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I’m a big fan of Lenny Rachitsky, and his podcast and newsletter simply called Lenny's Newsletter
He just posted about “Raising a Seed Round 101” with Terrence Rohan and Jack Altman
Here’s my favorite part:
“2. What do I need to prove to investors before I raise?
Generally speaking, before you raise, you should have taken the following steps:
- Proof of commitment: You have left your old job and are fully committed to being a founder. You can’t expect to raise capital if you aren’t yet fully committed yourself. **
- Proof of work: You have done enough customer development and research on the problem to *give yourself total conviction* in the opportunity. Tomer London from Gusto puts it this way: “Validate the customer’s needs and your unique product insight. Speak with buyers (100+ in the consumer space, 30+ in SMB, 10+ in enterprise) to deeply understand their pain point, and offer them your solution in the most realistic way possible (a prototype) and name a price. You’re looking for at least 40% of ‘wow!’ and ‘when can I get this?.’ Anything less is just people being nice to you.*”
- Proof of insight: You have some expression of your thesis. At the most, you have built a simple product and have some paying customers.”
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As Lenny says, investors are indeed looking for proof of commitment, work and insight. I would also add proof of confidence, speed, and an unfair distribution advantage. Many founders believe that “If I build it they will come”. Unfortunately that only works in the movies.
Many founders think that it’s the investor’s job to fund building the product and figuring out how to sell it. They go out pitching for money to do that.
Wrong.
It’s the founder’s job to do as much as humanly possible to show first THEMSELVES and then investors the proofs above so that the investor can’t help but reach for their wallet.
- The founder is the biggest investor in the business. They have been and will be investing their life in it for many years. Don’t do it if you don’t have total conviction.
- They have to convince the investor that the market is so large and the demand is so strong that investing in this business will make them all $$$. They would be crazy not to be part of it.
- There are artful ways to generate this FOMO without sounding like a hyperbolic used car salesman. The more data you have about users loving your product and being willing to pay for it, the better. You can let the data do the talking. Investors will listen.
Know your audience, know what motivates them, and make sure your pitch gets them as excited about your company as you are.
Do you agree?
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* emphasis mine
** I will leave the topic of when to quit your job and become a full-time founder for another post. It’s not as cut and dried for everyone as Lenny presents it.
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