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Building A Startup – Phase II – Getting to the Seed Round

In the last article, we talked about how to get your startup from zero to being funded by your friends and family. You then used that money to build a tech demo, file a provisional patent (about $200), show that demo at a trade-show or two, and get at least one customer that will write a letter of support saying they would use your product, or even better, a letter of intent to buy it when done. Crowdfunding also works here if you have a product that can be purchased in units small enough for individuals to buy in.

For every committed customer you have, show that there are several dozen customers like them that could give you even more money. All that is limiting you is needing some investor funding to build your core IP on your own dime, so you own it separately from these contracts and scale your development and production to handle all the new customers that are waiting. This is much harder than it sounds.

Get professional help forming your business plan and pitch. You need other people with a fresh, critical eye to look at your now overworked plan and reduce it back to reality and make it understandable. You have probably invented whole sets of words and concepts that now exist nowhere else on earth and it needs translating back to human. Plus, some of your ideas probably stink, and exposed to them too long, you have become used to the smell. Let someone point that out to you before an investor does. It’s a cheaper learning experience.

Take entrepreneurial business classes at a local university. Do an accelerator program where they help forge your ideas into a rock-solid plan where you know your potential markets, their relative sizes, which you are going to enter first and how and what your plan is to grow into the others from there. Find experienced businesspeople that are willing to consult for a mix of cash and stock and get a temp VP of Marketing and a temp Chief Financial Officer who know what they are doing and have experience. Then, have your temp CFO help you plan your product/service pricing model and get your VP of Marketing to create sales estimates by talking to customers and getting real feedback on your business model and pricing.

Make a ‘World Domination’ pitch deck, just as an exercise and NOT to show anyone. Try to figure out how you would take your tech/product/service and, step-by-step, take over the world with it. Don’t think small and don’t shortchange your company. Use every resource you have at your disposal to take over the world by any means you can. Bond villains don’t have to play fair, why should you? This prevents small company syndrome, where you get locked into one product for a specific market as your initial goal and just can never see how to get past that and scale. Heck, world domination plans worked for Apple, Microsoft, Amazon and Facebook, why not you?

Once you complete the global domination plan, identify the real, tangible elements from it that could enable this business to scale much larger than today and what needs to be in place for that explosive growth. Do your homework to make it real and flesh out details. Is it a key technology or a partnership with a company that helps you get there, or changing the initial go-to-market plan to better allow for future scaling? Now put those good nuggets into your real business plan but find ways to also allude to the potential future where you can scale massively.

Work with your CFO and VP of Marketing to make a solid financial spreadsheet with 5-year P&L, Cash Flow, Balance Sheet, … and most importantly, your budget for the next 8–20 months, showing what you plan to do with this investor’s money, in great detail.

Make sure you can realistically scale your revenue to $250M+ in 5 years and back up those figures. This allows you to plan for at least a $1B exit in 5 years, otherwise venture capital is not interested. They look for a 10x return on their investment, meaning they only invest in high growth companies with great promise. Your chart should look like a hockey stick, starting slow while you build products and establish yourself in the markets, then taking off once your products catch on and sales increase. You are not rigging it like this, you are using the real planning you did in your global domination pitch to achieve this. Remember, future sales figures are GOALS, not promises. You set them by estimating the best you can, striving to hit them and continuously adjusting both your strategy and your goals to adapt to the market. I did this in the Tesla business unit at NVIDIA 2008-2012 as we started up this now multi-billion dollar business.

Make a Capitalization (Cap) Table, showing how much money you are raising now, in the past and in the future, and make it fair so that everyone makes their money back on an exit, even if you miss your sales targets and get a fire-sale acquisition, they still recoup. Take care of all your investors. If you try to low-ball them, and they might not make their money back, they will either not invest or be nervous and helicopter manage your company after they do or put in claw-back clauses to protect their investment in a fire sale or replace you as CEO soon after investing. Investors with a bit more equity who feel good about their investment (and chances of recouping it) make for a much better scenario. You are going to build a better company, and you will all make more in a solid exit.

Now do some PR. Spend ten thousand dollars with a firm that knows how to work with startups. Money spent on PR articles and press releases is worth 100x any money spent on advertising. In reality, you have to pay people to write and compose both ads and PR and you pay for space in publications with both routes. People, however, are much more likely to read articles that are objectively written by PR people and actually take them seriously yet will ignore biased and expensive ads. Get your PR firm to write some news articles and produce some videos about your company and get them in the big publications – Forbes, Wired, CEO Blog Nation and on tech shows on TV and YouTube, or whatever applies to your startup. Do it in a way that brings people to your web page and social media to see the rest. Doing it yourself will not work. There is an art and science to PR, and you need the skills, credibility and connections to do it right (I dated a talented PR agent for 3 years, I know I don’t have their mojo).

Go to key trade shows and try to get startup pricing, or lower pricing because your exhibit has a cool factor. Or, even better, get in a booth with a larger company as a partner in one of their kiosks. You can do these things for surprisingly little money if you are clever. This generates exposure, contact by potential customers, partners and investors. Have your PR firm get footage from these shows and write articles about it. You do need to have something newsworthy for PR to work, that makes people want to look at it or read it, not just company X appeared at event Y. That means you have to work at it and really create something newsworthy, even if it is a fun gimmick like a holographic, talking, AI bartender in your booth or something else cool that shows your company in a fun way.

Corporate partners (like your booth host) with complementary products to yours, massive sales and marketing channels and tons of customers for both their products and your products combined are an incredibly valuable force multiplier. Leverage them for your sales and marketing partners with non-exclusive sales agreements (I will explain in comments). They will help to find your markets, help you pitch to their customers and even help with sales alongside their products, especially if you help drive sales of their products. In a partnership, both parties have to benefit.

See if you can find angel investors or small VCs that are interested in your business area that will put in a $1M – $3M seed round. Angels are elusive characters, especially in Silicon Valley, where self-identifying as an angel investor means getting swarmed by rabid entrepreneurs, so they tend not to advertise themselves. Use web resources, like Crunchbase (http://www.crunchbase.com ), Fundable (Crowdfunding for Small Businesses ), Angel List (http://angel.co) and LinkedIn to list your company, show your plan and to connect with angel investors. Find investor events, networks, and when talking to people, give a solid, short pitch then lets people ask questions, admit weak areas and risk in your plan, ask them what they would do, and get a card to follow up when you can show them you have filled the holes in using their advice, and be sure to thank them. It shows people you are willing to listen and work with them, that you are mature, admit risks and will take direction from them. That will make them want to invest more than the most rabid pitch.

If you have done all your homework, have a solid tech with IP protection, a patent, a solid product demo and customers vouching that they will use it, and you have a solid business pitch and plan that shows where your market is and how you plan to get there, and you have a core founding team that complements each other plus advisors waiting in the wings that can join the team when you are funded, you are ready. Go pitch those Angels and VCs!

 

Author bio:

Brent Oster

This 3-part series is by Brent Oster, founder and CEO of ORBAI (https://www.orbai.ai)

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This is a post from a CEO Blog Nation writer. CEO Blog Nation is a community of blogs for entrepreneurs and business owners. Started in much the same way as most small businesses, CEO Blog Nation captures the essence of entrepreneurship by allowing entrepreneurs and business owners to have a voice. CEO Blog Nation provides news, information, events and even startup business tips for entrepreneurs, startups and business owners to succeed.

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