Raising Funding in a Harsh Environment
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With the following four elements in place, you can get venture capitalists to take notice of your business and raise that all important first round, even in the midst of an economic contraction.
Pick your Market
In his highly useful blog, Marc Andreessen identifies the market as being the most important factor driving the success of a startup--market defined as the number and growth rate of potential users for your product or service. If there exists a strong demand from your target market, even a simply adequate product can succeed, as the "market pulls the product out of the start up," as Andreessen says.
The reverse is seldom true. Even great products often don't succeed in tough markets, and very rarely do they create new markets (there are examples of this happening, but these are the exceptions rather than the rule). So pick not only your battles, but also pick your battlefield.
To speak from our experience at Pontiflex, making the case that there existed a strong market demand for our product was relatively easy. The evolution of the $24 billion online advertising market can be viewed as a quest for greater returns and higher ROI. The last recession saw the growth of CPC pricing models at the expense of CPM advertising, witness the rise of Google Adwords. Thus it was logical to make the case that the current downturn will see the advertising industry going up the next step of the ROI ladder--from CPC pricing to CPL. In short: why pay for clicks or impressions when you can pay for leads from interested potential customers?
Unless you've invented a way to turn lead into gold, these days you must show paying customers or enthusiastic users to prove your value to potential investors.
There are several indicators you can point to in order to demonstrate that your business has real market traction:
- New customers/beta testers (do the dogs eat the dog food?)
- Short sales cycles (are customers eager to sign on the dotted line?)
- Renewal rates (once customers use the product/service, do they come back for more?)
- Press coverage (do you have positive write-ups in the press?)
- Testimonials (are your customers willing to testify just how your product solves their problems)
Believe in your team
It has become clichÃ© to emphasize the importance of people as being crucial to the success of an endeavor. But in a startup, the importance of having a good team is not nice to have - it's a necessity.
Hire people you can trust to do the right thing by your company--as if it were their own, after all it is! Unlike a large organization, there is no room for slackers or primadonnas at a startup. Make sure you hire people who can envision a broad strategy, and back themselves to execute against it.
At all times, be wary of "experts." Experts can tell you how to do something that's been done before, and do it really well. For sure, this is important in certain situations. But never forget that the whole point of a startup is to develop new solutions to existing problems.
Find Validation from Naysayers
It is often said that nothing worth doing is ever easy. When you embark upon the roller coaster that is starting a new company, you will find many naysayers who will tell you that it can't be done. This is actually a good sign--what they really mean is that they don't know how to do it, and therefore believe that you won't be able to do it either. Remember, if they did know how to do it, you'd already be too late.
The path of an entrepreneur is more often than not, a lonely one. Few people will be able to see through your eyes. So have a long-term vision that you can clearly explain and around which you can rally your team, and keep you focused during the challenges that inevitably arise.
Back your vision with a firm belief in innovation. Steve Jobs once said that innovation is the single biggest difference between a leader and a follower. As you innovate and your vision takes root in the market, you will often hear cries of denial bordering on protest--which is the most common reaction of a market segment that has been disrupted.
Stick to your vision and believe in your team and you may one day realize your dream just as the IPO market is starting to reopen and companies are once again beginning to un-shelve their own big market hopes.
Zephrin Lasker is CEO of lead-generation marketplace Pontiflex, which raised a $6.25 million venture capital funding round in April.