Entrepreneurship

Top 10 Questions from Investors 

Top 10 Questions from Investors 

questions from investors

questions from investors

If you’re raising money for your company and wanting to pitch to angel investors and venture capitalists, then it is essential for you to know and expect what questions will be asked and how you should approach these questions. More often than not, they will ask you the same questions over and over again which will help determine why they should choose you. Make sure you are taking notes on the questions from investors so that you can score during future meetings.

For the past 2 years, VenturX has been actively participating in pitching to investors and of course, we have compiled the top 10 questions your investor will ask you and how you should approach these questions.

Top 10 Questions and How to Approach Them

Q&A

1) Where do you see the sales trend over the next 1–2 years?

This is an open-ended question. To approach this question, you must give a broad response and even touch on a variety of issues that could prove valuable to the investor’s decision-making process. The time frame will give the investor a good gauge of the opportunities as well as the risks involved over a short term. You need to provide as much proof that your answer is not full of just speculations (ie. we have 5 signed letters of intent for the next 4 months, we already have $100,000 in purchase orders that we just need to fulfill, etc.)

2) Who are the competitors in the industry?

The investors want to know who the potential competitors in the market and they expect you to know them in detail. They would also want to be alerted with any new products or services that may appear in the market which could impact your company. You should already have a concrete plan on how to deal with these competitors and focus on what makes you so special over them before your pitch.

“If an entrepreneur tells me that they don’t have ANY competitors, that is a red flag! They didn’t do their homework!” — Marvin Liao, Partner at 500 Startups, San Francisco. 

3) What obstacles are you currently facing?

No doubt every business is prone to failures and weaknesses, they are part of the equation of growth and they are often where all of the great learnings come from. The investors want to know what are the vulnerabilities in your company. However, keep in mind that identifying the problem is only answering part of the question. It is more vital to convince them how are you going to overcome these problems in both short and long term and convince the investors you have what it takes to overcome any potential obstacles.

4) How is your business performing?

Your investors are interested in how your business is performing. You should give them an introduction to Key Performance Indicators (KPIs) and other non-financial metrics that are going to affect the company’s growth. For software companies like us, KPIs include the lifetime value of a customer, customer acquisition cost, and monthly recurring revenue. Whatever your key metric is, it’s usually unique to your specific business. For more info, check out one of my favourite books “Lean Analytics” — by Alistair Croll and Benjamin Yoskovitz

5) How do you track trends in your market?

Due to the nature of start-ups, especially tech-based start-ups, things change very quickly. Investors would like to know if you are aware of your industry, as well as how you find data to stay on top of industry trends. Before pitching, be prepared to share how you find data about your customers and industry, as well as how you can leverage this information to improve your business to stay on top of the game.

6) Can you tell me a story about a customer using your product?

This should not be a surprise as it should already be included in your pitch. According to our experiences, the best pitch usually is the ones that open with a story about how your products and services are helping customers. We would advise using real names to be as specific as possible to describe how your services have transformed your customers and get rid of their “pain.” Hence, be sure to craft an excellent story on your customer and let that tell a story for you!

7) How can I connect with some of your customers who have used your product or service?

If your investors ask this question, you are on the right track! They find your pitch interesting and begin what’s called the due diligence process. During due diligence, they want to know a lot more about your target market/customers. Some insights you should provide to your investors are: who they are, how you know who they are, how did you find them, what do they think about your product or service, how often are they using it, on what scale, how you interact with them, etc. This would be a good place to use metrics that we guide our startups with such as Conversion and Engagement.

8) How would you predict your market will be like in five years as a result of using your product and service?

This is a great opportunity to tell a story on the growth of your company. Predict or picture how your customers’ future as a result of using your product or service in five years’ time. Prove to your investors that you are able to envision and think critically about your product and how your customer will evolve over the next 5 years.

9) What if five years down the road we think you’re not the right person to continue running this company-how will you address that?

Don’t be surprised when they ask you this question. Yes, it is rude and odd but often times, particularly with high growth start-ups, funding CEO does not remain the CEO who scales the company beyond the start-ups’ phase. This is the part where you convince the investors what kind of entrepreneur you are. The reason they asked this question is that more often than not, many founders’ ego get into the way of a company’s growth and they refuse to step down for the good of the company. It is important to address this issue and prove to the investors you do not have such “quality.”

10) How much equity are you offering?

This question usually comes at the end and if it does, it should tell you that you are on the right track and your investors are interested in the deal. The investors would like to know how their shares will be allocated and how it will be diluted assuming there are future rounds of funding such as Series rounds or even IPO when your company has matured enough. A good way to answer this would be to provide data such as generating a Capitalization Table and show them how much shares and how will that change down the road. If you need help generating a Simple Capitalization Table for your pitch, fear not, check out our article on Cap Table 101.

Pitch

That should be the top 10 questions you should expect your investors to ask during your pitch. It should have covered all grounds, if not I’d love to hear from you any types of questions that aren’t covered in this article — please post them in the comments down below and don’t forget to give us a clap if you enjoy reading this article. Interested in knowing how will VC invest in 2019? Our article got you covered! Are you a startup seeking funding during Seed or Series A? Check us out here!

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About VenturX

VenturX is a web platform that helps entrepreneurs through their journey from idea to launch and beyond. VenturX uses data-driven analytics to score and connect startups and investors at Seed and Series A financing.

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How to Understand Your Term Sheet

How to Understand Your Term Sheet

What is a Term Sheet?

Term Sheet

A Term Sheet just to be specific is an agreement between you as an entrepreneur and an investor — a series of terms you think that matter. Some key values of the term sheets include what the valuation of the business is, how much investment the company is getting and for what percentage. Early Term Sheets are for entrepreneurs who are raising seed and angel capital, which is what we will focus on this article. Personally, I like to keep them simple, not a lot of bells and whistles, not a lot of rules.

However, Term Sheets can vary depending on what type of funding round you are in, and how much is at stake, as well as who is involved. If you decided to go for Series A & B rounds, your Term Sheet is going to get more complicated which includes who’s going to be on the board and how many board seats are there, what happens when the board voted for you as a CEO to step down. Yes, I know right, if it’s not for the movie I recently watched, I always thought the CEO represents the top of the ladder and they exercise full control over the company.

There is a great set of templates available online put together by Fenwick & West (National Law Firm) and Andreessen-Horowitz (Silicon Valley VC Firm).

Breaking Down the Term Sheet

Term Sheet

Pre-Money Valuation

According to Investopedia, Pre-Money Valuation refers to the value of a company not including external funding or the latest round of funding. Pre-money is best described as how much a startup might be worth before it begins to receive any investments into the company. This valuation doesn’t just give investors an idea of the current value of the business, but it also provides the value of each issued share.

