There is no avoiding the fact that startups are hard…
Despite the false founder bravado, the truth of the matter is, 95% of startups crash and burn. The number one reason startups fail is a lack of cash in the business. Cash is fundamental to the day-to-day operations and is often underestimated. Especially with inexperienced founders and startup hubs that are obsessed with growth.
You should never scale your business when the risks outweigh the potential rewards.
Trying to grow fast and scale your business before validating with the market, determining a unique value proposition, and achieving product-market-fit, will simply burn through cash. Leaving you buried in debt or looking for a new job before your idea has the chance to flourish. It’s extremely common for failed startups to have happy customers, a good product, and an ambitious and hard-working team. But an overly-anxious desire to scale contributes to their downfall.
So then, how do you scale without wasting money or giving up the dream entirely?
Unless you have an endless investment tree, the only effective way of scaling a business with confidence is one that is driven by metrics. You need to understand the typical journey of a successful startup from ideation through to product-market-fit and eventually scale, and meticulously optimise the relevant business metrics along this journey. With that in mind, let’s take a look at the startup journey…
Preparing for each stage of the startup journey (prior to scaling)
As you tread the startup path it feels non-linear. You’re in the trenches and there are numerous forks in the road and tough decisions to be made. However, if you take a bird’s eye view and analyse the most successful startups of our time, there is a high degree of commonality in their growth trajectory. They all move through a series of stages from ideation to funding and beyond. If you too can understand and move between these stages you will accelerate growth and avoid potential mistakes or even failure.
Below is a visual representation of this journey:
Now, let’s briefly look at how you can prepare for each of these stages so you scale without leaking money:
Ideation & Concepting
In the first stage, you are determining the business idea and vision. You want to deeply understand a problem your customers have and how you solve it in a way that nobody else does. At this point, you are making several assumptions about the market which will be validated at a later time.
Some key things early-stage investors like to consider from this part of your journey include:
- Business Model: How your solution will be delivered to the market and how this approach is different/better than what is already available.
- Your 60-Second Pitch: As you garner interest from potential advisors and Co-founders you need to effectively articulate your business model and it’s potential in 60-seconds.
- Co-Founders: Ideally, you will work with a Co-founder(s) who has complementary skills to yours. Investors like to see diverse skills, point-of-view, and distributed risk when assessing a business.
- Advisors: If you choose not to go down the Co-founder path (or even if you do), it’s critical to work with experienced advisors who can accelerate your learning and fill the gaps in your knowledge.
Research & Validation
Once you have an idea and understand the problem you are solving you’re ready to validate that idea in the market. At this stage, you should check on industry insights, market behaviour, the macro-environment, and innovation trends to ensure you are the right person, with the right idea, in the right market, at the right time.
Here are some things investors look for from your market research and concept validation phase:
- Customer Opportunity: Are people willing to buy a solution to the problem you are trying to solve? Are you uniquely positioned to solve this problem for them?
- Market Opportunity: Is there an unmet need for solving this problem in the market?
- Assumptions: What assumptions have you made up until this point that need to be validated?
- Competitors: What does the competitive landscape look like? How do they position their products? What are their Unique Selling Propositions (USP’s)?
- Customer Metrics: Do the standard industry Customer Lifetime Value (LTV) and Churn metrics provide a favourable forecast?
- Go-To-Market: What is your strategy for taking this idea to market? How will you gain initial traction and create an active feedback loop with early customers?
Getting Investor Ready
Ok, so you’ve come up with a business idea, entered the market and validated that it solves a genuine problem for paying customers. Now, you want to think about taking things to the next level with investor funding. How do you get investor ready?
There are 5 things you need to prepare prior to approaching investors for the first time:
- Your Pitch: Investors are typically busy, so if you get the opportunity to pitch, you’ll want to have a meaningful impact in a short period of time. Leave no stone unturned when preparing your pitch deck, aim for about 15-minutes in length, and practice, practice, practice. Your pitch should include the key learnings from the ideation and validation phases of your journey, as well as a financial forecast.
- Financial Model: Investors are persuaded by the customer, market, and financial metrics. They won’t take you seriously if your numbers are embedded with assumptions or out of kilter with their expectations. So, work with a robust model to create an accurate financial forecast for the business.
- Targets and Raise Strategy: No matter how good your market validation and customer feedback is, if you think approaching one investor is enough then you will be bitterly disappointed. To some extent, it’s a numbers game. You need to identify a list of relevant investors and be prepared to pitch as many as possible. It won’t be the right time for some investors, as well, you may find that certain investors aren’t a good fit for your business and vision. The more investors you contact the better chance you have of refining your pitch and securing a positive round of funding. Most investors will want to understand what your strategy is for raising future funds too, so be prepared to map this out for them.
- Business Structure: A sticking point for many small businesses as they grow is the structure of their team. Naturally, investors will want to better understand your team’s structure and how you plan on scaling. How will you find talent? What type of talent will you need to scale? How will your organisation be structured?
- Legal Documents: The final piece of the investor-ready puzzle is the legalities. You want to come across as a professional when you approach investors, so be prepared with all relevant legal documents as they relate to your industry, and have legal counsel waiting in the wings to review any contracts that may be negotiated between you and the investor.
From SEED to Scalability
Securing your SEED round of funding gives you the means to lay the foundation for a scalable business. But just because you have satisfied the research and validation expectations of an early stage investor doesn’t mean the business is guaranteed success.
There are two more critical phases of the startup journey that will determine your ability to grow with confidence:
- Creating a Minimal Viable Product (MVP): Your MVP should only be good enough to validate your assumptions from the research phase and confirm user demand. If you spend too long creating an MVP then it no longer becomes minimal, and you run the risk of wasting time and money in the process.
- Finding Product-Market-Fit: When your product (or service) meets the needs of a significant group of customers better than any of your competitors, you have found Product-Market-Fit. The process for achieving this position comes down to how well you have isolated a significant customer problem, validated the desirability of your solution to that problem, and developed a solution (MVP) that exceeds customers expectations. You are analysing the customer buying journey, monitoring and testing conversion rates at each key juncture of that journey, and then optimising those conversion rates so the whole ecosystem performs at an optimal level.
Now you can scale (but do it slowly)
If you can prepare your business to secure a SEED round and then work towards finding Product-Market-Fit with a process of conversion rate optimisation, you are in a position to look for further funding and attempt to scale the business.
Of course, at this point, your market position is favourable and fast growth is extremely likely. But take it as slowly as you can. Scaling fast is rarely an ingredient for success but more often than not an uncontrollable accelerant to failure.
Get Investor Ready with our Investibility MasterClass Webinar.
To Kick off 2019, we are running a special free Investibility MasterClass Webinar on the 31st of January 2019, 3-5pm AEST for early stage founders looking to secure investment within the next 6 months to help them scale.
This is not suited for those that are at ideation phase or pre MVP. Join this session and hear directly from our CoFounder, Creel Price, of Investible to share what investors are looking for. Register today, we look forward to seeing you online soon!