How to get started getting started with a startup

Hi, I’m Kwin, co-founder of Daily.co and two previous startups. This post is part of a series about startups, tech, and startup founder skills.

Recently I had lunch with an executive at a big Silicon Valley tech company who wants to become a startup founder. She has impressive career achievements to her credit, and an idea, and a co-founder, and a pitch deck. But she hasn’t made any progress fundraising.

So we spent most of lunch talking about fundraising. I have this same conversation with first-time founders pretty regularly, so I figured it’s worth writing down my thoughts. In all these conversations I tend to say pretty much the same things, because even though every company is different in lots of ways, there are only a small number of paths to raising money for a tech startup.

These days, professional investors fund early stage companies for one of two reasons:

1. You show them that you’ve made (and are continuing to make) specific progress toward a goal that in their heads they can map onto a potentially large market opportunity.
2. They already know you and are willing to fund you based on that existing personal relationship.

That’s it. That’s the list. This often comes as a surprise to people, and I totally understand why.

If you read the tech press, it’s easy to get the sense that everybody in Silicon Valley raises money over coffee at Blue Bottle, with just a big idea and a viral growth model sketched on the back of a napkin.

That’s not the case. Press coverage of early stage startups is deeply misleading as a primary source of “signal” about how the startup ecosystem works.

The biggest problem is that press coverage is about as pure an example of survivorship bias as you can possibly find. When you read press coverage about startups, you’re reading about the outliers. You want your company to become an outlier, definitely. But few of us start out that way.

It’s also true that ten years ago it was possible to raise a first round of funding based only on a well-crafted pitch deck. So if you’ve been a tech executive for a while, but haven’t actively tried to raise money yourself, you probably have an out-of-date sense of how funding happens. The funding environment has changed a lot over the last few years.

From an entrepreneur’s perspective, most of these changes are great.

• It’s much, much, much cheaper now to start a company and get your product in the hands of users.
• There’s a lot more first round capital available from a massively bigger pool and greater diversity of experienced, helpful investors.
• The venture funding business is much more open and transparent. (Thanks in no small measure to the pioneer VC bloggers, Brad Feld and Fred Wilson.)
• And more people have heard of startups, so fewer people give you a blank look, or worse, when you tell them you turned down a job at Microsoft to start your own software company. :-)

But those changes — particularly the fact that it’s so much cheaper to demonstrate real progress — mean that the table stakes have gone up. Investors expect you to show them not just what you say you can do, but what you have already done.

So, to get your company off the ground:

1. Write that pitch deck, but write it for yourself. You need to be able to explain what you’re doing, and that starts with explaining it “internally.” You need an elevator pitch (one or two sentences). And you need to be able to say, very concisely, what you’re building, who will use it, who will pay for it (not always the same as who will use it), and how what you’re doing can grow to become a very large business.
2. Build a thing. If possible, build a minimum viable product that someone actually pays you money for. If that’s not possible, build a really great prototype. (Not drawings. Not wireframes. A working prototype that people can actually use.) If it’s not possible to actually build the tech you think you’ll eventually need, then “build” a prototype of your business model, without the tech. There’s a great tradition of tech startups getting started without much actual tech. The umbrella idea, here, is to do things that don’t scale.
3. Get people to use the thing you’ve built. If possible, get people to actually pay you. Most professional investors will argue with everything you tell them about your company, every time you go out to raise money. (This is one of the hardest things to get used to as an entrepreneur! Venture investing trains people to be micro-contrarians, to pick apart every positive statement about a startup.) But revenue is hard to argue with.

If your product isn’t something you can get people to pay you money for (yet), figure out some other way to demonstrate that what you’re doing has value: testimonials or letters of intent that say people will buy your product when you’ve scaled it up or when their next budget cycle comes around, active user numbers that are growing without marketing, customer acquisition costs on a spreadsheet that are easy to understand and that show potential profitability on a per-customer basis in a short period of time. You get the idea.

When you have an actual thing to show investors, and people using that thing, you look really, really different than if you just have a plan.

Startup founders are optimists by nature, and this can feel unfair. “What, you don’t think I’m going to be able to do what I say I’m going to do?” But it’s worth understanding how things look from the other side of the table. Investors get a lot of pitches — really, a lot of pitches. They have to say no much more often than they can say yes. And they regularly see companies they love, started by founders they respect, struggle to raise their second and third rounds of funding. Startups are hard.

So, when you go out to raise money, your job is to take as many reasons to say “no” off the table as you possible can. The best anti-no weapon is the answer, implicit or explicit: “oh, yeah, we already did that.”