To calculate the value of your shares for the current round using Pre-Money Valuation, it’s not rocket science. Let me walk you through this, assuming the Pre-Money Valuation is at $3,000,000, we will divide that by the existing number of shares (10,000,000 for example)=price of shares at which new investors will buy. Hence, $3,000,000/10,000,000=$0.30. Each share would cost $0.30.

Post-Money Valuation

On the other hand, post-money refers to how much the company is worth after it receives the money and investments into it. Post-money valuation includes outside financing or the latest capital injection. It is important to know which is being referred to, as they are critical concepts in the valuation of any company.

To put it simply, Post-Money valuation is Pre-Money valuation + Amount Raised. Let me walk you through the calculations, given the same amount of Pre-Money valuation as the previous example, at this round your company raised $1,000,000 and hence your Post-Money valuation would be $3,000,000+$1,000,000=$4,000,000.

However, if the calculations get more complicated as the company grows, this is a great online Post-Money valuation and Pre-Money valuation calculator to generate the numbers for you.

Preferred vs Common Shares

When a business wants to raise money by attracting investors, it can do so by issuing stock: common stock or preferred stock. There are many differences between preferred and common stock. The main difference is that preferred stock usually does not give shareholders voting rights, while common stock does, usually at one vote per share owned.

Common stock allows its holders to make a profit through rising share prices and dividend payments. Holders of common stock also get to vote on corporate issues, such as electing new directors to the corporation’s board. For example, Detour Gold Corp. interim CEO Michael Kenyon resigned 3 months ago following a vote by shareholders and hence the company took an entirely new direction because of common stock shareholders.

However, should the company end up in bankruptcy, holders of common stock are last on the list to get their money back. Putting it simply and plain, if you hold common stock and the company goes bust, you are unlikely to get any of your capital back. For more in, see The Motley Fool.

Preferred stock also represents owning a share of the company, but it works a bit differently than common stock. Preferred stock pays a predetermined dividend, whereas the dividends paid to common shareholders tend to vary according to the company’s fortunes. Dividends on preferred stock are often larger than those on either common stock or the company’s bonds. Holders of preferred stock do not get a vote on company matters. And if a company’s assets are liquidated, the preferred stockholders get to redeem their shares before common stockholders do, giving them a better chance of getting at least some of their money back.

For most investors, common stock is a better deal. It’s slightly riskier than preferred stock but will usually show a slightly higher return as well. If you want to enjoy the potentially high returns of a stock investment but want to minimize your investment’s volatility or your exposure to company-specific risk, the preferred stock might be a better choice. Preferred stock may also be better if you’re looking for a source of income you can depend on, as the dividends paid on such stock are fixed. But whichever class of stock you choose, be sure that it’s an investment you’ll feel comfortable holding over the long haul.

Participating or Non-Participating Preferred

Non-participating preferred typically receives an amount equal to the initial investment plus accrued and unpaid dividends upon a liquidation event. See more at STARTUP COMPANY LAWER. Holders of common stock then receive the remaining assets. If holders of common stock would receive more per share than holders of preferred stock upon a sale or liquidation (typically where the company is being sold at a high valuation), then holders of preferred stock should convert their shares into common stock and give up their preference in exchange for the right to share pro rata in the total liquidation proceeds. Non-participating preferred stock is favoured by holders of common stock (i.e. founders, management and employees) because the liquidation preference will become meaningless after a certain transaction value.

“Participating Preferred” also typically receives an amount equal to the initial investment plus accrued and unpaid dividends upon a liquidation event. However, participating preferred then participates on an “as converted to common stock” basis with the common stock in the distribution of the remaining assets.

Participating Preferred stock is favoured by investors because they will receive a preferential return over both low and high exit transaction values.

A perfect example by founders workbench to illustrate what is going on is the following. Assuming company A has one series of non-participating preferred stock with a liquidation preference of $6 million representing 50% of the capital stock of Company A. If Company A were to be sold for $10 million, the investors would receive $6 million (as the $6 million investment amount is greater than the preferred’s 50% share of the $10 million sale proceeds) and the remaining $4 million of proceeds would be distributed to management. Company B also has one series of preferred stock with a liquidation preference of $6 million representing 50% of the capital stock of Company B, but its preferred stock is participating. Upon the same $10 million sale event, the investors would receive $8 million (the $6 million liquidation preference plus 50% of residual $4 million of sale proceeds) and the remaining $2 million of the proceeds would be distributed management. Thus, in the same $10 million sales, the difference between participating vs. non-participating preferred resulted in a $2 million shift in economics away from management to the investors, which represents one-half of the return that management would have received had the preferred stock been structured as non-participating.

Potential Red Flags in a Term Sheet

Red Flag

After breaking down various important key terms in a Term Sheet, let’s dive into what red flags to look out for in a Term Sheet.

1) Review Period

Some Term Sheet will include a Review Period that allows them to pull the Term Sheet after it’s been signed. Including this is like saying your investors assume there’s a high chance that the deal will fall through, which is ironic since it’s counter to investor norms. That being said, reputable investors would not issue a Term Sheet with a review period if their business diligence is done and they are confident towards the deal.

2) Change in Management

As discussed earlier, your board of directors could replace the CEO if they deemed the CEO to be not a fit. However, these can be done without specifically including it to the terms. If this term appears in your Term Sheet, remove it. Investors would rarely willing to invest in a company where they immediately hope to remove to CEO, and of course, frankly speaking, this is quite rude as well.

3) Guaranteed Exit (within 5 years)

Last but not least, guaranteed exit. This basically means the founder legally commit that they would find a buyer for investors’ shares within 5 years. Startups have unproven economic business models. More likely than not most startups are still experimenting or pivot in the initial years. It is unknown how long this could take because it differs from case to case. 5 years is perhaps when they figured it out what worked and what does not. Lots of opportunities for capital to be returned will arise organically over the life of your company and hence if the investor wants an exit within 5 years, no doubt this is a huge red flag to look out for.

Conclusion

Image result for term sheet for startup
Investor Meeting

As you can see, the Term Sheet can be really quite scary and exciting for new startup founders. If you are pursuing Seed or Angel round funding, Term Sheet is usually less complex and provided by the investors whereas if your company is more mature in the future and decided to go for Series A & B funding, the Term Sheet is usually created by the company. Are you a startup seeking funding during Seed or Series A? We are here to help!

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About VenturX

VenturX is a web platform that helps entrepreneurs through their journey from idea to launch and beyond. VenturX uses data-driven analytics to score and connect startups and investors at Seed and Series A financing.

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Differences between SAFE and Convertible Notes

Differences between SAFE and Convertible Notes

Investment

With convertible notes slowly becoming a thing of the past, in recent years startups are beginning to embrace Simple Agreements for Future Equity (SAFE) as an alternative to raise funds. Despite being similar as both are tools for raising funds, there are many outstanding differences between them and we will dive deeper into them in this article.

