It's Not All About The Product [Start Up Your Startup]
Funding is on the mind of almost every entrepreneur. Before you see any financing, though, you have to understand the investors’ perspective. Investors, by definition, want to make money. Their principal interest is how the startup makes money and how it plans to increase the value of the company. However, most entrepreneurs focus too much on the product and the technology. That’s fine and dandy if you’re delivering a customer presentation, but investors don’t care all that much about the product. They’re more concerned with the business of the product.
[quote_center]Investors don’t care all that much about the product. They’re more concerned with the business of the product.[/quote_center]
Startups build products and services based upon customer needs. Likewise, when seeking funding, the company itself is the product—so you need to market it to investors. The best time to approach the investment community is when your startup achieves a milestone and shoots up in value—not when it’s about to go broke. The entrepreneur should build a company that will be attractive to investors, just as they build products that are attractive to customers.
So, what makes a great company? There are a lot of elements involved, including the team, the product, the business model, and customer understanding. While all of these categories are important, you may be surprised to learn that the team outweighs all of the others. Why? Unlike small businesses where the financing is debt and loans are collateralized with corporate or personal assets, there is no recourse for a startup investor when the company folds and collapses. The money is gone. Furthermore, it’s easier to change the product than the team.
[quote_right]If investors wanted something conservative, they’d invest in Apple or Coca-Cola.[/quote_right]
Too often, entrepreneurs try to show investors how their proposal is conservative. Startups are risky investments, and with a higher risk comes a higher potential return. If investors wanted something conservative, they’d invest in Apple or Coca-Cola. If the entrepreneur is too conservative in their plan, investors won’t see the team as bold enough to develop and grow the business. Investors want confidence—they want passionate, enthusiastic entrepreneurs because a salesperson’s attitude is arguably the most important factor in a sale. As an entrepreneur you have to sell your startup to everyone.
Investors often look at how the entrepreneur approaches the funding process as an early indication of how they will run the startup. The investment community is very tightly knit—so if word gets around that you presented your proposal to a bunch of possible investors and none elected to invest, then future potential investors will begin to wonder why.
While outside funding can be very useful, it’s not mandatory. Plenty of very successful companies are 100% bootstrapped—and there’s nothing wrong with that. Regardless of whether your startup is investor-backed, investors’ thought processes can help you determine what you’re doing right and what needs to change.
This post is part of our ongoing Start Up Your Startup series.