Startups are a long slog and can be incredibly difficult. Like any marathon, you need to know what you’re in for and be prepared.
Last summer I had a similar adventure: a 150-plus mile bike ride with a lot of hills. I had set out some rigorous training goals with my partner. The ride went well because of the training and preparation, but the training wasn’t glamorous — it was work.
The preparation changed the outcome. It will for your startup as well.
If you’re thinking about leaving your day job and launching a new company in 2019, there is some work you should do first — while you still have a paycheck and benefits. When you start a company, you are the largest investor, in both time and often, cash. So I’d recommend you treat your startup idea like an investor would.
I created a startup scoring rubric last year for the Startups Meet Angels event, a quarterly pitch event. The rubric outlines a method for scoring the investment opportunities presented to the angels. Some investors use a scorecard; some are “pattern matching,” which means they have a checklist in their head. The rubric scores you on these ten criteria, using a 1-to-4 score: 1 = bad, 2 = not good, 3 = good, 4 = great!
- Team (Domain experts; diversity; serially-successful founders; from great companies; functionally competent)
- Idea (Big “category” idea; early/late continuum; technically achievable; “pain pill or vitamin”; in investors’ “investment thesis”)
- Product (Customer-first focus; clear value proposition; design/ease of use; clear launch and scale offering)
- Market/Customer (How big is the market – TAM/SOM; unmet customer need; how many incumbents; nascent go-to-market system)
- Competition (Barriers to entry; differentiation; well-funded competitors in Crunchbase)
- Business model/Finance (High transactional value; clear profit model; capital efficient; scalable; no “bad” things on cap table)
- Traction (Customer adoption; customer engagement; early revenue; know the unit economics)
- Timing (Emerging innovation; “meta” factors are favorable — industry/market tailwinds vs. headwinds; established demand)
- Intellectual Property (IP required or does the market require IP?; IP in process; how will you build a moat over time?)
- Clear Ask (Do you want advice, capital, introductions, staff?)
How did you score? If you have some “4’s” — congrats! If you scored low in some categories, you know what questions you should answer before you make the leap.
Here are some tips to improve your scores:
- Team: Don’t have a co-founder yet? A lot of investors see that as your first “sales” if you can’t get someone to join you on the journey. You won’t be able to get one for free — it will cost equity or cash comp. If you don’t want to give up anything, you’ll likely be in the same spot on Dec. 31, 2019.
- Market: If you don’t have a big market, you won’t attract investment. It could still be a great business, but not the “venture scale” that investors will look for as an outcome. A low number here might just be due to how you describe the market. Don’t take for granted that the investor knows the market as well as you do!
- Traction: Remember if you don’t have revenue or customers yet, you should have at least interviewed 50-to-100 prospects for feedback. If you have data from those interviews that validates your opinion, it will help. It’s not revenue, but is validation.
Finally, remember that all business models have three components you’ll need to unpack for an investor:
- Creating Value: This is the product or service that you provide to your customer. There is a cost to build the product or deliver the service. This is development, hosting and support costs, if it’s a tech product.
- Deliver Value: This is how you market and sell your product. There is a cost of selling the product. These are the unit economics involved with the sale of the product.
- Capture Value: This is your ability to create margin and profit. Investors will want to know how they get their investment out of the company as well. If the profit is reasonable, you won’t attract a lot of interest. If your profit is exceptional, investors will be interested.
All of these costs go into the spreadsheet and investors will want to know that you have a hypothesis on all of the costs, not just the cost to build the product. Having a product that no one knows about means it will be difficult to sell.
Take some time to answer key questions in advance and you won’t be surprised when you get to the investor meeting. Compressing the time from launch to revenue is the goal. You won’t need as long of a personal runway or to raise as much capital if you’re prepared.
These are the same topics we cover monthly during 6 Month Startup, a monthly meetup for founder to launch their startups. It launches in Seattle on Jan, 9 and in Tacoma on Jan. 16 (ticket required).
Here’s to a great 2019!