What are Convertible Notes?

Convertible Notes

According to FundersClub, convertible notes are an investment that is structured similarly to a loan. A convertible note is a type of debt which might convert into equity in the future. Debt, I’m sure most of you out there are familiar with this term, if not put it simply — When I borrowed money from you, I have to pay you back in the future, but with interest. A convertible note is a type of debt but slightly different as instead of paying you back with interest in the near future, we change that into equity and offer you part of the ownership. Sometimes we like to call convertible note debt-like since it’s similar to debt with slight variations.

What is SAFE?

SAFE

SAFE was introduced by the Silicon Valley accelerator Y Combinator as the new big boy in town for startups to have more options, or even to replace convertible notes when it comes to raising capital. To put it simply, SAFE is a warrant to purchase a stock at a later priced round, and hence is basically a contract. The main difference SAFE differs from convertible notes are maturity date, interest rate, and conversion to equity.

Maturity Date

Maturity Date

While SAFE is not a debt and hence does not have a maturity date, convertible notes do have a maturity date.

Upon reaching the maturity date, entrepreneurs face tough decisions on whether to pay back the principal of the convertible note, with interest or convert the debt into equity for the investors. Most would opt for the latter option as paying back the principal amount with interest could be difficult for startups, especially at an early stage.

Interest Rate

Interest Rate

As discussed earlier, since SAFE is not a debt, but a warrant/contract, it does not carry an interest rate hence keeping things simple and founder friendly. While SAFE does not carry an interest rate, convertible notes, on the other hand, carry an interest rate (simple and not compounded) between 5–8%.

For example, if the interest rate was 5% in a $100,000 convertible note seed financing and Series A funding round occur a year later, the investors would convert an additional $5000 ($100,000 x 0.05).

This may not be considered important for a short-term investment but may create financial problems if it’s long term and since there is maturity date for convertible notes, this might post as a bigger problem to entrepreneurs. The interest rate, however, could be a way to incentivize startups to raise rounds on a timely basis. That being said, there is a maximum interest rate that may be charged on a loan depending on which state, this is known as Usury Laws by State.

California for example (for obvious reasons), according to Law Office of Melissa C. Marsh, ” Pursuant to California law, non-exempt lenders (the average individual) can charge a maximum of: (i) 10% interest per year (.8333% per month) for money, goods or things used primarily for personal, family or household purposes and (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year, or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the date the loan is contracted for, or executed. In other words, the general rule is that a non-exempt lender cannot charge more than 10% per year (.8333% per month) unless there is an applicable exemption”.

Conversion to Equity

Conversion to Equity

While both SAFE and convertible notes do offer a conversion into equity, there are differences since they do not call for the same terms of conversion.

SAFE only allows for conversion into equity at the next round of financing. Meaning, if you decided to opt for SAFE during the seed round, conversion into equity option is only available the following round, meaning Series A round. Hence SAFE does not carry a multitude of conversion events.

Speaking of which, I almost forgot to mention during the next funding round, SAFE can be converted even when you raise any amount of equity. Many have argued that SAFE is very easily manipulated because, without minimum amount raised to trigger conversion, you could simply raise $8000 the next round and trigger the conversion.

For convertible notes, besides allowing a conversion during maturity, it does have an option to convert at the current round, and future round. Also, a conversion would take place when the minimum amount (reflected on the agreement) is met.

For example, assuming investor invested $200,000 and were granted the right to convert to equity at a $2 million valuation. If the start-up were then acquired for $10million, the investor would receive $1 million or 10% of the proceeds, by converting the $200,000 loan into equity representing 10% of the issued and outstanding equity, post-conversion ($200,000 divided by $2 million + $200,000).

What’s the Best Option for Seed Investment?

Seed Investment

So, after diving into the 3 main differences between SAFE and convertible notes, what does that mean for all entrepreneurs out there? For my take, SAFE is made simpler for entrepreneurs and they can use SAFE to raise capital with ease without having to go through the trouble of negotiating maturity date and interest rate terms, and also clarify when is the next funding so as to trigger the conversion. SAFE does indeed align the interest of investors and entrepreneurs in a whole new different way. That being said, always remember that what might be a pro to one start-up could be a con to another and hence depending on the nature of your start-up, choose wisely. Are you a startup seeking funding during Seed or Series A? Check us out here!

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About VenturX

VenturX is a web platform that helps entrepreneurs through their journey from idea to launch and beyond. VenturX uses data-driven analytics to score and connect startups and investors at Seed and Series A financing.

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Networking in Silicon Valley

Networking in Silicon Valley

Silicon Valley

Silicon Valley

There is a stigma that people in Silicon Valley are not like anyone else. From my time living there and then going back a few years later, I learned these tips about the how to formulate a simple networking goal, what questions to ask and how to get ahead of the game! I decided to write this article because I was scratching my own itch. It was something I wished I could find more info.

Questions to ask when you meet an investor:

1) Their favourite question of mine seemed to be: “If you only one day left in San Francisco, what would you recommend?” If you feel pride and joy about your city, it is something that would bring your thought back to happy memories that you would recommend to newcomers.

2) General questions about their work: What is your investment focus, what is your average investment size, etc..

3) What are you hoping to get out of this event?

4) How is your current firm different from the last VC firm you were at? (This is a great question for those who changed firms, which does happen a lot.)

5) Offer them something instead of ask for something.

Tim Ferriss made this great video about how to ask questions. Why would this be a good source? He is from San Francisco himself and he is an elite podcaster. Podcasters are trained in their craft to do one thing — ask good questions. His key insights are:

a. Ask questions that are easy to answer. Instead of “what do you like to read?” change it to “what is the one book you give as a gift most often?”

b. Asking the right questions produces an interesting conversation. (he has a different way of saying it.)

See the full video here:

Formulate Your Networking Goal

Form my last article, “Do networking events contribute to your business goals?” I talked a bit about the importance of investing any time or money towards a networking even only if it helps you reach your business goals.

For any goal to be obtained, it had to be: measurable, timed, and accountable.

When I attended the TechCrunch event in February 2019, I had a goal of meeting X number of startups in investors in my industry. I only had 3 hours at the event. I was accountable to my friend who I will report to the following Sunday.

Even before I went to the TechCrunch event, two friends invited me to the Facebook campus for lunch earlier that day, so I was already in the mindset of achieving my goals. So, if there was any space for extra networking, I would make a new “Facebook” friend. Unfortunately, I did not have enough time at Facebook to make new friends.

