All startups are funded, at any stage, by a combination of things. At the most basic, they are in no particular order:
- Product viability
- Market potential
- Team viability
- Future earnings potential
- Investor interest
- Investor mood
People come up with ideas all the time – many of which are not technically feasible. Perhaps the idea has already been invented and patented. Maybe licensing would be too expensive to go forward. Maybe the idea is entirely dependent on some other thing and that isn’t available to the mainstream yet, so you can’t even begin development. For many reasons, this can be a huge barrier to funding.
If you already have an MVP (or more), customers and proven traction, this makes things much easier.
Quite simply, this is how many people does your product affect. You want to understand exactly who is the target market of your product so you can clearly identify the size of their spend in that category. That way you can show the potential return on any investment that someone puts in your company.
For example, if you are looking at the Young Adult Male Technology Market, there are roughly 10M in the US with an average annual spend of $2200 each, or $17B.
Have you ever wondered why many of the funded teams have similar backgrounds, whether educational or work history? Investors like to know what they are getting. They need to know that the team can do what they say it can do, and past history of success – be it through personal experience or institutional credibility – goes a long way.
Future Earnings Potential
In line with understanding your customer demographics, you also need to know the financial trends of that market. What did they spend in that (and related) categories for the past five years, and project out to the next 10. If it’s not a nice big upward trend, it isn’t interesting. In the world of VC funding, “steady is deadly.”
Too many people go to the wrong investors to ask for money. If the person you are talking to is interested in FinTech and you are a FoodTech group, the deal will not close no matter how nice you are.
Not even if you bake them REALLY good cookies.
Even if you have everything else lined up perfectly, you still might not get funded because you caught the investor on a bad day and they saw your deal negatively because of that. They’ve got twenty other options in the pipeline so it’s not a big deal to them.
Any team that wishes to recieve funding must satisfactorily pass all of those tests in the eyes of their investor.
The streets of Silicon Valley (and elsewhere) are littered by teams who have not.
Originally Posted: https://www.quora.com/How-do-you-convince-an-investor-to-seed-fund-the-first-1-year-of-your-startup-if-you-wont-be-profitable-for-3-years
Originally Posted On: 2016-03-06