By Jim Cossler
YOUNGSTOWN, Ohio – In my almost quarter-century of working with startups, I have always found each to have its own singular set of challenges to overcome.
That said, there is one challenge that every startup faces. And it is typically the most difficult one. That challenge is funding. And it is a time- consuming, arduous, frustrating and, very often, heartbreaking process.
Let me see if I can better prepare founders for it.
All investors, no matter what type, look at startup funding through a careful evaluation of several critical parts of the whole:
The first is an examination of the products or services that the startup intends to offer and whether there is a market.
For example, in evaluating a B2B startup, for a business selling a product or service to another business, investors want to see hard data that answer the following questions:
• Does the product or service solve a real problem?
• Does the marketplace agree that it is a problem?
• Does the marketplace agree that it is a problem that has remained unsolved or just partially unsolved?
• Does the marketplace think it is important for the problem to be solved?
• Does the marketplace agree that the startup’s solution solves the problem and is willing to pay for it?
In business to consumer (B2C) startups, just change the word “problem” to “need.” Again, investors look for hard data that confirm there is a verifiable and obtainable market for the startup’s products or services.
The second focus of an investor’s examination is the startup’s go-to- market strategy.
Founders need to disabuse themselves of “If we build it, they will come.” They will not.
Investors are going to be focused during this examination on the CAC (Customer Acquisition Cost) metric. This is where an investor will see how efficient your process is at “closing the sale.”
And this is where you need to showcase your digital-marketing strategy.
Digital technology has transformed everything about marketing. It has driven customer acquisition costs to a tiny fraction of traditional marketing and advertising methods.
In fact, I am convinced you can build a $20 million enterprise today with a ridiculously small digital budget. But you will need a world-class strategy that is executed perfectly.
That is the strategy investors will look for.
Don’t have a digital-marketing expert on your team? I strongly advise you to find one. Because that is what you will need to succeed.
After the investor is convinced that you have an acceptable CAC expense- to-income ratio, the next metric they look at is LTV. That is, what is the lifetime value, expressed in total revenue, of each cost efficiently acquired customer?
What is your strategy for making your company “sticky” with your customers?
What is your strategy for recurring sales? What is your strategy for upselling your customers?
What is your strategy to evangelize your current customers to bring you new customers?
Now we come to the toughest part.
Investors are going to spend more time evaluating your team than any other aspect of your business. Sure, brilliant ideas are important. But here is what investors know for certain: Even the best ideas will not execute by themselves. Teams must do it.
Smart money will always invest in an A+ team with a B- idea before even considering investing in an A+ idea with a B- team.
The reason is simple. Smart money knows that with its investment, its network and its resources, an A+ team can transform a B- idea into an A+ one.
It also knows the reverse is almost never true.
And that is why solo founders rarely succeed. They simply do not have all the requisite skills needed. If you are thinking of a startup, think carefully about the team and the skill sets you need to succeed.
I hope this has been of help for all the would-be founders out there. But there is also a great deal I have left out of this 750-word length column. And there are nuances to almost everything I have written.
Here is the one takeaway I have learned about startups over the last nearly 25 years. They are a whole lot easier than people imagine.
Seriously. Especially if you have the right help available, like the Youngstown Business Incubator. And if you are willing to reach out and ask for it.
Have a startup idea?
Let’s talk. You can reach me at jcossler@ybi.org.