Why you should never raise money before launching your product
When you are first building your platform or product, you need to focus on what I like to call “The 4 Ts”: Technology, Team, Traction, and Turning a profit. In this episode I will explain each of the 4 Ts to help you build your product and raise money from investors.
Here’s the transcript from this podcast episode, please excuse any typos!
In this episode we’re going to explain to you why you should never raise money from investors before launching your products. If any of you are familiar with my book strap on your boots or my course startup essentials, then you’ll know that I typically talk about something that I came up with called the 40s. The 40s being technology team traction and turning a profit for revenue. First I’ll talk about technology, or maybe you have a product that you are creating, like a Kickstarter product or a new widget. I’m hoping at this point you’ve already built your software platform or your hardware device. And if you have not done that you should do that first obviously because investors want to see that you have a product or platform built. I’m also assuming you’ve already listened to my other podcast episode about how to validate your idea. And so you have people that are already using your product or your platform, they’ve tested the product, they’ve given you their feedback and you know how to perfect your platform or how to perfect your product so that when you do go to investors they see that you’ve already done the work.
See, the thing about investors is they don’t like dumping money into something for you to figure it out. They want you to figure it out for them they want you to mitigate the risk, so that when you take their money. You’re not just dumping it into r&d and figuring out if people actually want your idea. So, you have to validate it First, make sure it works, make sure it works well, it has to be scalable, and you know make sure that all the customer feedback you have and you can get to your investors says that their money will be going to good use. And not to like to figure everything out. They don’t want that. I can’t tell you how many times entrepreneurs come to me and say oh my god I have the best idea the best website the best product whatever it is they showed to me it barely works, it looks horrible and investors are gonna laugh at them and I tell them, Look, you can’t go to an investor with this they’re not going to give you a million dollars to invest in this, this idea. You really have to go back and fix it and make it better and get more customers, which brings me to. How do you get customers, how do you get people to use your product. Well, that’s what a team is for when aliens invaded New York City, Tony Stark or Iron man didn’t defeat them by himself. He called them the Avengers to help, because each team member had a special skill set, he needed to defeat the aliens. I know this isn’t the Marvel universe but if you look at most successful tech startups, or companies, they have a solid team of entrepreneurs backing them up at one point you just have to admit it. You can’t do everything yourself. Even if you’re really good at a lot of different things like I am, you still need a team.
And I always say, what would you rather own a small piece of a billion dollar company or a large piece of a $1 company. I’m gonna go with the small piece of the billion dollar company. And that’s why, giving out equity for performance based work is super super super important. People get incentivized when you give them equity, and I understand everybody wants to get paid money. That’s the whole goal is to get a job with your own startup and get an investor to give you money right. Well, in order to do that you need a team of people who are experienced enough to get you to that next level of funding.
So if you give them equity let’s say you have five people in your company CEO CTO VP of Marketing, a branding person and a marketing person. Each person should have a certain amount of equity depending on how much work they’re doing. So let’s say the CEO is doing the bulk of the work you know he or she might get 50% of the company, the CTO is building the app, give him or her 20%, you’re left with 30%, I’d say give 10% to the other three people. Ultimately, it should all be based on performance so if these people are not performing well they only earn a certain amount of shares over a certain amount of time so let’s say 1% every month for 2% every three months. That way they’re not getting the bulk of the equity right away so you’re not, you don’t have to be worried that you’re going to be losing equity, because they’re going to be giving you results. If not, then you fire them and you find new people, but it goes without saying investors do not want to invest in a company that does not have a team, and when you have all this equity, but nothing to show for it, they just, they’re not going to invest so you definitely have to go out there and find the team. How many times have the Avengers save the Earth from aliens or evil villains, how many times they stopped plots to destroy sees that their traction I guess you could call it is, is insurmountable they continue to take care of business and defeat the bad guy over and over and over again so people can count on that. When you build a company, you need a similar type of traction proof that you can keep growing and doing well over and over again without failure. Because in the end, this is the first thing and investors are going to ask you for Jason how many users Do you have and how many daily active users do use or may use monthly active users how much clothes Do you have overbooked.
