Beware Of The Fundraising Dead Zone

Desert

I often meet startups that can’t raise money since they are stuck in the fundraising dead zone – a situation where the amount you need to raise is too high for potential investors. Here’s an example of such a situation, which usually happens to early stage companies…

You have finally finished developing your alpha prototype, launched it and even got some traction. Now, you want to raise money to develop and launch the beta version. This should allow you to gain more traction, proof the business concept and hopefully raise venture capital money to scale the business.  Your work plan shows that you need around $500,000 to complete the beta version, and another $250,000 to survive until you can prove significant traction and raise more money.

The problem is that it’s extremely hard to raise $750,000 while only having an alpha prototype and just a bit of traction. $750,000 are also the upper limit of what Angel investors are willing to bet on. In other words, you’re stuck in the dead zone between the Angels’ sweat spot to the VCs’ sweat spot.

To avoid this situation, you need to properly define your Minimum Viable Product (MVP). For those who are not familiar with the Minimum Viable Product concept, the MVP is the minimal version that needs to be developed in order to validate a business assumption. In the example above, the business assumption that needs to be validated is that the product-market fit would be good enough to generate significant traction. Thus, the MVP should only include features that would enable users to experience the product’s main added value.

So if you found yourself trapped in the fundraising dead zone, go back to the drawing board and start stripping off features from your product. Don’t try to do it by asking yourself: “is this feature really necessary”.  We, as entrepreneurs, have a tendency to always answer this question with a big “YES”. Instead, ask your users which features they want and only develop those who are rated at the top of the list. Usually you won’t need more than 2 or 3 new features to test a business assumption.

Once you properly defined your MVP, you’ll suddenly find that you need much less time and money than you originally thought. So now you’re out of the fundraising dead zone and at a much better point to raise capital.

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