’re approaching investors who, once presented with your company’s value proposition, will be comfortable funding it in its current state.
3. Put yourself on the line
No matter how astonishing a new product might appear, investors are going to have trouble backing any company that doesn’t have the full buy-in of its own founder.
Think about it. Would you invest in a company that was a part-time pursuit or, even worse, a “zombie company” that’s all concept and no commitment?
“One of the things that we always struggle with is people who haven't put their own skin in the game,” Phenix says. “You're coming to an investor and saying, ‘Hey, you should support this project,’ but you haven't put any sort of tangible amount in. Sometimes it's sweat equity, but often, sweat equity isn't enough.”
As your own first investor, you have to be serious. The amount you’re willing to invest, both in terms of time and money, tells the next investor not only that you believe in your product, but that you’re willing to make sacrifices and take risks for it.
With a significant amount riding on the success of your new venture, investors can assume that you’ll be willing to do what it takes to make it viable, including taking advice from your investment partners.
“You have to really appreciate that you're taking people's money,” Phenix says. “You have a fiduciary duty to do what you can to grind it out, to make them their money back.”
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