Disclaimer: I’ve never invested in anything but my own companies. I have a fair number of friends who are angel investors or professional VCs, and I read a lot of books on investing and startups, so take this advice for what it’s worth.
Because the person asking me questions probably doesn’t want me sharing the details of his new venture publicly, here’s the gist with heavy redacting:
For about the past year now, my friends and I have been developing our own learning management system. [details removed–but mostly talking about all the problems with an existing system his high school used] We set out to fix these issues in our system. We are focusing on [details removed].
We have just really started the serious programming, and we predict that our system will be complete by this mid summer. We were wondering if we could get some advice on how to find investors. As of now, there are five people on our team. All college students, and two of whom are excellent programmers. However, making this learning management system is going to be extremely complicated and we’re going to need a few more people. We wanted to know how we could go about talking to an investor to see if they would be interested in helping us out. [details removed] The school system which my high school is apart of is a major school system in [location removed], and they are our potential client. They told us that once the program is complete, they would like to sit down with us and go through the logistics of everything. I’ve met with them twice now, and they have stated that they are very impressed with what we’re trying to accomplish and that they find the system very attractive. Thank you so much for your time.
Allow me to play devil’s advocate. These are questions I would ask you if you were a potential investor:
1. What happens when you spend 2 years working on this (because programming projects always get bigger the more you work on them), spend $10M that you got from an investor, and then you go pitch the school district and they come back and say “Oh, we decided to go with a different system. Thanks!” What then?
2. Who are all your competitors? The one you mentioned might be terrible, but what about Instructure or the other 50 educational software packages out there? Have you used all of them? How will your software be 10x better? Twice as good isn’t good enough. If your software isn’t 10x better then it will be hard for you to get customers. If you ever say “We have no competition,” then you’re dead. No investor wants to put his money into a market that doesn’t exist, and if there is no competition you’re telling him there’s no market, otherwise someone would be going after it.
3. How familiar are you with the purchasing process for your type of product? Having the best product doesn’t guarantee you’ll get the sale, otherwise the school district probably wouldn’t have purchased the system they have. What politics are involved? What government regulations? Who do you have to please? Who on your team has sold software to school districts before?
4. What can you sell to a school district today, rather than developing for a year or something before having something ready to sell? If not today, how about in a month? Customer feedback is critical to developing good software, so you want to get your system in the hands of customers as quickly as possible and start getting that valuable feedback. What’s the fastest way to get there? What’s your MVP?
5. Who on your team has developed educational software before? If nobody, why should I believe you can pull it off? Why wouldn’t I take my investment to the team that has done it 4-5 times before?
6. What’s the ownership structure at your company? How do I know everyone is going to stick around and see things through? What are the team dynamics?
7. Have you read The Lean Startup, The Founders’ Dilemmas, Business Model Generation, Four Steps to the Epiphany, and Venture Deals? How about The Hard Thing About Hard Things as a reality check? Has everyone else on your team read these books? I wouldn’t invest in a company where the founding team hadn’t read all these.
If I were a potential investor I would ask at least these questions and more. You don’t need to answer them to me, but you need to be able to answer them to yourselves and to potential investors. If you don’t have solid answers to these questions, I don’t see you being able to attract investment dollars.
Now, even if you can answer all those questions, the key is to get customers to pay you before you try to get investors. The way to get investors, at a good valuation, is to show them “Look, we already have paying customers. But we could have 100x the number of paying customers if we could do more development on our software and invest in marketing.” Your company only becomes interesting as an investment when the investor can see a path to earning a return. If you can create a credible story that says “A tiny cash infusion will help us do XYZ which will make us be worth 100X as much, and your investment be worth 100x as much,” then that’s the bare minimum to attract attention, based on what I’ve seen.
But again, I’m not an investor, so take this advice for what it’s worth. Good luck!
Are you an actual investor? What do you agree or disagree with? What would you add?Liked it? Share it!