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Fundraising & Investment

A 6-Month Review of the “Are You Investable?” Quiz Results

By May 19, 2020June 18th, 2020No Comments

“Hope” is a 4-letter word to investors. I don’t want you to hope you have the right early, niche customer segment. You shouldn’t hope this new marketing tactic will work or hope your larger competitors won’t build something that makes your product moot.

Most importantly, I don’t want you to think finding an investor is your only next step. Let’s not hope some fairy godinvestor will come to save you.

Back in November, I launched the Are You Investable? Quiz, excited about the opportunity to help founders answer the big question, “Is fundraising the best use of my time right now??”

After 6 months of gathering submissions, I’m excited to share the findings with you. Let’s see what we learned!

Summary Findings

With 23 total points available, there are three brackets that respondents can fall into:

  • < 8 points: Focus on raising from friends and family as you’re probably too early to gain investment from experienced angels and venture capitalists.
  • 9-16 points: This is a great time to start building relationships with investors but do not be surprised if they ask for more traction.
  • 17+ points: If you need the capital and are interested in giving away a stake of your company, you have what it takes to secure funding.

Over the course of 6 months, we gathered responses from 75 founders. The average score among these founders was 12. This means that the average founder who filled out the Are You Investable? Quiz is at a stage where they can consider talking to angel investors and groups but they’re not in a surefire position to successfully raise.

By the way, the average response took less than 6 minutes so jump right into taking the quiz yourself.

Quick Note on Validation

  • 8 founders scored in the highest bracket and 5 scored a 16 at the cusp of this bracket
  • I reached out to 13 of these to find out if they had received funding in the past 6 months
  • We could validate that at least 5 of them have raised money in the past 6 months. Congratulations!

So where do our founders stand in regards to traction, customer, revenue, marketing, innovation and execution?

Traction

84% of respondents have a prototype demonstrating their product or service. This prototype may exist in the marketplace or be a fully fleshed out design that they have tested

72% of respondents have a product or service already in the marketplace, meaning that they are offering something to their target customer segment that delivers on their value propositions

But just 63% can show several months of traction.

35% of respondents have such high customer demand that the team cannot meet incoming needs. These founders are raising money to increase their capacity to reach customer needs.

Commentary on Traction

The way these numbers represent a funnel are not surprising. Most entrepreneurs have a product-bias and tend to focus on perfecting the product over marketing anything unfinished. Innovators get really excited about their own ideas and bulldoze through product development early-on.

Entrepreneurs also often find themselves in a position where they have run out of money building a product and need the money to invest in marketing. Without a validated marketing strategy, investors will be hesitant to have you use their money to figure out how to sell your product.

Insights & Advice on Finding Traction

Figure out marketing and sales early. Do not believe that your product has to be perfected for you to get good feedback. Find something that you can offer customers early and build from there.

Customer

81% of respondents have identified the customer segment(s) that is willing to pay to solve their problem.

Commentary on Customer

Many entrepreneurs are more confident than they should be in knowing their exact customer segment so I suspect that, if in full due diligence, at least half of these would break under a pressure test.

Revenue

79% of respondents have crafted a business model that includes a recurring revenue model with just 27% already collecting money through their recurring revenue stream.

45% of respondents indicated that they are seeing some revenue. The money is from the type of customer that will continue buying from them as they grow.

Only 19% can show revenue growth month-over-month for the last 6-12 months.

Commentary on Revenue

As an investor colleague of mine said post COVID-19 quarantine, “I cannot ignore a company that has top line revenue.” Recurring revenue is important as it creates stickiness and scalability, both of which you can demonstrate in your financial modeling.

Early on, your challenge is to find the quickest way to money. That’s why we see that 45% are collecting revenue but only 27% are collecting recurring revenue. Oftentimes, the quickest way to money is by offering services to your clients while you build the product.

Sales & Marketing

65% of respondents know the 1 or 2 sales and distribution channels through which they will acquire customers. Their strategy is narrowed to direct or outside sales, to a key distributor or reseller, or through digital channels like aggregators, platforms or their own website.

43% of respondents have a superior distribution channel where they are able to manufacturer at a lower cost or have a partnership with an established player in the marketplace.

