Whatever. When you consider the whole concept of the "pivot" it's clear that this is a business of betting on people rather than business plans, which makes this essay a bit redundant.
How to Convince Investors
71–80 of 119 posts
Re: How to Convince Investors
#72"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addres…
One way to take a stab at this is to try thinking about how much money you'll make for anyone else; your TAM will probably be some fraction of that number.
Re: How to Convince Investors
#73The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction. If you are a startup that has low scalability, but you have traction, you will get funding If you are insanely scalable, a great idea, but you don't have traction, you just won't get funding. It doesn't matter how awesome your team is. Investors just can't see good ideas through the traction curt…
Is the traction you're referring to here the type limited to web startups or (if anyone else knows) does this hold true for virtually any startup in any industry? I imagine there are a handful of industries where achieving 'traction' may take several years, eg biomed.
Re: How to Convince Investors
#74Shakespeare. amazing clarity of thought put to words.
Re: How to Convince Investors
#75"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addres…
Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between.
This is why lack of competition is often scary to potential investors -- paradoxically -- they ask themselves, how attractive can this supposed new market be if there are no other companies going after it?
The advanced way to do market analysis -- which only the most experienced entrepreneurs ever actually do, but which works really well, at least with us -- is to spend very little time on market theory or top-down market estimates (handwaving), and instead put a lot of effort into building a solid, well-though-through BOTTOM-UP market analysis.
What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments.
E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing.
This kind of analysis answers several questions at once for the investor:
(a) Is there a big market? (b) Does the entrepreneur actually understand the dynamics of the market she's going after? (c) Does the entrepreneur understand the sales and marketing requirements and costs of her business? (d) Is this an entrepreneur who takes every aspect of her business seriously and rigorously?
Re: How to Convince Investors
#76As someone who is starting a seed fund with a few friends, I want to address one of the footnotes:
"The best investors rarely care who else is investing, but mediocre investors almost all do. So you can use this question as a test of investor quality."
I think the part about mediocre investors is true, but I'm not sure if I agree with the part about the best investors. There is actual value in knowing who else is investing. First, knowing the caliber of other investors is a signal. It's not the only signal, and it's not the best signal, but it is a signal. Second, my partners and I have a network of trusted coinvestors. If we hear that one of them is investing in a company, we can share due diligence, which is great for founders because it avoids duplicated meetings, and great for us because it saves us some time/helps us focus on questions that haven't already been asked and answered. We have never made a decision to invest in something "because X is investing", but we've certainly used our relationships with various X's to inform our due diligence process.
Re: How to Convince Investors
#77The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction. If you are a startup that has low scalability, but you have traction, you will get funding If you are insanely scalable, a great idea, but you don't have traction, you just won't get funding. It doesn't matter how awesome your team is. Investors just can't see good ideas through the traction curt…
understand that even the best investors have to pay heed to the Pattern because it tells you when things are different. it is very, very hard to evaluate, from scratch, every opportunity that comes your way. (I myself have been pitched a thousand+ times. Augh.) the Pattern is helpful because it is the differences that make companies succeed or fail; bad investors automatically think that differences from the Pattern…
Virtually all of the breakthrough conceptual innovators in any field (music and art, to name two) also have comprehensive knowledge of all of the creative work that came before them. It's really rare to get the big breakthrough out of someone who isn't obsessively steeped in the field.
Re: How to Convince Investors
#78The underlying concept I took from this post was a fundamental rule of marketing and sales... Every decision made starts with an emotional trigger, and ends with a defensible position.
Yes -- this is what engineers who refuse about sales never come to understand. The decision is typically emotional; the facts are assembled and interpreted to justify the decision.
The reason it isn't insane for VCs to invest money into ambiguous situations even knowing that we are doing this is because the enterpreneur who can't get the a VC to be emotionally positive isn't going to be able to get anyone to be emotionally positive about what they are doing (recruits, customers, press, etc.). Conversely, the best entrepreneurs often marry great product skills with great sales skills.
Re: How to Convince Investors
#79"The people who are really good at acting formidable often solve this problem by giving investors the impression that while no investors have committed yet, several are about to. This is arguably a permissible tactic. It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup, and misleading them about how far along you are with other investors seems the compleme…
Paul's stance on this form of bluffing being "arguably permissible" is dangerous -- if you try that with a VC and they find out you're bluffing, you're screwed, not just on that deal but with that VC for the rest of your career. VCs talk to one another about this more often than entrepreneurs think.
Re: How to Convince Investors
#80"You need three things: formidable founders, a promising market, and (usually) some evidence of success so far." Evidence of success often makes the first two way less relevant. Up to the point where tables are turned and investors will be trying to convince founders to take their money.
Where this whole thing breaks down, though, is where you need more money than you can self-fund, to get to that point of having some evidence of success so far. In theory, the whole point of "seed stage" capital is to take a company who aren't at that point yet, and get them there, where they can leverage that success to either grow organically, get acquired, or attract additional investment.
But these days, would-be "seed stage" investors are acting more like VCs looking at an A round. Everybody seems to have become incredibly risk averse, and acts like they've forgotten the "high risk" part of the expression "high risk, high reward".
Now to be fair, I'm speaking from an East Coast perspective, and I understand the investors here tend to be more risk averse than their West Coast counterparts. But from the sounds of this, this mindset may be spreading.
Oh well, at least, in our case, we aren't trying to raise money (yet) anyway. Our goal is to self-fund as far as possible and only raise outside money if we absolutely have to.