How to get ahead of the game

· Add people to your LinkedIn beforehand with the note “Looking forward to meeting you the TechCrunch event tonight — Sydney, Founder of VenturX.” It is simple and short enough to fit in that introduction box LinkedIn gives. The reason for that is to get a small idea of who is attending and what their business is about (and if it relates to yours). Note: you can only do if you have newsletters or an email from the event organizer telling you who is going to be there. I received this list 2 days beforehand. (Estimated Time: 5–7 mins for 20–25 new contacts)

· Add attendees beforehand on twitter. If you are in a B2B business like VenturX, I recommend following their company twitter and check on crunchbase for the founder’s names too. (Estimated Time: 10 mins for 20–25 new contacts)

· When you get a strange request from someone you don’t know, I recommend saying hi and asking how you can bets work together. If I don’t know you and you send me a request, I will ask you that. (You can try and reference this article.)

· Thank new contacts afterwards for any tips or resources new contacts gave you. People always like to hear that their advice was helpful

· If you taking photos for company social media account as well, get there early and take photos. This is especially if your phone is slow. It takes 15+ minutes to find the wifi password, connect to wifi with my slow phone, think of hashtags, find the event hashtag, and think of my own hashtags/text, and take pictures. If you want to tag any sponsors/ people, it would take even longer.

In conclusion, networking events are great for face to face interactions so the person you are dealing with isn’t just another email to type.

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ICO 101 and Why Should You Consider It?

What is ICO?

ICO

ICO, ICO, ICO. There’s no doubt everyone is familiar with or at least heard of cryptocurrency. If not, you are really living under a rock! Even my taxi driver is familiar with the most popular form of cryptocurrency, Bitcoin!

If you are like me, interested in investing in cryptocurrency simply because everyone is talking about it, I’m sure you’ve come across terms such as ICO (aka. Initial Coin Offering)

ICO is a way to crowdfund by issuing cryptocurrency tokens for blockchain projects. And no, these cryptocurrency tokens are not Bitcoin if you are wondering. Instead, they are tokens made by the company which explains why there are thousands of cryptocurrencies circulating in the market right now. ICOs have proved to be valuable fundraising tools for investors since the concept was brought into the limelight in 2013. So far this year, investors have used ICOs to raise over $1.8 billion.

During an ICO, there are two kinds of token you can purchase. First being the utility token, it’s meant to be used on goods and services developed by the cryptocurrency company and nowhere else. The second type of token is the security token, it works very much like stocks where you buy part of the company during IPO. However, unlike IPO, you will not get the equity that comes with regular stocks.

Let’s say now that you have decided to invest in a security token, how can you trade it? You must register yourself on an exchange to trade tokens. However, please do extensive research on various exchanges as not all exchanges will accept the token you own unless you’re holding to the popular ones such as BTC, LTC or ETH. Popular exchanges include and not limited to Coinbase, Coinmama, Luno, Bitpanda, and Kraken.

ICO has achieved its goals if the soft cap is reached. The soft cap is a minimal amount for the project to move forward. And of course, there’s a hard cap, the maximum acceptable amount. However, if the soft cap is not reached, most ICO will return its funds to investors.

ICO is considered a high-risk investment. One of the recent tragic cases on ICO happened in 2016. DAO launched its ICO in 2016 and raised over $150 million through the ICO campaign. However, the smart contract behind the DAO had a small bug that was later exploited by a hacker who eventually made off with $50 million. Both the fundraisers of the ICO and the investors were devastated by the news.

If you decided to test the market or are very interested in investing in ICO, practice doing extensive research around the project by researching about the whitepaper, understanding how the projects apply real-world value and knowing who the key stakeholders of the company are.

The main difference between ICO and Venture Capital

Crowdfunding

Venture capital is raising money from a group of venture capitalists by pitching to them your idea/project to convince them to invest in your company in exchange for your company’s equity. Interested in pitching to venture capitalists? Get your Capitalization Table in check!

How to choose between VC and ICO?

VC vs ICO

VC over ICO

Addition to funding, if you are seeking to expand your reach, consulting services, and business guidelines, this option is for you. VC investors are more reliable since they are experienced businessmen. If you are looking for long-term support on your project, you can rely on VC investors as they have part of the company’s ownership and hence in the long term, without question, they would want the company’s equity value to rise. In addition, VC has a stronger advantage when it comes to public perception. Raising money from VC gives you a stronger trust credit since they are business professionals and they will carefully vet through your project before investing hence if they decided to invest in your project, it proves to the public that your idea is brilliant.

To summarize, benefits of VC includes building valuable connections, investors’ support, and PR credit.

ICO over VC

If you are only looking for a quick way to raise money by reaching out to the mass, this option is for you. Everyone, including a taxi driver, can be an ICO investor. You can raise enough money from everyone. It is an easy way to raise money if your idea can convince the mass. Also, your investors do not have any ownership right, hence you get the freedom to decide over things instead of gathering all the company’s stakeholders before moving forward with your decision.

To summarize, benefits of ICO includes easy reach in fundraising and freedom, no equity required.

Which is better for me?

While ICO and VC are similar processes, they can be very different and each at the opposite end of the spectrum. Which method is better really depends on your objectives and the nature of the company. However, both are promising and a necessary way of raising funds in order for your company to strive.

I hope that you’ll arm yourself with the right knowledge regarding which funding method is best for your company. Please leave any comments if you have burning questions and I’ll be ecstatic to acknowledge them.

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About VenturX

VenturX is a web platform that helps entrepreneurs through their journey from idea to launch and beyond. VenturX uses data-driven analytics to score and connect startups and investors at Seed and Series A financing. 

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All You Need to Know About Capitalization Tables

All You Need to Know About Capitalization Tables

What is a Cap Table?

Capitalization Table

Cap Table is a spreadsheet for an early-stage venture or a start-up that lists all the company’s securities, their holders and the price paid by the investors to hold these securities. It shows each stakeholder’s percentage of ownership and how it can be diluted over time. In short, your Cap Table is a standing summary of who owns what in your company. It is a crucial part of your data room file for early stage investment. For the full package, check out our previous article: What to Include in an Investment Package.

Why is a Cap Table Important?

I wouldn’t be writing this article if it isn’t. Most important to investors, they will want to look at your Cap Table. How you have raised money and who owns the company. In fact, this might be the only thing investors would care about, aside from your ideas. It is also interesting for them to know who else has already invested. They may be interested because the other investors have a strong reputation and are very hands on or they are competitor investors.

Shareholders want to keep track how much of the company they own; founders and investors would like to know how much of the shares they are giving away if the company issues more shares.

So, founders, do not screw up your Cap Tables! Because screwing-up your Cap Table is like getting a face tattoo when you’re drunk!

How to Use a Cap Table?

Spreadsheet

Understanding Your Equity

One of the uses of the Cap Table is to make decisions on should you raise funding for another round. Cap Table also shows how certain decisions can affect the company’s ownership structure and by how much.

Managing Stock Options for Employees

When the company expands, and more employees are hired, you would want to introduce incentive plans such as incentivizing them by giving them stock options. By offering some degree of company ownership to employees, it gives them the incentive to contribute more so their contribution can be monetized as the company’s stock price rises.

