For many Startups, a major challenge is to attract investors and raise funding. Investors would rather like to invest into an established startup that has some proven track record than to invest in a potentially high-risk startup where the payback is also grim. Here comes the lean startup methodology that can help you reduce the risk of losing money and attract investors with a better chance of getting attention.
There are times when you are convinced that your idea has huge potential, is solving an existing problem and is a potential success soon. Investors on the other hand would typically juggle between potential risk v/s upside! If the potential earning is low or the risk is high they would rather invest their monies elsewhere.
Let’s understand how a Lean Startup model and actually reduce the potential risk involved and what possible questions an investor might ask.
The Lean Startup
Lean Startup isn’t about being cheap [but is about] being less wasteful & still doing things that are big. The model has gained great attention over few years. It favours experimentation over planning, mitigates the risk of guessing and iterates development rather than the traditional large scale water-fall projects. It’s about encouraging to create a “Minimum Viable Product”, testing it with the real-world customers and then basis the learnings – developing the business model, products and services. Investors love these kinds of Startups.
What do you want from an investor?
From fresh infusion of capital to experience, contacts, customers and collective knowledge – Investor brings everything to the table that can help you take that big leap. Startup Entrepreneur may resolve if you want an active or passive investor, stake and exit strategy that you may want to suggest the investor.
Pitching for Investors
Identify the potential investors you would like to approach. Understand the spaces they invest in before reaching out. Research them on the internet and scan their social media for clues. Look at their past investments. Try and find out if there is there a commonality that you can use to your advantage? When you are ready to ready – You can start by pitching your ideas and plans to the ones at the bottommost and study what’s expected of you and take interest in what kinds of questions they ask. Trust me your initial meetings will blow you off. You will have all the possible elements of surprises and an opportunity to improvise on your pitch presentation before you are ready to invite the most appropriate investor that’s ready for the nuptial.
Prove your Potential
The Lean Startup methodology advocates you to build your business model by testing a set of hypotheses. You build authenticated erudition a step by step by documentation of your experiments, which you can then build into your business model. But then it’s all about numbers and the potential investor would be keen to understand the following:
- Customer Acquisition Cost (CAC): How much does it cost to acquire a new customer. This can be documented through the initial product/market fit analysis. You need to apprise how big your average marketing and sales spending is per customer. Also you should be able to envisage development in CAC going forward with a target CAC.
- Lifetime Customer Value (LCV): The estimated earning you will make from one customer during the whole duration of your relationship. Research churn data from your sector & prove the average revenue & cost for your delivery.
- Your ability to scale: If you can prove that the LCV is considerably higher than the CAC the next question will be if you can scale your business. If yes, numbers to explain the same.
- And the rest of questions: I’m sure you will have to handle a whole lot of objections the potential investors may have. You tell to have that convincing story behind your startup. Be ready with questions like why you started, what problem you are trying to solve, how are you making money, what’s your unique competitive advantage to who’s your competition and who all are part of the team. Be ready to explain why you will be successful.
The Lean Startup Model allows your business model to be tested and proven with a significantly small investments and reduced risks. Largely investors don’t like to take a lot of risk and that’s one reason why they love the Lead Startup Methodology.
Bootstrapping helps! Self-finance your startup and provide evidence on your CAC, LCV and stability. By doing so you have not only reduced the risk of failure but also inspire investors to invest in your startup and help you scale your business model.
The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses is a book by Eric Ries describing his proposed lean startup strategy for startup companies.