What Entrepreneurs Need to Know About Early-Stage Funding
Early-stage VCs focus on entrepreneurs and start-ups with a large market and high potential for quick, long-term growth
Being an entrepreneur and starting a company is not for everyone. Hence, nine out of ten start-ups fail.
Of course, bringing your unique vision and innovative idea to life while being your own boss would sound appealing to most. But, as most successful start-up founders can attest, it’s a long road filled with failures and challenges ranging from human capital to raising capital.
While there are more resources and funding options available than ever before, convincing venture capitalists (VCs) to part with their money and securing significant funds to build and grow a start-up will always be one of the most difficult challenges for early-stage company founders.
When seeking out early-stage funding and considering your options, specifically through a VC firm, know that not all companies and business ideas are appropriate for VCs. Early-stage VCs focus on entrepreneurs and start-ups with a large market and high potential for quick, long-term growth that can deliver tenfold return on investment.
VCs are one of the most sought-after early-stage funding options because they are one of the few ways to access a large amount of capital at once. Additionally, the right VCs contribute much more than cash flow, they serve as collaborative partners providing expertise, business strategy, and a network of resources to help a start-up scale to the next point of growth.
If your business is suited to grow quickly and has the potential to disrupt a particular industry, here are three key factors (among many) you should know VCs consider when evaluating their investment prospects.
Proven Product-Market Fit
It's critical for founders to have a true understanding of their early-stage company's product-market fit (PMF). According to CB Insights research, the top reason for start-up failure occurs when entrepreneurs make products no one wants.
Ask: What is your product? What is your market?
Addressing the first question should be straight-forward. However, knowing what your market is and correlating your product to fit a large market's needs requires research, data points, differentiators and a deep customer perspective.
Founders and early-stage companies that truly understand and can articulate their PMF have a greater opportunity to attract potential VCs versus those that pursue an idea with limited market knowledge and customer insights.
VCs will want to see a proven PMF, and paying customers are the best proof of that. Even more than paying customers, investors will also want to see traction, recurring behavior, and waves of customer adoption. A proven PMF will show that your product satisfies customers’ needs in a way that competitive products do not.
Having a proven PMF is not always possible for companies in the early stages. In those instances, some investors may consider cases where PMF can be proven in alternative and creative ways.
For example, we invested in Ossio, an Israeli company that makes bio-absorbable screws and pins for orthopedic surgeons to use instead of metal. Since the product had to go through FDA approval before they could generate sales, they could not prove PMF as we prefer. As an alternative, we had three orthopedic surgeons study the product and provide us with their inputs.
Raising money is hard, even for those who possess the rare skill.
As an entrepreneur, not only are you expected to create, build, and grow a company, you are also expected to continuously scour for fresh capital to keep the ship going.
It’s imperative that the founder have what it takes to continue raising money beyond the initial investment. The second reason for start-up failure, according to CB Insights, is running out of money.
In addition to an unwavering fundraising grit, continuous relationship-building with investors is required and a job that should not be outsourced. Engaging with potential investors during and between fundraising windows is equally crucial. We prefer engaging with founders when they aren’t raising rounds because that’s when they are less guarded and more transparent.
Also, especially at the early stages, investors value face time with the founder. Investors aren’t betting on a well-oiled business that has all issues sorted; they are betting on the founder.
Smart and experienced VCs will spend a great deal of time researching and evaluating the founder, focusing on their tenacity and proven ability to navigate ever-changing and challenging environments while keeping their moral compass firmly pointing due north. Investors will look for the entrepreneur's ability to lead others into the unknown since they have to be able to attract the right talent to follow them.
You can think of VC early-stage funding like dating. Once you've found someone to invest your time in, you'll engage in a deeper relationship. Similarly, once a VC finds a founder worth investing time in, they will invest with the intent to be in that relationship for the long term until exit.
In closing, as much as founders are being evaluated by a VC, it's just as imperative for founders to place importance on who they get early-stage funding from. In the current funding climate where money is commoditized, you want to hunt for those that can be long-term partners and not short-term relationships that'll become troublesome to manage when the road gets a bit rough.