The Early-Stage Fundraising Conundrum
5 min read
When it comes to fundraising, one point of frustration that we often hear from our founders is, “Investors are telling me they need to see a product, but I need capital to build a product.” This presents quite the catch-22 for many of our non-technical founders (the majority of our community). And even our technical founders often struggle to build their product without outside capital. So we’ve spent some time thinking about how to help our pre-seed founders navigate this technical roadblock.
How can I appeal to investors if I don’t have a polished product, especially if I’m not a software engineer?
The way we initially approached the question was to come up with a pre-product “toolkit” that our founders could bring to investors to convince them that as soon as the check hit the bank account, they’d be off and running building the next viral product.
This was the idea:
+ 1 product roadmap + 1 clickable prototype + some pretty wireframes
=
$ in da bank and I’m getting those Madewell jeans that I’ve kept in an open tab for the last year + hiring some tech talent (but first those jeans)
Unfortunately, in talking with our Investor Co-Founder, Brittney, we reluctantly accepted that there is no one formula for success. Investors are going to perceive different risks based on your experience, your industry, and the work you’ve done so far to build out your company. Frankly, if you are not technical, in certain industries, investors are probably going to see that as an execution risk. In other words, an investor may worry that even if they gave you the money you won't have the skills and knowledge to build the product.
However, lacking technical skills and/or a built-out product doesn’t have to be a dealbreaker, you’ll just have to be even more impressive in other ways. In talking with investors in our network, we’ve learned that, in lieu of significant hard data to evaluate growth potential at the early stage, their decision-making largely depends on the somewhat intangible factors that get them excited about a business or founder.
In having these conversations, we’ve identified two key (overlapping) themes that we think investors care most about at the pre-seed stage: Demonstrated Customer Need and Evidence of Ability to Execute.
If you can speak convincingly to these areas in your pitches and conversations with investors, you’ll have a better shot at generating the level of excitement that attracts VC dollars.
1) Demonstrated Customer Need: Does the customer actually care about this need or pain point and are they willing to pay to have it solved? The number one reason that startups fail according to CB Insights post-mortem on over 100 VC backed startups, is lack of market need. In other words, not enough people have that problem or care enough about it to pay to have it solved. Thus in order to avoid this all-too-common pitfall, investors want to see strong evidence that your customer actually has the need before putting money behind your ability to scale to a larger market.
2) Evidence of Ability to Execute: Does the founder have past experience building something like this? Or has the founder found ways to hack together solutions to work with customers? An investor wants to know that you’re not just an “idea person,” but that you’ve got what it takes to follow through and make it happen. One way to convince them is if you have very directly relatable past experience. For example, if in your former role you built an early product at a startup or larger tech company, or if you've worked within the HR benefits/healthcare/retail industry for years on a specific need and are now leaving to build a new product to solve it. But outside of that kind of directly comparable past experience, your goal at this stage is to show that you’ve found scrappy ways to work with and learn about your customers. Moreover, it’s important to communicate how you’ve been able to use the tools and network that you currently have at your disposal to generate forward momentum. If you’re resourceful with limited resources, investors are going to have greater reason to believe that their money is going to be spent efficiently and that you’ve got the hustle to get the job done regardless of the obstacle.
So we put together this list to help you brainstorm and identify ways to demonstrate customer need and execution ability so that you can illuminate the opportunity in your next conversation with an investor. Include the ones that are relevant to your company-building journey.
Customer Interviews - Have you rolled up your sleeves, gotten out of your comfort zone, and talked to your customer? Investors will want to know that you’ve done robust market research and have become an expert on whom you’re serving. And it’s your job as a founder to communicate the unique insight you’ve gained from doing all of those interviews.
Waitlist - Getting people on a waitlist provides some evidence of the customers’ need and their interest in your value proposition. Try adding a form to your landing page and have people sign up with an email address to join a waitlist.
Pre-Registration #s - Even better, can you get people to commit to paying by having them pre-register for your product with their credit card information? Investors love to see signs of early revenue! You can use Moonclerk to set it up so that pre-registrants won’t be charged until the product is released.
Concierge Pilot Test - A concierge pilot is when you manually perform the task that you intend to eventually automate in your solution. This way you can work directly with the customer early on and iterate on your value proposition quickly. Plus it demonstrates customers’ willingness to make some level of commitment (eg. time, feedback) to have their problem solved. Ideally, you get them to pay to participate.
Case Study - It may be harder to get an enterprise client to commit their budget to pay for a concierge pilot test. However, they may be willing to exchange their time and a testimonial in the form of a case study that you can use to attract future clients and show to investors as a signal of market interest.
Letters of Intent - Even better, see if you can get a “Letter of Intent” from an enterprise client, stating their intention to work with you in the future. This is the next best thing to a legally binding contract, which will be harder to get without a product.
Community Building - Test out bringing together a group of customers to connect with one another in an intentional way. Creating a community can be helpful for engaging with your customer segment to better understand their pain points. It’s also a good starting point for recruiting customers to sign-up for waitlists, pre-registrations, and pilot tests.
Newsletter / Blog Post / YouTube Channel Audience - Have you built a significant audience around content related to the pain point you’re solving? Creating content is helpful for figuring out what kind of solution will resonate with your customers. Moreover, you can launch your products to your existing audiences without incurring expensive marketing costs.
Event Participation - Can you put on a paid event, workshop, or webinar? If you charge for an event you can gauge customers' willingness to pay to have their problem solved. Plus it positions you as a thought leader in the space, important for strategic partnerships and sales.
Build a Frankenstein or “Hacked” Solution - One quick way to create a functional product is to use applications and software tools that already exist and connect them through a workflow app like Zapier. Zapier allows thousands of different tools to talk to each other automatically. If your customer sends in a request via a Typeform on your website, that information can be automatically sent to your information database on Airtable, and depending on what information the customer inputs, you can then trigger an email notification via Mailchimp.
Build a Prototype / Demo - Prototypes are a tangible model or early version of a product or service used in the design process to get feedback from customers. Prototypes and demos come in many forms depending on your product and have various degrees of complexity. You can use tools like Balsamiq to make low-fidelity wireframes, or Figma and Invision for higher-fidelity, clickable-prototypes.
Build a No or Low Code Functional Product - If a Frankenstein solution won’t cut it because you can’t find the right existing software to leverage or those tools don’t connect to the Zapier API, another option is to use a no-code development platform like Bubble (for desktop and mobile web browsers). While you don’t need to learn to code, there is a learning curve for building on these platforms. But it will be much faster and cheaper to deploy and update a solution on Bubble versus taking a coding course, hiring someone technical, or outsourcing to a development firm.
We’ve made the case that not having a non-polished product doesn’t have to be a deal breaker for a pre-seed or angel investor. Now we want to ask you to flip the framing. Can you use the fact that you don’t have a built-out product to your advantage? Can you use it as motivation to find scrappy ways to more deeply understand your customer and what they want, need, and are willing to pay for? Beyond just being more convincing en route to securing funding, you’ll also have done the groundwork for building something that people actually want! Whatever you do, don’t wait for the money, just keep moving forward!