Commentary on Sales & Marketing

We can see here that less respondents have figured out their marketing than have figured out their product. Entrepreneurs tend to believe their product is so amazing (I know, I’m sure it’s amazing) that people will naturally love it and everyone will become an evangelist. Unfortunately, marketing is really hard.

One way I can explain an investor’s outlook is using a traditional scale. On one side is Marketing and on the other side is Technology. We’re weighing how much of each an entrepreneur has figured out. Both sides do not have to be equal but you cannot have one side totally figured out and the other side with very little to nothing at all validated.

Distribution Channels and Strategic Partnerships are one way a company can create a competitive advantage and differentiate themselves to their customers. For instance, when EventBrite integrated SocialLadder into their platform, Social Ladder could leverage EventBrite’s existing market position to grow.

Early on, your challenge is to find the quickest way to money. That’s why we see that 45% are collecting revenue but only 27% are collecting recurring revenue. Oftentimes, the quickest way to money is by offering services to your clients while you build the product.

Technology & Innovation

63% of respondents consider their technology or offer first to market. Their customer does not have another option to meet their needs.

59% of respondents believe their larger and more established competitors are unable to move fast enough to deliver their product.

49% of respondents have intellectual property in the form of patents or trade secrets. About the same amount believe that their intellectual property creates a competitive advantage.

Commentary on Technology & Innovation

The number of entrepreneurs that believe their offer is first to market is wildly unlikely. Philosophically, people have goals, needs and problems to solve in perpetuity. The technology is what changes over time. Example: people need to communicate with loved ones in different locations. They used to have the technology of writing letters and sending via mail, then they had e-mail, then SMS, internet chat, and, now, mobile apps galore.

Customers always have existing options to solve their problem. Whether that solution is tech-enabled is a different question. Your product might have unique features, but unless you have technology that literally does not exist, it’s unlikely investors will consider you as “first-to-market”.

Intellectual Property is one way to create a competitive advantage but most software companies do not qualify for or require patents.

Ability to Execute

64% of respondents have a team working full-time on their company. 53% of respondents have the team in place needed to reach next milestones.

57% of respondents believe they have exceptional connections within their industry. They may have connections to thought leaders, influencers, experts, media or business executives.

64% of respondents have previous entrepreneurial experience. These founders or their co-founders have started and run other companies for at least one year – whether in the same industry or not.

Only 24% of respondents have previous fundraising experience. These founders or their co-founders have actively and successfully raised money for another company as a founder or team member. 19% of respondents have successfully exited a startup.

Commentary on Ability to Execute

Being the right team with the right skills and right connections is essential to any business. Investors want to know, “Why you?” If you’re a new entrepreneur with little fundraising experience, having the right support network around you is absolutely necessary in convincing an outside investor to jump on board. On the flip side, if you have previous entrepreneurial and fundraising experience, a lack of network in your industry may just break you.

Closing Remarks/Scale

For those that scored less than 8 points, it’s time to make your business investment-ready.

Those that scored 9-16 points are at a stage where fundraising can be considered. They may need to prove more to potential investors – whether that be through traction, revenue or customer pipeline.

Finally, those that scored 17 or more points are in a pretty ideal spot. If they haven’t already gathered investors, an angel group, or venture capitalists, they are primed and ready for that to happen when they decide to shift their focus onto fundraising.

But there’s so much more to entrepreneurship than fundraising. Remember, potential investors are going to look under the hood of your car. They’re going to open the trunk, check out the upholstery and pull all the levers. If you spend all of your time and effort perfecting your pitch deck but little to no time on your product, customer pipeline or marketing, you’re essentially bringing them a really, really fancy shell of a car. A beautiful car without an engine does not a successful startup make.

 

Through these results, I was able to provide 75 founders with the insight that they need about fundraising for their business. Time and time again, I see entrepreneurs put aside everything to go after investment only to wake up 6 months later and realize 1) they’re not getting funded right now, and 2) they could have spent those 6 months building their business.

I created this quiz because I genuinely want to see more people succeed and reduce the “90% of startups fail” statistic. When you share this quiz, you help fellow founders properly grow their startup without the burnout and overwhelm that come with entrepreneurship. If you know a founder who has not yet taken myAre You Investable? Quiz, please share.

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