In today’s dense VC ecosystem and macro-economic environment, securing a seed round is not as difficult as it once was. Chances are, if you have connections to the right people and an interesting idea, you will probably secure seed funding sooner or later.
But is that your main objective? I think it is of utmost importance for founders to remember a truth that can get blurred on the road to establishing a VC-backed startup:
Raising money should not be the end goal, raising money should be the means by which you build and scale your billion-dollar business.
With that being said, how does one go from pre-seed to seed in the smartest way, a way that will not only secure seed funding, but will give your startup a better chance of navigating through the valley of death, building the right foundations, and later securing that A, B and C round?
There are many different ways to go about validating your thesis. Here are my two cents on the method I believe gives your company the greatest chance at success.
Before you begin to validate your business thesis, you need to have a clear vision for your startup. The vision is the endgame of your idea- the impact your startup will have when it is fully formed. As a founder, it is the vision that keeps you up at night as you burn with the knowledge and belief in your product.
Vision is what fuels founders and keeps them focused on the bigger goal in the entrepreneurial vortex, rather than getting lost in the maze of daily details.
It is essential to not only have a distant vision, but to distill and articulate it- for yourself, for your team, and for your investors. This gives you the ability to inspire others and attract future customers or partners.
Writing a vision statement should take time and effort and will act as a foundational business document. There is no template for writing a vision statement, but the successful ones have a few elements in common- they are concise, clear, future-oriented and inspiring.
Examples of inspired vision statements include LinkedIn’s or Tesla’s:
“Create economic opportunity for every member of the global workforce”
“to create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles.”
After you have a clear vision, it is time to focus on finding and segmenting your market. The number one barrier for a VC-backed startup is a lack of a solid market for a product. Therefore, it is crucial to define your target audience and ensure that there is a big enough market and an urgent enough demand for your product at the earliest stage possible.
This involves dividing a large homogenous market of potential customers into clearly identifiable segments based on demographics, needs, priorities, common interests, and other psychographic or behavioural criteria used to better understand the target audience.
To find your market you need to answer questions like who exactly are your customers? Are these customers suffering an extreme pain point that only you can solve? How much would your customers be willing to pay for this product?
As a startup, you have limited resources in the early days, so knowing your target market is not only important in determining the validity of your startup, but the way to use your resources in the best way possible.
Once you have segmented your market, the next step is targeting. In the targeting stage you will need to find and partner with your most relevant customers. Targeting differs whether you are a B2B or a B2C startup, and I will be focusing primarily on B2B.
As a B2B company, you need design partners to help build your product. A design partner should be your ideal potential customer. Finding and partnering with design partners is a necessary step during the pre-seed stage as it directs the implementation of the product you are building.
Working with your design partners will give you invaluable input from your target customers, enabling you to collect the data points that will make your product as robust and relevant as possible, to eventually achieve product market fit.
How to go about choosing the right design partners is a different challenge which I will cover in my next blog.
Measuring Relevant KPIs
Choosing and keeping track of your KPIs is the next stage in the validation process. This allows you to assess and present the progress and growth of a product along the lifetime of the company.
While your company will have multiple KPIs, the North Star metric is the key measure of success. Your North Star KPIs serve a few critical purposes- it gives clarity and alignment on exactly what needs to be optimized and what can be set aside; it conveys the impact and progress of the product to the whole company ensuring support and focus; and it holds team members accountable to an outcome.
In my opinion, a company must have two North Star KPIs, one related to business and one to product. The business KPI could be revenue or number of customers, while product KPIs could be automation, accuracy, or integrations. Focusing on and optimizing Product-KPIs guarantee your product can scale, while focusing on Business- KPIs guarantees there is real value to your business.
It is important to choose the right North Star KPI for your company, A KPI that portrays realized value to the customer. For example, a KPI like “daily active users” or “registered users” may be easy to track, but they say little about the real value of your product. An example of a solid North Star KPI is what Facebook chose in its early days- “# users adding 7 friends in the first 10 days”, this pinpoints an early action that leads to customer retention and is specific to Facebook’s product and what their users’ value.
These are important steps to take before you look for VC funding. Spending a solid amount of time validating your business, including segmenting your market, finding the right design partners, and measuring relevant KPIs, will not only put you in a better position for securing a seed round, but will help you set the right foundations, and give you a better chance at scaling your business down the line.
Don’t forget: raising money should not be the end goal, raising money should be the by-product of building a solid and scalable business that creates real value for its customers.
And remember- if you are an early-stage startup and interested in getting feedback, I’m here, good coffee guaranteed.