Cap Table then come in handy in situations as such. Cap Table can easily calculate out by adding in an extra stakeholder, by how much would current stakeholders’ share change. Also, by showing you how many shares are available to be issued with an addition stakeholder.

How to Make a Basic Cap Table?

Excel

I was looking around the net and realized most cap tables are more complicated than it should be. There should be a basic Cap Table template out there but seriously, it seems to me that every template seems to overcomplicate things. Cap Table can be quite tricky sometimes if you have never worked with one before. Hence, for those entrepreneurs out there who are looking for a basic Cap Table, fret not! This article is for you.

I have quickly put together a basic Cap Table template using Excel for you to reference on. Please remember with every additional round of funding, you must update your Cap Table. For example, and not limited to — changing stock options for stakeholders, issuing new shares and transfer of shares. Without further ado, I present to you the basic fits all Cap Table.

Capitalization Table Example

A basic cap table should be divided into two sections: ownership and valuation. Using the example above, highlighted fields are variables for you to fill in whereas the rest are automated using formulas. In the ownership section, enter each investor’s name and the dollar value each of them contributed and the rest of the fields will be automatically generated for you!

Same goes to the valuation section, enter the current company value, the current number of shares and new equity raised. The screenshot should be an easy way for you to follow and generate your own basic cap table template.

I personally do prefer a simplified and transparent cap table as I certainly do not think you need a complicated cap table at an early stage in order to run a startup. I strongly encourage to try it out yourself. The template can be found here! Modify, if you have to in order to create a cap table that a story about your company!

Remember, there is no “right” way to format your cap table, but to keep it organized and simple. The right cap table for a founder might look entirely different than the right cap table for another founder.

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Why Startups Should Never Give Discounts

Why Startups Should Never Give Discounts

When your business is starting out, it is common to want to sell right away, rack a huge number of clients and build credibility in your industry. Building all of that takes time. What startups tend to talk about these days revolve around motivation, grinding and how well to treat to your customers. What they leave out is how not every client is good for your business, how “doing whatever it takes” may harm you in the short and long run, and how all this may affect your credibility overall.

From working with 300 startup clients, I have had the chance to see that our market is very dynamic from one client to the next. Normally, our clients are not known to have deep pockets so that is where I learned the unique lessons about discounts. A couple of key learnings have come out of that over the years that I wanted to share…

1. 80/20 Rule

20% of the people take up 80% of your time. This is a tried and true statement among many psychological situations. In business, this would be true of your clients. In a startup’s early days, it may seem like you are supposed to give discounts in order to make those initial sales and gain your credibility. However, we have seen a huge difference in those clients who will and won’t see your value. (Check out our previous article: Am I Being Paid What Am I Worth?)

For example, we had a standard fee for writing business plans as an extra add on for those looking for funding. We had a client in the past who tried to negotiate during the 11th hour when I was almost finished the business plan to demand a discount. The request was to do 3 weeks worth of work in just a few days and they did not finish preparing their research either. Because of the situation the client put us in and the hard deadline, we spent 40% of the time negotiating and 50% of the time working on the business plan (and about 10% of the time sleeping). It was a prime example of how a client took 80% of our time and it was a hard lesson to learn.

80–20 Rule

What can you do about it?

A) Walk away…

In hindsight, we did not need their business. It would not have affected our brand and our core business of helping startups get investor funding. This business plan writing was a side service that was offered.

B) Flip your 80/20 rule to benefit your business!

Applying the 80/20 Rule to Your Business

2) Beware of Acquaintances Who Try to Squeeze Your Business

As your business grows and people start to see value in what you, some people will migrate back in your life and ask for discounts to gain the benefits. One example that happened was an acquaintance of mine who needed marketing consultation because he was part of a “Co-CEO” team but neither of them was the marketing/business person. This acquaintance is someone who I haven’t seen in about 10 years and only met through school friends a couple of times. I did not know he moved back to the city a few years ago. So after agreeing on the rate and services to be provided, this acquaintance messaged me back a day later and aggressively wrote this:

“Good morning,

I’ve just checked the contract and want to point out one thing

Are you really charging me the fees the same as you charge to strangers ?”

I was not sure what this aggressive greeting was about. I eventually saw that it was his way to “ask for a friend’s discount.” I was really confused that this happened after everything was agreed upon and written up in a contract that he then refused to sign. His partner and I sorted it out later and we commenced the work. It was done in bad faith after all because the 6 month contract…got cut into a 3 month contract…got cut into a 3 week contract…

Back Stab

Back Stab

Back Stab

What can you do about it?

There are a lot of support systems in your community or even online like a Facebook group full of entrepreneurs who will give great advice based on your specific situations. I went on a Facebook live chat full of entrepreneurs because I was new to this situation and was starting out this branch of the business at the time. I went on a live video to talk to people who have walked this path. They explained that I should not consider these people to be “friends.” Also, I should go back to them and ask for more. That is what I did during the second negotiation. They only hired for 3 weeks (but it was possible that is what they intended in the first place when negotiation a 6 month contract).

Another solution is to hire a sales coach if you are new to these negotiations. If you need recommendations for sales coaches or facebook support groups, send me a message!

If startups bow down to giving discounts every time they are asked, they will only be attracted discounted clients. These small clients will take up 80% of your time. You will be spending less time doing what you love — which is providing the solution or product. Even if your product or service is superior on the market, if you act like you are worth less, than that’s how the world will treat you.

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The Importance Of Customer Service To A Startup

As the owner of a young startup or business, your goal is to get customers by the droves. The type of business your startup is into makes no difference. As long as profit and not loss is the goal, your business is dependent on the presence of customers.

In the same vein, every business owner wants customers to keep coming back to do more business. Every company wants customers to advise friends and colleagues to do business with them. This is the cycle that the whole profit and loss industry runs on. This cycle has been around for centuries, yet it is still doing the trick.

Building a network of happy and satisfied customers doesn’t just happen overnight. It is a complicated network that thrives on awesome customer service. Just as strikers are to a football team, so is customer service to a startup business. Without it, there is no focal point.

With the advent of the digital age, the impact of customer satisfaction has increased drastically. Nothing spreads faster than rumors. With the internet, they spread faster than the speed of light. One tweet or a blog post from an irritable or dissatisfied customer can potentially mar your startup business. As the owner of a new business trying to break into a highly competitive market, you can grasp the importance of reputable customer service.

Essentially, customer service is a personal interaction with customers that becomes a pipeline to invaluable feedback, insight, and advertisement. Notice the use of the word “personal”. Most startups make the mistake of outsourcing their customer service needs. It is supposed to be a two-way communication that brings you and your customer closer together.

