You think you need investment? What you actually need is revenue.

Through acting as a mentor at the Lightning Lab accelerator in Wellington, helping to run Startup Weekend Auckland 2013 (May 10-12, and Nov 22-24), and in our own investment and consulting activities, I meet a lot of energetic and smart entrepreneurs who are focussing on getting seed capital funding or angel investment to develop and execute on their idea.

I admire start-up entrepreneurs for their tenacity and drive — Character is a large part of any decision to invest in this person (and their idea) or not.

But all too often there’s very little executed to date, so we’re basically talking at the ‘idea stage’ with a correspondingly low valuation.  Plus, we then have to look into previous work history to see if this person or team can execute.

There seems to be a pattern emerging in the start-ups that I have been encountering this year. I’ll sum it up here, as I want more people to succeed in launching their business ideas and creating viable companies, particularly exporting kiwi technologies, products & services to paying customers overseas.

You think you need investment?  WHAT YOU ACTUALLY NEED IS REVENUE!!!!

  1. Often I see kiwi entrepreneurs that are engrossed in their product or service, rather than the problem that they are intending to solve, the size of the market, and their sales & marketing channel to acquire the customers. Conversely, in the San Francisco bay area start-up scene, I see people  being much more focussed on pitching the commercial opportunity. Tell this part of the story, and potential investors will take you more seriously.
    Disclosure: I too have been guilty of neglecting this part in the past, to my detriment.
  2. Paying customers are the best form of validation for both your idea and your ability to execute.  If you cannot achieve validation with paying customers pre-money then it’s likely that you haven’t yet found a real pain, and so don’t have a solid potential business. (See Steve Blank’s free video class on Udacity – the Lean Startup principles are worth thinking about.)
  3. If you ask customers to pay a ‘fair value’ (not full commercial price) for the setup of their trial deployment especially when it comes to complex enterprise systems, you can fund the development of your solution from revenues rather than investors’ funds. (What’s the worst that can happen? They can say no, so you enter a negotiation discussion with the aim of achieving a mutually beneficial outcome… you’re not trying to pull one over anybody!)
    Neil Richardson made this comment about Endace‘s growth in the early days in his speech at the SODA Innes 48hr business startup competition in Hamilton recently.  The customer in that case was AT&T.
  4. If you get enough of those customers paying you, then you won’t need cash from investors, or at least you’ll be in a better negotiating position with them.
  5. Always seek strategic investors.  There are two types of strategic investors.  First, those who bring important relationships with their investment dollars which significantly increases your chances of success.  Second, those who are in the business (as a supplier, a customer or even a competitor), bringing the ability for multiple points of margin or profit and so not relying on your start-up alone for their return on the investment.
    Strategic investors will respect you for the progress you’ve made, and bring more than cash to the table: partner/customer relationships, market access, complementary products/services, or people/skills to round-out your minimum viable team.  Some angel investors mayn’t be very happy that I share this advice.
  6. This can be transformational to your journey as a startup entrepreneur, as you’ll retain more ownership of your company, and without a group of non-strategic investors focussed on an quick exit and acting as a ‘boss’ breathing down your neck, you’ll keep more of the creative autonomy that many entrepreneurs crave.  (Though, if you want ‘control’ please read The Partnership Charter and reflect on why you want that.)

Heath Milligan
021 188 9979

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