As a mentor at MIT’s Venture Mentoring Service I was very fortunate to be given the opportunity to review 20 of the 50 applications that were submitted in the General category for Demo Day – probably because I’m a generalist! While all the information in these applications is confidential, I can share a few things I toke note of and provide some insight into how to become investor-ready.
- Have a great team and toot their horn: From my experience founding four venture backed companies, raising multiple rounds of investment for those companies, plus attempting to raise capital for a few more, I’m confident in saying the most important element in being an investor-ready startup is having a great team. The biggest mistake founders make is not highlighting the experience and expertise of each team member that is relevant to their startup. And relevant is the key. Why will these team members help the venture become to successful? Too many applicants simply list names and titles, without listing either responsibilities or relevant experience. And my pet peeve is seeing COOs! There is no need for a COO (or a CFO) in an early stage company! There are only two jobs in a startup – making the product and selling it. COO’s and CFO’s do neither – very are just overhead!
- Tell what you did, not what you are going to do! Too many applicants don’t show any evidence of customer engagement, traction or whatever term you want to give to customer discovery and development. You aren’t investor-ready until you can demonstrate customer engagement. At minimum you should have had two or three successful pilots and evidence you can convert a pilot into a paid customer. I’ve seen too many applicants without this evidence of traction, rather they say something like “we’ll have the beta done in two weeks!” Focus on what you’ve accomplished that’s what you will be judged on, not what you plan to do, not that it isn’t important to provide a product roadmap.
- Don’t ignore margins. For those relatively few companies that have revenue you need to provide some information about your gross margin. It’s ok if it’s small or even negative, so long as you present a sound plan with evidence to back it up that as you scale your margins will improve. No one expects a startup to be profitable right off the bat. In fact is a bad idea, as you should be investing in product, business, and customer development as an early stage company. How will you achieve economies of scale? Keep in mind: investment is for one thing – scaling up. if you aren’t ready to scale you aren’t investor-ready.
- Be specific about your use of funds. Use of funds should be broken into two categories. One, how will you spend the money? For example, We will hire two more software engineers at $100k each. And two, what will you achieve with that investment? For example, One engineer will develop our iOS version of the app and the other will develop the Android version; both will be ready inside of 6 months. Spending should be tied into reaching milestones. The clearer you can make your use of funds and what you will accomplish with those funds the more likely you are to receive an investment.
- Raising friends and family funding is a plus. No one likes to go first and that includes investors and customers. Investors are always looking at how to de-risk an investment. If you have raised friends and family money that helps validate the business concept. Some investors like to see founders put in their own money. I don’t think that is necessary, but it is a plus.
- It’s not just about the market it’s about growth. Many founders attempt to size their target market but forget to include it’s growth rate. For example, VR gaming is a small market today, so what’s important is supplying evidence that it will grow rapidly. And what are the market drivers? Investors don’t like to put money into a shrinking or stagnant market where competition results in a zero sum game.
- Have a great video on your web site. If you are still in stealth mode password protect you video if necessary. But spending the time and money on a short – one to two minutes max, can be very effective in portraying your company. And videos have great passalong value, making them a good promotional tool.
The questions for applications for demo days and for acceptance into an incubator tend to vary. Don’t cut and paste your answers! Read the questions carefully and answer them clearly. Don’t act like a politician who replies to a question with “I’m so glad you asked me that!” and then goes off on a tangent unrelated to the question! If you are building your startup carefully and correctly you’ll have no trouble filling out these applications. But before you do, make sure you’re going to have a great demo! It doesn’t help to get accepted for a demo day if your demo isn’t really inspiring. Before you even apply attend several demo days and take note of what gets investor’s attention. And what does not.