There have been some huge success stories due to excellent customer service by huge brands. Today, Nordstrom is one of the biggest retail companies out there. Back in the seventies, Nordstrom allowed a man to return his tires and even gave him a refund.

This was done despite the fact that Nordstrom did not sell the tires to the man. It had only moved into a shop which was previously used by a tire business. That story is still talked about and has played a massive part in the popularity and success of the company.

Today, Nordstrom continues that fine tradition by using Groupon deals to attract and communicate with its extensive customer base.

Another company that has benefited from impressive customer service is Target. Today, Target is the second largest discount store retailer in the United States. That is no mean feat, and it came about through one of the most impressive acts of customer service.

A young man walked into a Target store a few decades ago looking to buy a clip-on tie for an interview. Target didn’t sell clip-on ties at the time. The young man later left with a knotted tie and some advice on conducting himself during an interview. He then got a job at Chick-A-Fila, and great tales have been told of Target ever since.

Customer service is a vital cog in the machinations of a startup business. In case you are confused about the tenets of impressive customer service, here are a few tips to start you on your way:

  • Let your customers know everything your business entails
  • Answer the newest electronic mails and digital inquiries first
  • Shorten the line and process for getting across to your customer care representatives
  • Make use of personalized emails
  • Use human touch to deliver delightful surprises to your clientele
  • Inspire your customer base, make them feel special and part of something bigger
  • Always be ready to provide solutions to every inconvenience no matter how inconsequential it may seem
  • Learn from customer inquiries and issues to improve your customer experience
  • Finish with a smile.

Check out these examples!

Target

Target

Nordstrom

Nordstrom

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What to Include in an Investment Package

What to Include in an Investment Package

If you are looking for investments for your startup but not sure what pieces of information investors will need, READ THIS ARTICLE!!!! We will be going over documents needed for investment submissions and making sure your more than ready for potential investors. To begin, we will be looking on how to share this type of confidential data with investors.

Data Rooms

To share documents and confidential information about your startup what you will need is a “Data Room,”this is a very safe location that is created by the seller where important data is placed to be viewed strictly by the investor or anyone else who is significant. These data rooms can be created virtually and many firms provide them. Datarooms.com, Drooms, etc. are just some of the few that provide safe due diligence with information like this. In addition to this, you also want to make sure you can track open rates, so then your data is actually being useful to investors. If you see a file being opened more frequently then others than make sure that file is your priority and ensure it is updated frequently.

Documents

1. Historical Financial Statements 

(Here is a Template)

This information is important to investors as it provides a means of analysis and helps evaluate your startup’s financial performance. Your historical financial statements also help determine future trends as well as future expectations on your financial runaway for your startup. However, different financial statements relay different types of information. For example, a Balance Sheet will state your assets and liabilities and represent what the company is actually worth. Income Statements will state your income and how much things are costing you; this is very important for investors as they would like to see growth. There are many different financial statements you can have, but it is good to have a wide range of them in order to be more transparent with investors. Below are examples of a Balance Sheet and Income Statement from Walmart.

Balance Sheet (See Template)
Income Statement(See Template)

2. Business Forecast 

(Here is a Template)

What this is, in essence, is a prediction of future developments in your current startup through many aspects. Whether this may be in a sales aspect, technology advancement, or anticipated expenses, this all helps with budgeting and giving an investor a better understanding on what to expect in the upcoming years. It also helps them gauge the potential future growth according to anticipated business environment changes. There are a few places you can check out to see how exactly to create your own business forecast, Chron, JumpStart, and Entrepreneur.com. Below are also snippets of brief business forecast’s to give you a general idea of what investors expect.

Business Forecast

3. Customer List 

(Here is a Template)

A great way to begin talking about this is by describing what exactly is a “Customer List.” This is a intangible asset which means it is a non physical, non financial asset. Investors would like to this because they may find the demographics of the customers very helpful in making their decision. For example if your product was designed and made for teens but majority of your customers are middle aged people, then there is a mismatch and something is off. They want to see a realistic market potential sized and addressable market. It is mostly for transparency within your startup and making sure that your product or service is indeed reaching it targeted market. Although you may be reaching your sales or profit goal, analysing the customer list may tell investors that you are hitting a different and maybe a smaller market; in fact, it may decrease long term growth and potential. In addition to this, keeping the privacy of your customer lists is also very important and should only be provided to serious investors, do not post or upload customer lists online as it is a breach of your customers privacy. Below is a mock example of a very brief customer list example for general needs.

Example of Customer List

4.Customer Contracts 

(Here is a Template)

A “Customer Contract” is a legal agreement between you and the consumer by whom the service or goods will be received. In addition to this, the customer must be paying for the goods or services. Signing a partnership with another company is not a customer agreement if there is no monetary exchange for a good or service. An example, to represent this would be if Facebook partnered with Uber and created a new database of information. This is a partnership, not a customer engagement because there was no monetary exchange whatsoever. On the other hand, if Facebook paid Uber for all their data, then this would be a customer contract. As you can see, it is important for investors to know about these customer contracts as it may have potential growth for your startup in the future. Only include customer contracts that consist of big amounts of money relative to your startup and ones you may feel are appropriate.

Example of a Customer Contract

In addition to this, letters of intent are also great ways to show customer agreement with the service or product you are offering. Check out this article to learn more about it in more detail.


5.Monthly Recurring Revenue (MRR)/ Churn (SaaS) 

(Here is a Template)

MRR = Revenue/ month

Churn Rate= # of clients lost in period/ # of total customers at the beginning of period

Let’s begin off by diving into MRR ( Monthly Recurring Revenue). MRR is essentially a measure of your revenue stream on a monthly basis. This is applicable to companies who operate on a subscription basis and get recurring revenues and also companies who also make regular single transactions that may not necessarily reoccur. Examples of a recurring revenue type of model is Bell, Netflix, Spotify, etc. A startup with monthly recurring revenue is also more attractive to investors as there most likely is stronger retention rate. For companies who have regular one time transactions the MRR can be calculated using the average amount for each month.

Moving on, the “Churn Rate” refers to the percentage of clients who stopped and discontinued commitment to the service they signed up for. An easy way to remember this is through an equation.

(Churn Rate= # of clients lost in period/ # of total customers at the beginning of period)

Sample Charts

MRR Chart
Churn Rate Chart

6. Employee Contracts 

(Here is a Template)

This is a signed agreement between an employer and employee; it is vital in protecting employee rights and also employer liabilities. Aspects such as salary, general responsibilities, duration of employment are all addressed in this document. Investors maybe be interested in this info as they want to know what type of team your startup consists of and if it is well balanced. For example if you had a high paying programmer compared to other programmers in the startup, investors would like to if it makes sense especially if the startup isn’t as widely scaled yet. Every dollars matters and it matters even more when it’s the investor’s dollar. In addition to this, a “Non-Disclosure Agreement” would also be in the employee contracts and this is very important to include. This prevents any vital information regarding the startup to leak out to the public or competitors who may utilize for their own profit.

