The least amount of time, money, and resources to prove your business.
There are many entrepreneurial patterns, some good, some not. One pattern I see a lot is this belief that things will work and you jump one or two steps ahead of where you should be. (See my previous post on the stages of going from idea to business).
Here is a concrete example: Imagine you are building a back-office SaaS app for private schools. You talked to a few schools and done your customer development, but you have no product or customers yet. You go out with a great story to try to raise $750K for your startup. You might even have great mocks of what the product will look like. I can tell you ahead of time, you’ll not going to raise that money.
In your mind, you need to hire a designer, a couple of developers, a sales person, and sell to 5–10 schools in your state so you can raise a $3M Series A once you proved the model — which you are sure you will — in 12–16 months.
The entrepreneurial eagerness is clouding your judgment.
Is it the minimum?
You did a spreadsheet and you know for sure that 750K will take you there. It even might. But that’s not the point. a) You don’t understand the unit economic yet and going from 0–5 customers is harder than going from 0–1 customer. b) You don’t know what you don’t know.
The right approach for most B2B / SaaS / Marketplace / B2B2C products is to do 1 (one!) sale. Preferably without having written a single line of code or built any product. You need to ask yourself: What’s the smallest amount of effort you can make to prove someone will pay for it?
Can you use Excel and some macros? Or SquareSpace and PhotoShop? Can you just put all the data in SQL or Hadoop, manually do whatever you need to do and give the customer what they want to see? Can you do the matchmaking between the buyer and seller by arbitraging email?
But I can’t test it without funding!
It’s fine. Maybe you don’t know how to code or you can’t create a mock of the product and you really need some amount of money to figure it out if it works for a single customer. But instead of $750K maybe you can raise $150K and see what can be done in 4-months. Beg, borrow, or “steal” whatever you need to make your resources be enough to prove it.
This level of scrappiness bodes well in the eyes of investors. It shows them that you can move quickly, and make optimum use of money and resources in your network. It’s important to remember the Seed round is not about growing, scaling, or hiring. It’s about learning.
The least amount of money you raise in the early days, the better your position will be if things start working. And, if they aren’t working, it really doesn’t matter anyway.