I hope it’s a lot, and now they don’t sound like that. I’m just trying to give you my investor voice. But in the end, they really want to know how many users you have, and that month over month growth, they only care because if you’re not growing, then why are they going to give you money? This is why I keep drilling into people’s heads in my book in my course, the importance of analytics and data demographics and figuring out your target market. I can’t tell you how many entrepreneurs don’t know the answer to this, or they don’t care. They always say like why do I need to know this, why do I need data Why do I need demographics, why do I need to know my target market. Come on, really, if you don’t have a target market Then who are you advertising to everybody?
It just doesn’t work that way. I’m not going to be your target market or steak, because I don’t really eat steak so if you’re pushing meat online I’m not going to buy your meat I barely eat it. I’m vegan for the most part, so you got to figure out your target market, and then go after it, and industries want to know that you have that nailed down, because if you have a target market, and you have all this data supporting your network your demographics, the money they’re going to give you will help you grow those numbers, not help you figure it out. They just want you to grow those numbers. Imagine you’re in the woods with a bunch of friends and you’re camping out. What would you rather do is start a fire with some rocks or throw wood onto a big blazing campfire, because your friend already lit a fire. I’m going to go with throwing wood on top of the fire, no one wants to start a fire it’s hard to do with rocks you know you need, it’s better if you have a lighter, the investor wants to come by when the campfire is already blazing and he wants to throw some wood on top. In your case, he wants to throw money onto your fire. He doesn’t want to burn the money he wants to feel it. He wants to make your company grow more and more and more. And that’s what the money’s for for scaling, not for building. Nobody wants to invest in a build. That’s why most investors who say they invest in early stage companies, they always come with a couple of caveats they say well you need at least a million dollars in revenue and you need to have at least 5 million users that you know they say early stage but I very rarely have found an early stage investor who invests pre revenue pre traction pre technology pre teen. Which brings me to the next point of revenue. I call it turning a profit because revenue means you’re earning money but turning a profit means you’re actually being able to pay your salaries and being able to pay the cost of the company. And it’s one of the 40s So turning a profit. I mean, it goes without saying, investors invest money to make money so they only care about one thing, making their money back, and they usually want 10 times their investment so if they give you a million bucks, they want 10 million back.
So, this is why it’s so difficult to get investors to give you money, because you have to prove to them that you can get them their money back times 10 within a couple of years. I know I keep mentioning entrepreneurs, constantly doing certain things and this is something they always do. I must get pitched 50 times a week with people saying, I have the best idea. It’s going to be worth a billion dollars, and I want you to help me get an industry to give me a million dollars to kick it off. And I’m like yeah you and another 7 billion people want that it’s impossible. The only way you can get an investor to give you money for something you haven’t built or proven out is if you have a rich uncle, who literally has a billion dollars and doesn’t mind blowing a million on your ideas, or you live in Silicon Valley, and you learn how to code and you built a rinky dink prototype and you’ve put together a little PowerPoint presentation you don’t even have a team. They might throw you a million dollars because in Silicon Valley, there’s a lot of FOMO or fear of missing out so they throw
money at the wall and hope that one of the companies they invest in sticks and becomes a unicorn, or a billion dollar valuation. So you really have to figure out a way to make revenue or turn a profit for the company and the best way to do that is if you’re selling a product obviously is to start a Kickstarter campaign, sell like $50,000 worth of your product. If you watch Shark Tank, you see them always talking about, oh you sold $50,000 on Kickstarter, how much did you sell, after Kickstarter. If you ever watch Shark Tank you’ll see the sharks always asked the entrepreneur. Oh, so you sold $50,000 worth of your product on Kickstarter in two months that’s awesome. Good job. Now how many sales Did you have after that, from your own website or Amazon, and they always say oh you know we haven’t sold yet we’re still in the pre or see that’s the thing when you sell something on Kickstarter. It’s great proof of concept, but to get traction and revenue. That’s when you have to take it to the next level, you have to show the investor that not only did you sell an initial product of say $50,000 but you were able to take that product, and then sell $500,000 worth of that product. Within a year on your own website or Amazon. That’s how you’ll get an investor interested, gotta show revenue. When it comes to a mobile app. I always tell everybody that apps are mostly free, that people use them right , everybody uses free apps because no one likes to spend money on apps, but you do have to add some sort of component or mechanism in the app that monetizes your content in some way.
