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!
Completely agree with the need to find s shorter solution to getting customers, but my favorite question of strategy is to figure out how to have an unfair advantage. These can come in various forms and I recommend reading Zero to One by Peter Thiel to understand why competing head on isn’t s good idea. Great dialogue. Keep it going
I am going to take a slightly different approach here. As I read through the question section, the heart of the request seems to be found in the sentence: “We wanted to know how we could go about talking to an investor to see if they would be interested in helping us out.” I interpret this to mean – we think we need money, how do find and convince an investor to give us some. Here are my thoughts:
1. Have confidence/conviction: this sentence denotes uncertainty and lack of confidence. It is long, uses weasel words like “could” and “would”. Its long and relatively unspecific. How about something like, “We need to raise $X to achieve Y milestone. How can we convince an investor to give us the money we need?” The point here is not to critique their writing, but rather to point out that an investor will immediately read between the lines and see the lack of conviction and confidence in the company/product/opportunity. If you lack confidence in your own company, how can you expect an investor to have enough confidence in you to invest? Be confident in your and your team’s ability to succeed.
2. Be prepared: Confidence requires preparation. Do you have the right team? Do you know the market pain inside and out? Do you know how to access your target market? How are you better or positioned relative to the competition? How are you making the competition irrelevant? I could go on and on. Your business will change a thousand times, but you should still know it inside and out and have a plan for handling all of the current challenges and a realistic assessment of future challenges.
3. Know your stage/company type: There are lots of different types of companies and just as many forms of financing them. Know what type of company you are and the type of financing that is available to you. Each type of financing has it’s own risk and reward profile. This is usually one of the first things I think about when meeting a company – what type of investor is going to find this type of company interesting given its risk reward profile.
4. Reduce Risk: For investors, everything is ultimately about risk and reward. The more you can do to reduce the risk, the more likely they are to invest and the better terms you will get. There are lots of risks in a startup and you should focus on reducing the ones you can and communicating how those risks are mitigated when pitching an investor. You have the right team, the market is huge, customers are begging to pay you for your product, you have paying customers, you have a proprietary solution others can’t copy, why now is the right time, etc.
5. Define the reward: Reducing risk is not enough, you also need to effectively communicate the possible reward. The reward should be well matched to the expectations of the investor. A bank wants to get paid back principal and interest whereas a VC wants a huge exit someday. Make sure you can credibly assure them that the reward they want is possible/likely.
6. Blocking and tackling: This section could be a whole book. Make sure your entity is set up correctly, prepare pitch materials, get intros to investors, etc. However, if you follow the prior steps, the rest is fairly straight forward (though not necessarily easy). One tip on getting in front of VCs – get an intro from one of their other portfolio company CEOs. Then tell them the story you put together from going through steps 1-5.
Anyways, just my two cents as an early investor in Instructure.