Sex sells. Unicorns are sexy. The media loves what sells. They promote guidance from venture capitalists that discuss how to become the next unicorn. IT IS THE WRONG GOAL.
“The Big Pivot,” “A Good Deck,” ”Elevator Pitch” … It’s all bullshit. Some of the most idolized unicorns were some of the least prepared teams. I’ve heard several investors make fun of Uber’s early pitch and they seem to be doing alright. The reason is that they were focused on building a company — not a unicorn — just a company that changed the game enough to stand on its own. They had no time for “shiny;" it just needed to work well with consistent growth.
The 3 questions that matter most
The top 3 questions VCs pose are the same ones you should be asking yourself, but your answers don’t need to fit their model.
- Are you operating in a large market?
- Are you able to execute with a full-time team?
- Do you have traction?
Mark Suster wrote an article, in response to Paul Graham’s point that, for a VC, it is necessary to grow large businesses quickly. It lends great balance on this topic. The key word here is “business.”
Let’s look at each question a bit differently.
Are you operating in a large market?
You do need a large disruptable market, but you do not need to change the world or the way people behave. I’ve seen manufacturing companies you’ve never heard of move way up market with innovative technology (All-Fill Inc.) and waste companies destroy incumbents through levels of service that rival Four Seasons Hotels (The City Bin Company) without institutional money. Both companies are led by successful entrepreneurs who have had several acquisition offers.
Are you able to execute with a full-time team?
Do what is needed to build your company, not to impress investors.
Are you working full-time? What’s good for you, is good for your company. If you are financially stressed then you cannot work full-time on your company, and this is alright if you don’t have investors.
Do you have a co-founder(s)? Find partners to act as co-founders in the early days. This is the ScratchPad Studios model. Unless technology is your business, there is no need to decide on a CTO before you’ve proven that you have a business. If tech is not your secret sauce, then your CTO doesn’t need to own 50 percent of your vision.
Do you have traction?
Venture money should be used to grow a business when it’s constrained by its own cash flow — not to simply market or expand it — no matter how genuine your prayers are for growth. Failure is good, right? Well, sometimes. In the words of Jeff Thermond at XSeed Capital, "Don't repeat old mistakes; take new risks."
Jeff's point is spot on! Find partners, not investors. Investors are great if you are growing so fast it's like containing a bucket of eels with no bucket. Partners will help you avoid old mistakes and accelerate your trajectory.
Should you even be looking for funding?
If you don’t have a business, it’s a waste of time driving up and down Sand Hill. A business is a revenue-generating entity (not necessarily large) that is growing (not necessarily quickly) or a user base that is expanding as quickly as Elon’s next fast machine. Prove something, anything that can stand on its own two feet. Something that people are happy to pay for or they are using a great deal of the time.
What about forming relationships early on with VCs? Many are great people, but you are helping them more than yourself. To succeed, venture investors must be in the business of relationship proximity. Their feedback can be helpful, but for them, it's about giving you a positive experience so that you come back when they are ready. The best VCs run their business in a way that gets them continued access with little commitment. Trust me, if you have an actual growth story, it won’t matter how friendly you are with your potential investor. You are getting the check.
The bottom line
Every starved entrepreneur has thought, “There is so much dumb money being thrown around. All I need is a little to prove my concept.” Keep eating ramen and be happy you aren’t committed to a multi-year course to failure. Build an actual business first.
Want more resources for startups?
Check out our Guide to Getting Media Coverage for Your Startup.