Originally published at StartupCEOreflections.com by Jen Baird, CEO of Ann Arbor-based Fifth Eye and serial entrepreneur with nearly two decades of experience founding and leading high potential startups.
Building an investable business takes more time and effort than most people realize. Too often, I see people jumping the gun and trying to fundraise too early.
Just last week, I caught up for a couple of hours with a friend who is forging a luxury travel business in the crucible of COVID-19. He and his partner have made impressive progress since I had dinner with them just a few months ago. Honestly, it was exciting to see something good coming out of the impact of the pandemic! Let me explain.
Back in the time before COVID-19, my friend and his partner invited me to dinner to talk about their business concept. We discussed their ideas, and I shared some fundraising tips. I remember walking away with the impression that there were some great elements of potential there, but that everything was still a bit too soft, too nebulous, too unformed for real fundraising. It was like the ingredients for a cake were in the bowl, but not yet whipped into a batter and baked.
Baking the Cake
Now, as I caught up with my friend over Zoom, a silver lining of COVID-19 became apparent. As the stock market crashed, the country paused, and investors battened down the hatches in the spring of 2020, my friend and his partner wisely stopped trying to raise money and, for a few months, burrowed deeply into designing their business from the ground up.
With the little money they had secured from friends and family before the pandemic hit, they developed their software application MVP, designed an initial product offering, enlisted manufacturing partners, came to terms with top-notch future team members, crystalized their business model and financial projections, and developed a clear and compelling story of their business. By focusing all their energy on doing the difficult early planning and development work for their new company, with a few months of incredible focus, they built something. Something that was now baked enough to be credible in the eyes of potential investors.
Eating the Cake
They are now well on their way to securing the funding to hire the rest of their team, launch their software product, and begin manufacturing and sale of their physical products. I expect they will accomplish all of that within the next year. The momentum they are now experiencing has everything to do with getting their story sufficiently well-developed before they began raising money in earnest.
Reflections on the Importance and Process of Cake Baking
While it is impossible to know what might have happened under other circumstances, I do know that it would have been hard to stop putting fundraising feelers out (which quickly becomes a massive time sink when you are not quite ready) to just work on the core business. As I launched multiple startups, I learned that for me, getting from the initial business concept to something developed enough to raise seed money usually takes me and whatever team I have about nine months. The analogy to making a baby is not lost on me!
It is incredibly tempting to start pouring energy into fundraising at the earliest stages. Still, I have learned that the founding team’s initial months are often better spent getting the cake baked enough to be a tasty treat for potential investors.
There is a myth with just enough outlier examples to be credible of an idea sketched on a napkin getting funded. While this is more possible for CEOs with a successful track record, my experience is that most investors are much more demanding. They are looking for more developed opportunities. This is even more true for first-time startup CEOs who have more to prove.
At the genesis of a startup, cake baking becomes a question of putting together the necessary ingredients for a successful company in early incarnations, then adding enough evidence to show potential investors that the business concept has potential for success. For most companies, this includes developing prototypes for the product, validating the unmet need through customer discovery, estimating possible market size, designing a business model, securing licenses and other intellectual property elements, formulating operational plans and recruiting key team members, establishing a solid legal infrastructure, and wrapping it all together with credible financial projections.
To get a startup baked for fundraising, you must get to a minimum viable solution for each necessary element in a way that integrates into a future successful whole. Then go fundraise.