Moving beyond post-seed financing

Insights from a serial entrepreneur

Whew, you’ve got your seed money in the bank. … So now what?

This is what my co-founder and I asked ourselves as we started to navigate the startup waters. With more than 10 years of entrepreneurial experience in technology, e-commerce, and mobile and after having launched online businesses for both startups and multi-channel retail organizations, we thought we had this down. Many of the strategic tenets of starting a business—from financing and hiring the right people to concepting and building out a minimum viable product (MVP)—made sense to us. As we prepared to move beyond a seed round and impress future investors, there were still some important lessons to be learned.

Most veterans in the venture funding and startup worlds know that seed money should be used to assemble a team, build out the MVP, and understand your market fit and target customers. The confusion sets in and doors begin to close when startups are not adequately prepared to move forward into post-seed fundraising. Three things that future (and current) investors will scrutinize as you move into raising a Series A are how you plan to gain traction in the marketplace, retain your customers, and scale your business. Avoiding the challenges that can build around these areas of potential and indicators of success means having a strong plan.

So what do you need to do now to better understand your base, build a viable product that grows users in a scalable and economically viable way, and ultimately impress potential investors? Below are a few tips that we’ve learned and are relevant for just about any startup exec looking to move beyond the seed stage.

Focus on the product and the audience first and then the brand

You can find many good examples of what happens when opportunity meets a lack of preparedness on the popular pitch show “Shark Tank.” The interaction between the entrepreneurs and investors is often brutal, as the “Sharks” put the entrepreneurs to task about their concept, model, or product.

In one characteristic episode, an overzealous entrepreneur popped in to pitch the Sharks asking for $2 million in financing for a 10% stake in his business. Repeatedly, from Cuban to Corcoran to Herjavec, the sharks were asking for data around his target audience and details around the scalability and inner workings of his experience-based app. The entrepreneur talked incessantly about his brand, the number of “influencers” that were following him on social media, and the cultural change his app would bring both domestically and internationally.  

He was not prepared for, and maybe did not know, the answers to questions around usability, scalability, and economic viability. These are three questions that the Sharks (and VCs for that matter) seem to ask of every entrepreneur, and as he dug himself deeper into the brand hole, one by one the Sharks said, “I’m out,” leaving the entrepreneur with no deal and a lot more work to do.

What’s the lesson here? … By all means, do not go into an investor meeting without knowing exactly what will be asked of you. And most importantly, know intimately your product metrics and customer data points.

The best way to quickly turn off a room of investors is to ignore their interests and focus on your own. 

In the beginning, we sacrificed having the most elegant product in exchange for messaging, marketing, and content that would get people to discover our product and re-engage.  A substantial investment was made in the underlying technology to execute on these elements as well as capture and activate customer data.  In the post-seed financing world, we learned not to think so much about the brand. Do what you can to get by and present a viable product that people will start to know and love. You need to focus on optimizing against the data and product experiences that really matter to your users. As you acquire more users, harness that data to help create a strong acquisition and retention path. Then use that data to reel investors in and be able to explain how your product will scale.   

Understand the economics and illustrate future growth

It goes without saying that the economics behind your idea are of vital importance. Scalability comes into play here as well. Not only does your idea need to be scalable and able to service 1 user or 10MM users in the same way, the financing of that scalability also need to make sense. Showcasing scalability early on can be challenging for many. In our case, we shifted the focus and demonstrated our ability to scale by spending intelligently in marketing to drive long term value inside of our app as well as user retention.

The other key indicator of success is your ability to close the loss gap per customer. If you have a lot of users early on and you are losing lots of money per customer, you will need to demonstrate how that gap will be closed to drive profitability.  You also need to show how you will extract ongoing value from each user as your customer base and technology mature.

Do the talking and then listen and learn

As I said earlier, it is very important to keep a pulse on potential investor expectations. As you seek money beyond the seed round, think of yourself as a salesperson. A skilled sales exec knows the expectations, objections, and marketplace and delivers all of this with the utmost precision. Know what sectors they invest in, understand the personalities behind the team you are talking to, and research the new trends they are following in their investment thesis.  

And you should always be listening and driving the conversation. Not only when the investors are sitting in front of you, but also when your current investors want to do the talking. VCs love to be heard and have a vast array of knowledge. Use the signals they send to you to iterate on your business pitch and continually ask for feedback so that you can iterate even more.

Remember, however, that you have the power to push back when you feel you are being pushed in a direction that does not make sense for the product that you are working on daily. Sift through the noise to find real signals.  Conversations should go in both directions and it is important for you to not let your current or new investors distract you from your thesis that drove you to this successful milestone.

Image source: WSJ