5 tips for today’s tech entrepreneurs
Missed a Future of Work Summit session? Head over to our Future of Work Summit on-demand library to stream.
This article was written by Mike Fey, CEO and co-founder of Island.
It’s a great time to be a tech startup. Global venture capital investments reached more than $157 billion in fiscal 2021 alone, a record high. Despite the unpredictable economic landscape brought about by, or perhaps because of, the pandemic, investors have demonstrated an almost insatiable appetite to back tech companies – in search of the next unicorn. But while there is currently a surplus of capital available to tech startups, the onus is on founders to not only engage successfully with financial partners, but the to the right funding partners.
As co-founder of software startup Island, I have seen firsthand how partnering with forward-thinking investors with excellent reputations can dramatically change the trajectory of a startup and even attract financial partners. sharing the same ideas. While there is no shortage of manuals on the basics of fundraising, the guidance I received from my fellow founders proved invaluable during the fundraising process. Below are five tips that can be leveraged by tech entrepreneurs in the early stages of funding to attract top-tier investors.
Create a peer advisory group to improve your tech startup
Although there is cash available for startups, investment companies receive an average of 1,000 proposals each year, which means there is fierce competition when it comes to targeting a capital company. -specific risk. Before a start-up approaches an investor, it must validate its idea and adopt a game-theory-based approach to its funding strategy. They should anticipate any possible questions, objections or suggestions they might receive during the funding process to ensure that they present a fully formed vision. The most effective way to do this is to create a peer advisory group.
By consulting with the best and brightest minds in their network, startup founders gain access to a host of objective insights that can help them solidify, or in some cases completely reinvent, their businesses. Founders should come into these meetings with an open mind and be prepared to listen and pivot quickly based on feedback from their advisors. For Island, we spoke with over 100 industry experts to validate the use cases and core functionality that were essential for our early design partners.
During this consultation process, it is essential that founders avoid the mistake of confusing “peers” with “buddies”. Their advisory group should be made up of respected thought leaders who will challenge the founder’s ideas when necessary and who genuinely want to see the industry improve. Founders must also resist the urge to treat their advisors as future buyers. The advice they provide in the infancy of a startup can be infinitely more valuable than any potential sale down the line.
The founding team of a tech startup matters more than you think
There’s a reason it takes some startups about 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 the impact team composition can have during the funding process. In the early stages of a company, even before there is a tangible product, the founding team is a startup’s greatest asset when approaching investors, and each member of the team must be selected with this in mind. The technological vision and the products evolve naturally over time, but you can count on a good founding team to make these changes successful. At some of Island’s early fundraising meetings, investors spent more time reviewing the background and expertise of our founding team than evaluating our offering.
Having the right founding team gives investors confidence. Therefore, it is important to adopt a people- and role-oriented 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 cross-reference this list with a list of necessary skills and expertise that will complement founders and speak to investors. The overlap will provide a solid prospect list with which to start the recruiting process.
Strive to demonstrate market fit
Post-mortem studies from CBInsights found that 38% of startups fail due to a lack of cash or capital, while 35% of startups never deliver a positive return to investors due to insignificant demand from the Marlet. Not surprisingly, these two causes of death of new businesses are linked, making it essential to demonstrate a high probability of market adequacy to potential investors early in the funding process.
Tech startups must first establish what the market fit and demand for their business looks like. Does it displace competitors? Does it produce tangible results for a set of key customers? Or, in the case of Island, proving demand for a new category based on repeatable use cases? Once a startup has set a market fit goal, it is much more obvious to potential investors how and when it was achieved. To further assuage any hesitation, founders should come prepared with customer data to prove to funding partners that there is a market need. By defining their Total Addressable Market (TAM), then demonstrating step-by-step how they will penetrate that TAM and monetize their product, startups will tangibly illustrate a market need with hard data.
Savvy investors will look for market-appropriate red flags during the proposal process, including a low barrier to entry. We found that investors cared less about whether we could build what we were offering and more focused on whether the market would be there if we did. Leading investors are comfortable funding tough issues; in fact, they enjoy it. They understand that a high barrier to entry creates a lasting advantage. Building a great new business comes with a lot of risk, but if you’re successful, the win is worth it for everyone who took the risk with you.
Identify and engage with investors thoughtfully
Startups need to identify investors who are not only willing to fund them, but who can actively help shape their tech business with their unique knowledge and experience. In the beginning, too much emphasis is often placed on the terms of the money and not enough on the company from which you receive it. Although the economy matters, it means nothing if the business is not successful. Thus, the partnership with the investment team that increases your chances of success should be at the forefront of the decision-making process, before the evaluation. After all, owning a larger percentage of a bankrupt business doesn’t pay well.
By performing an internal audit, founders can identify their strengths and where they need support, allowing them to partner with investors who can augment weak points. Every founding team is different – for example, personally, I wanted investors who could partner with us to build our category and provide guidance on how aggressively we should apply funding versus efforts. Other founders may need help building their team, product design, or messaging. Firms may have different expertise, but the board member who joins you also adds to the dynamic and should be considered.
As the startup engages with investors, it’s tempting to treat it as a common selling process, but the reality is that it’s a team building process. The goal is not a round of funding. Rather, it’s about finding the partners who will make your business successful, especially in the early rounds where hundreds of decisions will be made at the board level that could make or break the business.
Early alignment makes 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 huge impact on the value that can be delivered to the startup. During the selection process, we discovered that the best companies actually add value through great feedback and insight from the first meeting. The line of questioning they engage in is often a clear indication of their expertise and a harbinger of your future collaborative process.
After signing the condition sheet, both parties are now part of the same team. Thus, expectations must be aligned before a cent is invested. For example, some technology products can be on the market in six months, while others can take years. Without setting expectations upfront, 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 them. Through frank and open conversation, timelines and KPIs can be achieved to ensure 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 available for today’s tech startups. The challenge no longer lies in scarcity, but in engaging with the right investors through the right channels. By taking the time to come up with a polished offering and approach each stage of the funding process with intention, startups can reach investors who truly believe in their vision and have the ability and capability to help them achieve it. As founders, we can never lose sight that the goal is not just to raise funds, but to build a successful business. Every step we take must be measured against this progression.
Mike Fey is the CEO and co-founder of Island.
Welcome to the VentureBeat community!
DataDecisionMakers is where experts, including data technicians, can share data insights and innovations.
If you want to learn more about cutting-edge insights and up-to-date information, best practices, and the future of data and data technology, join us at DataDecisionMakers.
You might even consider writing your own article!
Learn more about DataDecisionMakers