So maybe you unlock a feature in the app for like 99 cents, and now you can do something cool in the app or maybe you can unlock premium content in the app or you’re limited as to what you do a lot of dating apps for example, they let you do a certain amount of stuff in the app but then if you want to do more, you have to unlock it for 99 cents or $5 or whatever they charge a lot of apps charge for certain things, and that’s how they get investors because they’re showing revenue, so I know that you like having free apps and you want to build a free app and I get it, I do the same thing but you have to always add at least one form of monetization or revenue in your app. If you show that people are spending money in your app, then you can give them projections. So imagine you have an industrial meeting, and you’re going through your PowerPoint presentation. They really only want to see the slide that shows the traction growth and revenue, you really want to nail something like this in the past six months we’ve grown 20% each month from 50,000 users to 200,000 users. And out of those 200,000 users, we’ve determined that they are from the ages of 18 to 34, they live in the West Coast. They have annual incomes of over $80,000 a year, they’re homeowners, their car owners etc your mother demographics. And then you say, and that of those 200,000 users 30% of them are daily active users, and 50% of them are monthly active users. And out of all these numbers, we have been able to determine that over 42% of them are spending at least 99 cents in our app once a month. And we can grow all these numbers to, you know, 500,000 users and 10 million users and we can earn you know $3 million in revenue in the next couple years, basically you want to show growth. You want to project data you want to say like here’s what we have now here’s what we’ve been doing, here’s where we can go if you give us funding we can grow that that’s really all they care about. They just want to know that you can grow, what you already have. By using their money. They don’t want to hear that you’re going to be getting those numbers once you get their money. That’s how you lose them immediately. So, you have to have an amazing product that works well, whether it’s software or a physical product, you have to have an amazing team that backs you up. And when I say amazing team I mean you have to have the Avengers, basically, the Hulk Thor White Widow all. So make sure you when you go to an investor, your team is solid, and they will normally invest in you if you have all of the 40s. If for whatever reason investors do not give you money after you have all of those 40s down pat. There’s something else going on, whether they don’t like your idea overall, or they don’t invest in your market maybe they are a biomedical investor and you’re trying to push a consumer app or maybe they only invest in b2b or business to business, and you’re trying to push a physical product that is sold to consumers. You know, you got to make sure you know the investors as well you can’t just assume, because the person is an investor, they’re going to invest. No, that’s not the case. Certain investors only invest in certain things, and that’s just how it is. So make sure you research your investors First, make sure you have the 40s. And the last thing, this will do if you have the 40s. It gives you a very powerful thing I like to call leverage.
Let’s say you go to an investor and you don’t have the 14 so you just have an idea you have a PowerPoint you have a maybe a prototype no team. They could maybe give you a million dollars, but they’re going to take 50% of your company or more. Now, if you go to them with the 40s and you have everything you need to really show that you can scale this thing, then you can take a million dollars and maybe only give them 10% of the company maybe 20%, but at that rate you’re able to negotiate, because you hold all the cards you have all the control you have the power, you have the proof that you can grow this thing. So remember that the more you have, the more you can leverage at the meeting. So good luck out there hopefully you guys can get some term sheets from investors get those 40s. And don’t forget, this won’t happen overnight. It’s going to take some time. So just be patient and work hard and you’ll get there.
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