As we enter 2021, many entrepreneurs will likely have goals for success that include raising capital. The prerequisites for a venture-funded company are clear-cut: You must have a strong potential for high-growth and a willingness to build an exit in five to seven-plus years.
For the last several years, Rev1 Ventures has been recognized as one of the most active seed funds in the Midwest. We learn something new every single day and on every single deal. Here are five of our most valuable lessons.
1. Before You Ask Someone Else for Money, Have a Well-Thought-Out and Well-Written Business Plan
The business plan defines a problem in the market and how your company is going to solve that problem. This is the document that investors base their decisions upon. Company founders must write the plan themselves using guidelines, suggestions and templating tools, certainly — but the writing of successful business plans cannot be delegated. Writing a business plan gives the founders and early management team the perfect opportunity to work together to hammer out and formally express the assumptions and intentions of the business. It is a living document and the touchstone of progress. It includes market and customer intelligence, talent needs and reflects three- to five-year growth scenarios, including potential flashpoints. Anticipate and answer the questions investors want to ask.
2. Market Validation Is All About Customers
Market validation sounds big-picture and sort of grand. And at the concept stage of a company, it is important to get a sense of the total available market and then to narrow that down to the market that is addressable. However, successful startups quickly get down to talking to real customers with real problems. Make customers the pivot point from day one. Use personal, professional and industry connections to reach humans who have the problem you are trying to solve. Conversations — not texts and emails — are the best way to validate your assumptions and to find out if your assumptions are wrong. Don’t limit conversations to features. How are you going to monetize your solution? Who will buy it, and what will they pay? If a person who matches your ideal customer persona doesn’t see the value in your concept, then your prototype doesn’t stand a chance. The biggest mistake entrepreneurs make is not investing the necessary time and legwork to deeply understand the customers they are planning to serve.
3. Match Capital Requirements to Critical Milestones
There are many ways creative and focused entrepreneurs achieve concept-stage milestones without huge sums of capital. Effective cash management and bootstrapping (paying as you go with revenue) are two must-dos. The survival of a young company depends on how you prioritize expenditures. When you finally do have paying customers and a working product, target the right sources of capital to the appropriate stage of your company’s growth. Early on, identify an investor pipeline: public sources of funding, angels, and venture capitalists in your region. Build relationships with these folks and with a local bank well before you enter fundraising mode. Above all, remember the demand for capital greatly exceeds supply. As an example, as the most active investor in our region, we see hundreds of opportunities, and we invest in 25 to 35 deals per year.
4. Build a Board That Meets Your Needs
Well-managed startups develop advisory boards while they are early in the seed stage. This is not the time to rely on family members and friends, as well-intentioned as they may be. Seek out advisors with experience and knowledge that is relevant to your business. They could be from the industry you are targeting or experts in technology related to yours. Or maybe, as an engineer, you need mentoring in finance or marketing. Creating and working with an advisory board is excellent preparation for establishing a board of directors. An engaged board of directors can be an asset like no other. And it is an asset that, for the most part, you get to select. Look for people with time to invest in your company — people who are collaborative, with strong personal networks and problem-solving and board experience. Especially in challenging and unpredictable times like recent months, a proactive board of directors can be invaluable to helping extend the company’s runway.
5. Diverse Companies Achieve Better Business Results
Investors invest in people first and technology second. Build a modern company based on inclusion and diversity. Of the first three people you hire, at least two of them should have different backgrounds and experiences than yours. Tap into college and university internship programs. Today’s students are the most diverse generation in America ever — and they are creative problem-solvers who are eager to work.
While there are practically as many paths to startup success as there are entrepreneurs, there are critical milestones that every entrepreneur must achieve to succeed. One of the greatest things about entrepreneurs is their willingness to share their hard-earned experience.
Another great thing about entrepreneurs is that the best of them remain coachable and curious, so I would love to hear from you about lessons learned. My door is open — get in touch any time.