Below is a very brief employee contract meant just for example purposes.

Employee Contract

7.Details on Competition

(Here is a SWOT Template)

Competition is present in every industry in the world and there is a good chance you have a good set of competitors in the field your startup lies in. It is important to address these competitors for both yourself and investors as you want to be as unique as possible to order to differentiate. You can analyze your competitors in a number of ways but a common way is to complete a SWOT analysis on potential competitors. SWOT stands for strengths, weaknesses, opportunities, and threats. What this analysis does is that is looks at competitors through internal and external aspects and makes sure you are being able to differentiate them. Accept your weaknesses as a startup and continue building upon your strengths. Identifying and sharing threats early on ensure transparency and makes investors more aware of the whole market situation. Below is an example of a SWOT analyse on a pie company.

SWOT

8.Cap Table 

(Here is a Template)

This is one of the most important documents an investor is interested in and one document you should not miss in your submission. The “Capitalization Table” shows ownership segments within the company, including shares, options, and equity. Everyone who has a stake in your startup MUST be in this document so then valuation of an investment is valid and accurate. This is a table which also has to be updated regularly. In essence, every line you add to the table should add value to the company because it shows investors, employees, and partners that there is indeed a successful vision which they also believe by. Furthermore, there isn’t necessarily a proper way to format this table, just make it simple, organized, and easy for investors to understand.

Example of a Cap Table

9.Option Pool Information

An option pool helps to acquire top talent for your startup and entice people to stay with your company. This is done by offering them stake in your company. Where does this stake come from you may ask? There is actually a dedicated percentage of your startup dedicated to your employees, obviously if you opt in to do it. A scenario to represent this could be as such, you start up your own company in the field of creating innovative energy sources. You want top talent, so you hire a few grad students and someone who also has worked at other places to guide your startup the right way. In the beginning of their time at your company you can offer each of them a certain percentage of the company stake, this can be in the form of stocks assuming you are a public company. Let’s assume each year they get 200 individual stocks for each person which they can buy at the price at which they first joined the company at ($5 dollars). If they leave, they do not get to redeem any of the stocks they have. Over time, they tend to work harder and harder to make the company more successful essentially increasing the stock price. After 4 years each of them has quantity of 800 stock parts and the stock price is now $50 dollars. If they sold the stock at this point in time they would have made an instant profit of $36,000. {(800*50)- (800*5)}= 36,000. This is what drives employees and creates an urge to join your startup compared to others. Investors want this information because they want to know that dedicated percentage that you allocated to your employees and seeing if it makes a difference.

Cap Table with the Option Pool Option

The final step investors are going to do is call many large vendor customers and ensure there is indeed a legitimate business taking place. The investor wants to make sure his money is going towards the right investment and think of this call as a reference check. They want to know how the customer feels about you first hand and how their experience has been with you. Depending on the industry, investors will also ask customers if the product or service has made their job easier and if it is something sustainable.

You must understand that for a investor their money is very important and will want to know everything and anything their money is going towards. It’s best to be transparent with investors and provide adequate financial details with strong analyse on your competition. Investors have been through this many times and being prepared with all this information puts you ahead of the curve.

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How to Build Traction Starting from an MVP

How to Build Traction Starting from an MVP

A vision without traction is merely a hallucination. Cultivating and creating a successful startup is more than just offering a product or service, it’s a consistent effort of building, measuring, and learning. However, one of the most important factors to venture capitalists (VCs) is traction and measuring the potential success of your product. In regard to measuring traction for your startup, below is a list of what potential investors will value when looking for investments.

Minimal Viable Product

Let’s begin off with an MVP (Minimum Viable Product). This is not a beta or prototype you are launching it’s rather a product or service you make to see if there is a market for it. You are trying to learn what your users want and don’t want and minimize the amount of time you spend on creating features or aspects of the product which is not valuable. Believe it or not, many big companies we know today originated from an MVP.

Dropbox

A good example to represent this is cloud database company called “DropBox.” Their MVP product was essentially a video which showed what they wanted to do and a signup form for people who were interested in the idea and wanted to be early adopters. Almost overnight, there were over 75,000 signups all with only a 3-minute video of Dropbox and not even an actual product of the software. If you are very early in your startup, make sure there is indeed a market for your product or service using an MVP. This is a valuable aspect to present to investors if you haven’t created real customer data points yet.

Below is a list of more MVP’s which you may find very interesting and see how the actual product which has derived from this has changed.

1. Airbnb

Airbnb

Co-founders of Airbnb needed help paying their rent in San Francisco. They also noticed lots of business conferences around; hotels were very expensive in their area. They wondered if strangers would pay to live in someone else’s house for a night. They provided all the facilities and tested out their product assumption using the interface you see above. Creating a website like this especially in the type of technology we have right now would cost you couple hundred dollars max.. If you have no idea about coding then check out ShareTribe, it is great place to create a peer to peer marketplace website and they take of everything for you. You get to focus on building your customer base and they take care of everything that’s technical. Base plans start at $100 a month and this is definitely a great way to see your your product has a market fit without spending tens of thousands of dollars into something that hasn’t been validated yet. In addition to this, hiring university students in computer science is also a great cheap alternative as well.

(MVP is estimated to be $100/ month and 2–3 weeks of coding)

2.Groupon

the point

They first started off creating “the point” which was a platform for bringing people together for fundraising or boycotting a retailer. This platform failed and from this they created Groupon. They used a customized wordpress blog and didn’t invest any time in developing a coupon system or designing a new website. They just took whatever resources they had and made a MVP out of it. It definitely was not scalable but it did answer Groupon’s questions for them. To recreate this type of MVP a simple subscription to “WordPress” will work as well. Relaying information on your own customizable wordpress website is great and more importantly relatively cheap compared to investing in a dedicated server and a team maintaining the site.

3.Buffer

Buffer

What Buffer did for their MVP was create a landing page where they showed what it would do for potential users; if you were interested, you could sign up as a paying customer. If you still weren’t sure as to why you wouldn’t join, it you could still sign up for their email alerts and executives would reach out to to find out why you weren’t convinced to use the platform. Hundreds of people responded and the demand for Buffer was evident. This strategy helped give valuable feedback and find out what users really wanted out of the service. In today’s day and age creating a landing page to show potential users is very simple. The only real aspect of what is being invested is essentially your time to review and analyse what users are saying about your potential product or service.

You can use WordPress for $10–33 dollars a month and creating the static landing page will take a few days.

