Get Your Things Straight for the Funding Round
First, you need to define and test your value hypothesis, which once proven, will let you move on to your growth hypothesis. The value hypothesis defines what you are going to build, who is desperate for it, and what business model will you use to deliver it. Startups should start with the product and try to find the market, and not vice versa, since the emphasis of the iteration lies more in the market and the business model than the product itself.
A lot of people have opinions about Investors — the merits and demerits of getting invested in, what form of investment to go for, which firms to take money from, how to get angel investors to invest in your company, etc. These are often based on the individual’s specific experiences, people with negative experiences are more motivated to share and to tell others than those with positive experiences.
Venture Capitalists and Angel Investors are in the business to do a very specific thing. They raise a large amount of money, often more than a $100 million to invest in a series of high-risk startups over the period of 3-4 years. Keeping in mind their realistic investment horizon, they expect to have the returns from those startups flow back within the next 4-6 years, which is to require a credible potential of a 10x gain within the same period on any individual investment.
Not only this, you must have a strong product, which has the potential to generate those kind of returns, and not something which is an entirely new concept, something which would be a high-risk maneuver.
If you expect your startup has the potential to fulfill these criteria within the 4-6 year period, then raising venture capital would be the way to go. Most other startups should not. These include: startups where there is no expectation of a potential 10x gain; startups where the founders want to stay private and independent for a long time; startups working on projects with a duration span of more than 4-6 years.
If you see the potential for your startup, then you should strongly consider opting for venture capital for the following reasons:
- You get all the capital you require to invest in the business and grow it at the speed required to realize its full potential.
- You get all the investment from a professional investor, someone who invests in businesses as their full-time job, the reason for their existence in the world.
- Best case, you might also receive help from the VC partner in building your high-growth business.
One can only hope for this kind of growth from their business in the 4-6 years since its inception, if they have a good image as a brand, as well as their products fulfilling the Product/Market Fit criteria. What it is, is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Product/Market fit is both an art and a science. Scientific empirical models and cutting-edge execution, which is iterative, can start helping you to find a good Product/Market Fit.