Six Reasons Your Startup WON’T Raise Capital
When I talk to new Entrepreneurs there are times when I think I’m only talking to myself. I know I’m speaking English… But they don’t seem to hear. So I’ll write it down…
Here are Six Reasons your startup will never raise capital:
6. You’re a Services Business – services businesses don’t raise outside capital because they don’t have the potential return. The reason is that you need to increase your staff every time you add a new customer. You need a scalable product business so that as you grow sales you aren’t required to grow staff proportionately. Don’t know if your business is a product or a service? Can you make money when you sleep? You have a product.
5. You don’t have a product – you have a “concept” or an “idea”. The Founder Institute runs a program called the Founder Showcase, and to even be considered for presenting to a group of 400+ people with around 100 investors, you must have a product – not slideware, a prototype or demo. Can a person or a business go to your product and place an order (even if it’s free) and then use the product? Landing pages and demos are great for proving your concept, but don’t plan on raising capital until you actually have a product.
4. You’ve picked a crummy market – because it’s small, not well-defined or incredibly difficult, like music (see Is Your Company Standing in a Graveyard). Your market doesn’t have to be multi-billion $$, but it can’t be small. I see folks pick non-profit markets for for-profit ideas, another bad idea.
3. You don’t have a team – it’s just you, and sure you’re the smartest person you know, but you need a team. Many investors will tell you that they are betting on the team because they know it’s highly likely that your first idea isn’t going to be right. Then it’s all about the team pivoting to a new and better idea. Take Odeo becoming Twitter as an example.
2. You don’t have any market traction – you have a product, now the question is “do your customers care?”. Do you have registered users, letters of intent, actual sales or revenue? Even if you have two customers, that’s not validation of your product (unless they are $1M each). Are you making clear progress into a model that you can scale? Traction can be defined in a lot of ways – here’s a great blog post from Fred Wilson on Traction –
1. You need the money – just because you need the money doesn’t mean you can raise any money. In the early stage you’re going to have to boot-strap your idea. That may mean you need to write a check or learn how to code.
But, but, “all those things don’t apply to me or my idea”! I know, you’re “special” and Aunt Millie will give you money. That may be true, but before you take “friends and family” money, increase your chance of providing a return by doing the above six things.