5 Essentials for Maximizing Results From Seed Capital The founder's primary job is stretching those first funds to afford a team, a prototype and a marketing plan.
By Peter S. Cohan Edited by Dan Bova
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One of my favorite consulting services is advising founders on how to build their startups.
I work with a founder who knows what problem he wants his startup to solve and asked for advice on how to work with potential investors to raise capital.
He has persuaded some investors to write checks and as the money rolls into his bank account, he is turning his attention to using that capital most effectively.
Based on the hundreds of entrepreneurs I have interviewed and the seven in whom I've invested, I know that there are plenty of traps to avoid at this stage. Among the most dangerous is a founder's desire to build what he believes to be the perfect product. But what if he spends every waking moment coding, only to realize that all his seed capital is gone and his startup has no paying customers?
Here are five steps that founders should take to make sure they turn their seed capital into a paying customer.
1. Build a diverse team.
The founder should not work alone developing a startup's product. Instead, she should assemble a team that includes a customer who badly wants the startup's product, a technical person who will build the prototype, and a sales or marketing person.
If you are selling your product to a company, the perceived need for your product may vary by the level of the organization. For example, the company's CEO might look at your product as a way to cut costs, the department managers who report to the CEO might see it as a way to get their jobs done more effectively, and the people who use it will want your product to be simple and bug-free.
You should start off with the CEO on your team, move on to the department managers as the concept develops, and work with the users once you start coding.
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2. Agree on a clear goal.
You must next lead your team to agree on a common goal. As an example, Y Combinator gives startup teams four months to demonstrate their product to investors and win their first customer.
While four months will not be the right length of time for every startup, I advise founders to set a similarly specific goal once they have raised seed capital.
3. Build an inexpensive prototype.
Your next step should be to ask a potential customer to describe the pain that she wants your company's product to relieve. Let her description inspire you to design a product that will relieve her pain, then build an inexpensive prototype of your inspiration.
If you want to build an app, mock up some screen shots of what the key screens will look like and show them to your potential customer. If you are building a product, perhaps you can build a simple model of it out of balsa wood or use a 3D printer to print out a simple version of your product.
Set time and cost limits on prototypes because you will probably need to build four or more versions before you can get something that is good enough for a customer to pay for. If you raised $50,000, you should spend no more than $10,000 on each version of the prototype.
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4. Get feedback from early-adopter customers.
Once you've built the prototype, show it to your potential customer to be certain you understood her correctly. Before you spend too much time and money to build a product, you should find out if you were wrong or whether she miscommunicated.
To find out, ask her what she likes about your prototype, what she does not like about it, and what she really needs you to add to it.
If she offers you a long list of features that she would like to add, ask her to rank the features by their value to her. Ask her which features she would be willing to pay the most for and why.
5. Repeat steps three and four until you sign up your first customer.
You should build ever-improving prototypes and keep showing them to potential customers to get their feedback.
If you are doing that effectively, you will eventually build a version of your product that is good enough to convince one of those early-adopter customers to pay for it before your startup burns through its seed capital. When you do, you will be in a position to overcome the next hurdle to your startup's success -- going from your first customer to your hundredth.
Related: 5 Things Investors Want to Know Before Signing a Check
