“But I Got Contracts”

A lot of times, entrepreneurs use this approach in order to raise money from VCs.  It goes something like this from their perspective.

  1.  I have potential contracts with big customers.
  2.  I need the funding to execute on those contracts.
  3.  I can’t launch without the funding.
  4.  Those customers will not do business with me without the funding.

Of course, it’s a massive industry in the multi-billions and the VC has a chance to get in at the ground floor.

Flip it.  Here is what the VC is thinking.

  1.  I have to lock up a bunch of money in an unproven business for 10 years or more.
  2.  I will automatically limit what I can invest in since if another competitor comes along in your business I will have to pass since I am already invested.
  3. Why don’t the customers fund the business if it’s so compelling?
  4.  Why isn’t this business on a small scale so we can see how it really works in the wild?

Of course, it depends.  I am generalizing. There are some businesses that have some sort of compelling reason to fund them before launch.

  • Maybe it’s a medical device business or a drug business.
  • Maybe it’s something highly technical with a lot of IP or a different strategy or business model that will survive the trials and tribulations of the startup journey.
  • Maybe the founder is so compelling with a great track record of previous success in startups so you have a modicum of confidence that they can execute since they already have been down the path.

It’s really hard to invest off a spreadsheet.  I read the book Do More Faster by Brad Feld years ago and I think that the lessons elucidated in it still hold true today.

I have funded stuff pre-launch.  The road was always rocky.  When the small 12 ft dinghy pulls up to the aircraft carrier and says “I can solve your problems” they often get flipped over by the wake.  When you go whale hunting you better have a big boat.  Once you harpoon one, you better be able to control and land it.

Launch.  Get your product live.  Even if it’s small scale.  Learn, adapt, listen to the customer.  As the old Devo song “Whip It” says, “go forward, move ahead, whip it.” If you haven’t heard it, it’s a great song for entrepreneurs.