5 tips for today’s technology entrepreneurs
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This article is contributed by Mike Fey, CEO and co-founder of Island.
It’s a happy time to be a technology startup. Global venture capital investments reached more than $157 billion in fiscal year 2021 alone, a record high. Despite the unpredictable economic landscape caused by the pandemic, or perhaps because of it, investors have shown an almost insatiable appetite to support tech companies – in search of the next unicorn. But while there is currently a surplus of capital available for technology startups, it is up to the founders not only to work successfully with financing partners, but also to Turn right financing partners.
As the co-founder of software startup Island, I’ve seen firsthand how partnering with forward-thinking investors with an excellent reputation can radically change a startup’s trajectory and even attract like-minded financing partners. While there is no shortage of playbooks on the fundamentals of fundraising, the guidance I received from my co-founders proved invaluable throughout the funding process. Below are five pieces of advice that technology entrepreneurs can use in the early stages of financing to attract top investors.
Build a peer advisory group to improve your technology startup
While money is available for startups, investment firms receive an average of 1,000 proposals per year, meaning there is fierce competition when targeting a specific venture capital firm. Before a start-up ever approaches an investor, they must validate their idea and approach a game theory for their financing strategy. They should anticipate any question, objection, or suggestion they might receive during the funding process to ensure they are putting forward a fully formed vision. The most effective way to do this is to build a peer advisory group.
By consulting the best and brightest minds in their network, budding founders gain access to a variety of objective perspectives that can help them solidify or, in some cases, completely rethink their business. Founders should enter these meetings with an open mind and a willingness to listen and act quickly based on the feedback from their advisors. For Island, we spoke with more than 100 industry experts to validate which use cases and core functionality were essential for our early design partners.
During this consultation process, it’s critical that founders avoid the mistake of confusing peers with buddies. Their advisory group should be made up of respected opinion leaders who question the founder’s ideas when necessary and who genuinely want the industry to improve. Founders must also resist the urge to treat their advisors as prospective buyers. The guidance they provide in the infancy of a start-up can be infinitely more valuable than any possible sale later on.
The founding team of a technology startup is more important than you may think
There’s a reason why some startups are about necessary six months to hire an employee. A founding team is the engine of a new technology company and can make or break its success. However, many startups don’t realize how much impact team composition can have during the funding process. In the early stages of a company, before there is even a tangible product, the founding team is a startup’s greatest asset when approaching investors, and every team member should be selected with this, in part, in mind. Technology vision and products naturally change over time, but a good founding team can be relied upon to succeed through these changes. In some of Island’s early funding meetings, investors spent more time assessing the background and expertise of our founding team, as they did evaluating our offerings.
Having the right founding team gives investors confidence. That’s why it’s important to take a people-first, roles-second approach. Founders can start with a list of everyone in their network who has proven to be rock stars with the passion and selflessness to build a business from the ground up. They then need to compare that roster to a list of needed skills and expertise that the founders will complement and speak to investors. The overlap creates a solid prospect list to start the recruiting process with.
Strive to demonstrate market fit
Post-mortem examination by CBInsights found that 38% of startups fail due to lack of cash flow or capital, while 35% of startups never deliver positive returns to investors due to insignificant market demand. Unsurprisingly, these two causes of new business deaths are linked, making it vital to demonstrate that potential investors have a high probability of market adjustment early in the funding process.
Technology startups must first determine what market fit and demand look like for their business. Does it crowd out competitors? Will it deliver tangible results for a key customer base? Or, in Island’s case, the demand for a new category of evidence based on repeatable use cases? Once a startup has set a target for market fit, it is much clearer to potential investors how and when this has been achieved. To further remove any hesitation, founders need to be prepared with the customer data to prove to funding partners that there is a market need. By defining their total addressable market (TAM) and then demonstrating step by step how they will penetrate that TAM and monetize their product, startups will tangibly illustrate a market need through hard data.
Demanding investors will look for market-based red flags, including a low barrier to entry, during the proposal process. We found that investors were less concerned about whether we could build what we were pitching and more focused on whether the market would be there if we did. Top investors are comfortable financing difficult issues; in fact they welcome it. They understand that a high barrier to entry creates a sustainable advantage. Building a great new business is fraught with risks, but if you succeed, the win will be worth it for everyone who took the risk with you.
Identify and treat investors carefully
Startups need to identify the investors who are not only willing to fund them, but can actively help shape their technology business with their unique knowledge and experience. In the initial phase, too much emphasis is placed on the terms of the money and too little on the company from which you receive it. While economics matters, they don’t mean anything if the business isn’t successful. So partnering with the investment team that increases your chances of success should be at the forefront of the decision-making process, before valuation. After all, owning a larger percentage of a bankrupt company does not pay well.
Conducting an internal audit helps founders identify their strengths and where they need support, helping them work with the investors to improve any weaknesses. Every founding team is different — for example, I personally wanted investors who could work with us in building our category and provide guidance on how aggressively we should leverage funding against the effort. Other founders may need help building their team, product design, or messaging. Companies can have different areas of expertise, but the board member who joins you also adds to the dynamics and needs to be considered.
Since the startup deals with investors, it’s tempting to treat it like a regular sales process, but the reality is that it’s a team building process. The goal is not a funding round. Rather, it’s finding the partners that will make your business successful, especially in the early rounds where hundreds of board-level decisions will be made that can make or break the business.
Early tuning makes all the difference
In my experience, different founders can have completely different experiences with the same investors. The difference was one of alignment. Not only choosing the right investor, but also the right board member can have a dramatic impact on the value that can be delivered to the startup. During the selection process, we found that the best companies actually add value with great feedback and insight from the first meeting. The line of questions they ask is often a clear indication of their expertise and a harbinger of your future collaborative process.
After the term sheet has been signed, both parties are now on the same team. As such, expectations need to be tuned before investing a penny. For example, some technology products can hit the market within six months, while others can take years. Without setting expectations beforehand, it’s easy for both parties to get frustrated. Business leaders must share the returns they expect, while startup founders must propose when and how they can deliver it. Through an honest and open conversation, a timeline and KPIs can be achieved to ensure that all parties are happy with the business strategy.
The right strategy attracts the right investors
With the market seemingly saturated with companies ready to invest, there is no shortage of capital for today’s tech startups. The challenge no longer lies in scarcity, but in appealing to the right investors through the right channels. By taking the time to deliver a sophisticated offering and approaching each step of the funding process with intent, startups can reach out to the investors who genuinely believe in their vision and have the capacity and ability to help them achieve it. . As founders, we must never lose sight of the fact that the goal is not just to raise money, but to build a successful business. Every step we take must be measured by that progression.
Mike Fey is the CEO and co-founder of Island.
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