4.Zappos

Zappos

The founder began off by posting photos from the local shoe store and uploaded them to this website. He then checked if anyone was interested and if there was he would go to the store and buy the shoe and then sell it to the customer. Doing this overtime he found out there was indeed a need for this type of service and answered his question if his product would be accepted into the market. Only after that, he invested into infrastructure and inventory. Reselling is becoming very common in the 21st century and online commerce is almost everywhere around the world. To recreate this type of MVP it is very cheap, quick and easy. For example you can get a subscription on “Wix” for $5–10 dollars a month and use a premade template to upload photos onto your site. This process can take as little as a day. There are multiple website builders such as Wix, Shopify and SquareSpace and all with free and paid options as suited to your individual needs.

You can get this website running in 1 day and $5-$10/month on Wix

5.Twitter

Twttr

It was first used as an internal messaging system for Odeo employees and it picked up so much that the monthly bill for the messaging system went into the hundreds of dollars. They noticed the demand and prepared to take Twitter large scale and release Twitter publicly. Creating an MVP like this is more expensive than the other options available. Creating a whole messaging system for internal use requires some capital equipment which many startups may not be able to afford. However if you do have a reasonable number of assets and capital equipment then you should consider creating something for a specific group of people then expanding once you see the validation. Another way to overcome this issue is getting a developer on your team who can use today’s available tools to create a messaging system more efficiently and cheaply.

6.Zynga

Zynga

Zynga uses landing pages and adword MVP tests to direct available resources into developing projects. What this means is that they launch ads for games in existing games and if the user clicks on it and seems interested in the new game, then they would continue developing the new game and put more attention towards it. Farmville, Yoville, etc. are all games that were developed this way and based of users interests. This type of MVP is essentially placing ads whiles users are playing games or browsing through Zynga. Sending ads to your own users are virtually free but placing ads through the Google Search Engine costs about $0.58 per CPC.

Creating and launching your own ads take a few days.

7.Foursquare

Foursquare

Foursquare began with a single featured MVP which is essentially a version of the product where design and features were minimal. They started off with user check in and offering gamification rewards. Once they realized users like this they added more features and then tested those out. It was a very repetitive process but in the end it creates a product completely sculpted by users. Although it is still very pricey to outsource work in the creation of making an app as an MVP (50,000–1,000,0000) it is strongly advisable to have a experienced coder who has coded apps before. This saves on a lot of money and you make it completely customizable towards your needs. The whole app making process however takes a number of months. If you are still insistent on hiring a company to create your apps there are few who are great at that (247 Labs, Openxcell, etc.)

This MVP takes 3–4 months to build.

8.Pebble

Pebble

Pebble actually was actually able to get money from investors; however, over time, the money ran out and they needed funding to showcase their research in E Ink displays in watches. They really wanted to find out if people would be interested in a smartwatch that had an exceptional battery and could connect to your phone. They started a kickstarter which had a video explainer describing the product and reached their goal of $100,000 in 2 hours. At the end of the fundraising they had raised 10.2 million for the project and then finally they went to manufacture the product after the evident market demand. Kickstarter is a great way to really see if your product has a market fit without starting to mass produce the product. It’s free to launch on Kickstarter but there is one catch. You need to get all the funding you submitted for, if not you lose the funding you raised. In addition to this there will be a certain percentage kickstarter will take away from each successful fundraising effort. Furthermore, you need to have pictures and a live demonstration of your product in order for you to be valid for kickstarter. This whole process will take a number of days and it will be for. More specifically the Kickstarter team spends 30 hours reviewing your submission and will reply back in 2–3 business days.

If accepted, this costs $0 and 1–10 days to make the graphics/ video. (This does not include promotional campaigns.)

9.Spotify

Spotify

Spotify has a 4 step cycle when it comes to creating and testing out its MVP. “Think it, Build It, Ship it, Tweak it.” Spotify is made up of many small teams and they have many ideas, the way they get this idea validated is by first creating the MVP based off their idea. Then they release it to users very slowly and take in a mass amount of reviews from their MVP. After, they tweak the MVP based off the reviews and users’ thoughts. They used this very process to scale from bottom up. While Spotify’s MVP product was very expensive because of its strong software background, Spotify was still able to minimize costs by creating a complete roadmap of early and cheap prototypes. They only completely launched when baseline of quantity was met.

The next sign of traction I would like to focus upon is customer acquisition. How are you going to reach out to customers? What’s the cheapest way to reach them? How much customer growth have you had? Different traction channels works for a variety of startups and can cause a chain of explosive growth for your venture. A few examples of channels for traction is through targeting blogs and search engine marketing.

A) Targeting blogs is one of the most effective ways to reach out to your first wave of customers and create your presence.

  1. The first step is to find a blog which is in the similar field as your product or service and ensure there are an appropriate number of followers on that blog suited to your needs.
  2. Secondly, reach out and offer your product or service to its readership to develop and build traction. Popular startups such as Code Academy , Mint and Reddit all got their start by targeting blogs. Mint actually gained initial traction by reaching out to mid sized blogs and ensured the bloggers were a good fit for their service. The famous bloggers used to exemplify the service and showcase it while Mint gave them VIP service in return through the service. This essentially grew the customer database.
Search Engine Marketing

B) Another channel to gain traction is through “Search Engine Marketing.” This term refers to placing ads on search engines such as Google and Bing and because SEO is so broad it will be applicable to any startup. This whole SEM process works by finding high-potential keywords which leads to your website or business online. The page that a potential customer lands on is called a landing page, and this is one the most important pages on your website. Key SEM metrics to reflect upon are CTR and the CPC. CTR (Click-Through Rate) is the percentage of people who clicked on your ads compared to the amount of people who actually saw your ads. The CPC (Cost per Click) on the other hand is the amount it costs to buy a click on an advertisement. What this means is how much are you willing to pay to get a potential customer on your website.

www.ancestry.com

A good example of a company that used this method to generate traction is Inflection, this is the company behind Archives.com which was soon to be acquired by Ancestry. They spent over $100,000 a month and dedicated several employees to customer acquisition through this method. Obviously very early startups don’t have this type of resources, but Monahan’s input on SEO is that “even if you decide to send less than 5,000, do it, because you get to have an early base of customers and users and it will create a whole bunch of things that are important in terms of regular metrics.”

The harsh reality is that majority of startups fail, and investors know that, that’s why traction is very important to them and making sure there is a market for that product or service. A MVP (Minimum Viable Product is a great way to see whether or not a business opportunity exists and ensures your long run potential. There are many ways to gain traction and I have showed many examples of it from successful startups who have all taken very different routes. Ensure there is a product market fit and traction will follow. The more traction you have, the greater the chance to catch an eye of an investor and finding external investment. “Almost every failed startup has a product. What failed startups don’t have are enough customers”- Gabriel Weinberg (CEO/Founder of DuckDuckGo)

To learn more about examples of traction feel free to head on over to the article written by us on how letters of intent can increase your startup’s funding success.

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