By Mark Brenner, CEO and Co-Founder, WEST Growth
Most early-stage companies don’t have much money unless the founders are independently wealthy. So when most companies come to us, they have maybe ten different things they’re working on, but they don’t have the resources to do those ten things. It’s a priority to identify how much the next raise should be and what needs to happen to get that raise.
Those raising capital will need to tell that group of investors what the business is going to accomplish with that money. But frequently companies approach investors and report how they’ll use the funds instead of what they’ll accomplish. They may say, “I’m going to spend 50% on tech, 25% on marketing, and 25% on overhead.”
That may sound well-thought-out but it really doesn’t tell the investors anything. Investors want to know what that investment is going to accomplish, like raising additional money or getting to cashflow break-even. That’s why it’s important to think ahead about whether you’ll look for a second raise or focus on getting to cashflow break even. You need to ask yourself what’s required to get to that second milestone.
At WEST Growth, we work with companies to help them lay out a clear path of milestones that may lead out a year or two years. This process almost always results in honing focus. If a company comes to us with ten things they want to do, we often help them narrow that down to a set of three things that they really need to accomplish.
Product-market fit is probably the most important consideration investors look at when considering whether to support a business. Product-market fit means that customers have experienced the product or service, and have found that it solves a problem.
Investors will want to know who exactly comprises your market. Many companies make assumptions about their market early on that turn out to be wrong. It’s essential to talk to your customers. Ask them what products and features they value, what they would pay for, and what they want to avoid.
Cost per acquisition follows from product-market fit. As you experiment with various types of advertising and marketing and serving various types of business clients, you can refine your cost per acquisition as product-market fit starts to come into focus. Going through this process of identifying and developing efficiencies to acquiring your best customers is really critical.
After you’ve worked out your progressive milestones and iterated on product-market fit, next comes your business model. Refining your business model involves proving what people will pay for the product. It’s important to prove this in actuality with data from real, paying customers.
Putting together a functional business model will allow you to de-risk the next set of goals, such as figuring out the lifetime value of a customer, creating a plan to boost retention, and fine-tuning margins of the business.
If you’ve done the previous steps accurately and thoroughly, you’ll end up with a business model based on a simple analysis, which is the key to getting investment. Investors will ask, “If I give you money, will you be able to market and sell to a customer with that money? Will you then be able to develop revenue that is a multiple of that investment in sales and marketing, and then have margin associated with it?” If your answer is a solid and evidence-based “yes,” then you’ll be good to go.
Another factor that holds high importance for investors is whether you can operate a business efficiently and take care of the money that is given to you. You may have a product or service that is working, but if you spend exorbitantly on areas like overhead or move too fast into the market beyond your resources, your company may not succeed.
Investors seek companies that will stay on track with their milestones and avoid going in other directions. They will look for companies that are financially disciplined. Operating against a budget and making decisions that demonstrate focus and necessary tradeoffs.
Financially disciplined founders need to communicate this discipline effectively to investors and to their employees. They should avoid hiding bad news or creating overly optimistic budgets, as such actions break down trust between investor and entrepreneur, as well as leadership and employees.
Most investors worry most about the possibility of an entrepreneur going off track and spending the invested money unwisely. The probability that they won’t know this is happening compounds their worry.
This is why your numbers equal trust. The day that the investor does not trust your numbers or what you tell them is the day that your company and your position as its leader are at high risk. If you do what you say you’re going to do and you have efficiency, discipline, commitment, and financial clarity, things are going to go well for you.
There are a million things that need to be done in a business to ensure financial organization and clarity. You have to charge sales tax, send W-9s to vendors, manage the cap table, track and organize expenses, and on and on. The founder shouldn’t necessarily be dealing with these things, but someone better be. They can’t be ignored. If you show up to an investor meeting and have to admit that you haven’t paid sales tax for five years or you haven’t filed your previous year’s tax return, your company will be out of luck, even if you have done everything else right.
Almost every company can winnow down their priorities by asking three essential questions: How much does it cost for me to acquire a customer? How much will that customer pay me over time? What does that mean for my business’s margins?
Answer these questions by being customer-driven rather than rolling them around in your mind. Go get customers as quickly as you can and at as low a cost as you can. Don’t spend three years building the perfect mouse trap without asking a single flesh-and-blood customer whether they like — and would pay for — what you’re building. And don’t overspend on marketing and advertising until you’ve locked in on your product-market fit.
Your business model must flow from your customers, and investment will flow from there.