The Funding Paradox

Startup Roadmap

You need to show you can make money to raise money, but you need to raise money to develop and sell the product/service offering to make the money to show the investors. This is not the first time this paradox has suddenly dropped into an entrepreneur’s lap. In fact, it’s a cycle that I have witnessed over and over again. The concern is usually centered around the question, can your business model concept make money?

It does not matter what you think, what your friends think and even what the investors think…none of that matters. The only answer to that money question comes from the market. The only way to get that answer from the market is to put your product/service offering in front of real customers. It is crucial to find out as soon as possible if your business model concept is worth investing money and maybe prevent a huge fail.

I can assure you that those investor pitches in Step 5 of the startup roadmap are much more productive when you have already shown what the target customer is willing to pay based on a positive outcome experienced with your product/service offering. So why not start doing the research for an investor pitch deck during the vetting process? 

One way to do the research is to go out and pitch the new product/service offering using the concept of Minimum Viable Product (MVP). By testing the target market with a MVP offering while vetting the business model concept, you’ll gain a better understanding of how to make it investable and worthy of building a new company around. Remember, if you really want to be successful, all that matters is how many customers need your product and how much they’re willing to pay for it. Figure that out first, and then take whatever path those answers lead you to…this is what vetting and business planning is all about!

This strategy is not new. Book publishing is all based on selling things that don’t exist yet. Authors sell their book without a finished MVP all the time. They just fill out the book proposal guidelines and then the publisher has to guess from that whether it will be a good product. Then the publisher’s salespeople have to sell the book to bookstores with nothing more than a cover and marketing copy to show.

This is the approach I’ve been using in one form or another for over 40 years, and the strategy has evolved as technology has evolved. There is nothing magic about it and I can’t tell you exactly how to be successful with your own startup, but I can give you guidelines and add a few rabbit holes you can slide down. So where should you start?

Step One: Commit to test selling your proposed offering to the target customer during the vetting process. Think of it this way, later you will start creating an investor pitch…this means you’re selling your business model concept before it’s built. An investor pitch is simply the proposition of selling investors the sales projections before the product/service/company is built. So how about reducing your projected financial forecast to one unit offering at a time? The simple truth is you’re never going to sell a forecast to an investor if you can’t sell one unit to one customer. This is where the concept of Minimum Viable Product (MVP) comes in. The MVP concept has allowed many startups or even existing companies to prove that you can sell products/services while those are actually still being developed and refined. This is the low cost way…fail quickly and refine your business model concept to what the customer wants. 

Step Two: Using a small investment, develop your business model concept offering in the form of diagrams or demos or MVP mockups to get something tangible in front of a customer. Interactive demos can be used as a mockup for communication and validation of an offering. In my experience, people get past the learning curve and react to core concepts when they are “hands-on”. Apps like Invision, Sketch or even Service Model Canvas allow creation of visual concepts, turn them into mocked-up screens, and then navigate those screens just like a mobile or web app. I have used a visual mockup attached to a computer to allow the customer to operate the product.

If you don’t have the funding or time to build something interactive, try a MVP landing page using apps like Photoshop or Procreate. I have even used Keynote Slides to mock up still screenshots. Remember that making these beautiful should be second priority to making them functional. Sometimes you need to sink a few days into learning the tool so the offering and its business concept are shown in the best possible light. Yes, the landing page is not a prototype of the product/service. However, you can explain all the features of your product as well as plans and pricing there. You also would like to have a registration button which will lead to the page where you will tell that you are on the development stage and ask the user to leave details to be notified about updates. This will help to track how much people are interested in your proposition, before building an actual product.

Step Three: Once you have a MVP visualization complete, decide who your target customer will be and how to show it. It might not even be investable as it is currently conceived, but it will help you start answering investor questions about market viability, revenue streams, and profit potential. Keep in mind that your target potential customers or early adopters or whoever might actually want the sales offering. Perhaps those customers might want to fund your idea into reality or maybe you’ll sell a few MVPs and get some early revenue. I actually sold enough MVP’s during the vetting process to fund a total redesign of one of my products.

Be sure to  identify and make the presentation to the customer decision maker and the target customer…these may not be the same person. When vetting a concept, you have reached a “GO” decision with a business model concept when the product/service offering fits (almost) perfectly with the customer segment you have identified and those people are the ones who place the highest value on the product. This means you have designed and developed a product/service that corresponds exactly to what the target market wants…just the answer to investor concerns.

Step Four: MVP testing yields a lot of rejection. This is not failure…you are gaining information on how to be successful. Be ready to refine the mock up or even the business model concept. Remember this step can be very iterative so don’t let it get you down. This is normal. A business model is all about understanding that your business is your customers, so you must customize it to them. In order to do so, you must know who they are and what outcome they seek. What are their dreams? What problems do they have? What can you do to make their lives easier? During this stage is when you get that valuable feedback to use during the funding stage.  

Startups tend to take a lot of time in the beginning to measure their progress with a lot of metrics that aren’t dollars. This is fine, as long as you don’t lose sight of the pursuit of revenue. The best way to to answer the funding money question is to ignore everything that doesn’t generate revenue. The goal of any business is to make money if it wants to be sustainable. This is what any investor is interested in so be sure to build your business model concept around answering that question by generating sales data during the vetting feasibility analysis.

For more on the concept of Minimum Viable Product testing, read the thought entitled Validate Your Concept Without Spending A Fortune and read a free sample of the new book “Small Business Thoughts Real-Time Strategic Planning“.

Copyright ©John Trenary 2022

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