For startup entrepreneurs, there’s a certain sweat-inducing knot in the stomach reserved solely for those moments when familiar, local or competing startups excitedly announce outlandish figures of XY million dollars in new funding to an apparent throng of eager media.
Being on the outside looking in is incredibly difficult and the questions of how and why it wasn’t said entrepreneurs’ own business which was now able to start ordering the games room equipment and drinks machines, might circle indefinitely without ever finding resolution.
So what is it that investors are really looking for and how can startups position themselves to best court valuable funding?
The latest buzz in the startup world is around the Lean Startup Movement. For those unfamiliar, the movement is a proponent of getting a startup’s offering to a Minimum Viable Product status as soon as possible. This first landmark is incredibly important as, the sooner you can get a product into a customer’s hands and have them using it, whether it’s software or hardware, the sooner you can start receiving invaluable feedback and validation.
Having this tangible offering has also become more appealing as, in many current markets, there also exists a lower barrier to entry for competitors. If a startup can prove they have a viable concept, getting that product to the marketplace, in some iteration, as quickly and efficiently as possible, is key.
Successful companies are created to solve a problem, not to be appealing to investors. When a startup focuses its attention on building a product or service which solves a real pain point for customers, whether niche or not, logic dictates that those customers will use it. And with willing customers come willing investors.
In the past, and especially with the rise of social startups, there has been a push for users rather than customers. Companies built user bases and worried later about how they would find revenue.
That model is, however, shifting. Investors like to see some hard cash coming in the door. Without some form of traction, some form of conversion from user to customer, the product is not being properly validated as a business opportunity. Paying customers are traction points that unquestionably prove the startup is solving a pain point and has the potential to turn a profit.
Having a strong customer base also enables a startup to access third party objectivity. Internally, companies have numerous conversations that steer their product development. They determine the direction they want to move and they theorize about the impact this will have on their customers’ experience. With a customer base, especially a paying customer base, these theories can be tried and tested and clear and definitive answers gained on what does and what doesn’t work.
Although obviously more relevant to later rounds of financing, for an investor, finding a startup which has even a relatively small existing customer base which is providing revenue and validating the business model, can make an attractive proposition.
Products bring in customers and customers validate and inform products. This simple cycle is one which is integral to the growth of a business. Where a million users may have been the clear mark of a hot startup two years ago, these days, a couple hundred early customers makes, not only for a sustainable startup, but a fundable one.