Unless your last name begins with “Karim”, “Ronning”, or “Lawson”, et. al. (Minnesota tech masters of the universe for those of you who need to brush up on your local tech lore) then you are going to need to prove yourself and tech start-up to would be early stage tech investors – aka “Angels”.
Part of proving your start-up is demonstrating the potential for a meaningful exit (what all investors deep down are looking for) by having a solid base of facts which can be used to establish the foundation of your early-stage company. The best way to come across as credible is to present key operating metrics, financial measures and milestones to prove you have what it takes to be a Minnesota tech superstar.
A few key recommendations on facts you should be prepare to show a potential investor which will dramatically improve your chances of scoring the early stage investment you are looking for:
Revenue Growth: In this market, it is highly unlikely anyone is going to invest seed capital in your tech business unless you can show a revenue growth curve that is trending up in a meaningful way. It isn’t so important that you are profitable yet, but early stage investors want to see proof in your ability to execute, and that customers are buying into whatever it is that you are selling.
Market Size: Many investors will pass on a deal if they see you have not done your diligence on the market you are entering. Investors are generally smart (although usually pretty clueless when it comes to being tactful) and they know that market size approximations are never going to be completely accurate. The point is you have some sense of what you are getting into.
Bottom-Up Financial Analysis: It is far better for an investor to see you are building a financial model from the ground up, using your key assumptions to build out a plan, versus top down. If you use some basic formula in a spreadsheet which shows linear growth, you probably don’t know what you are getting yourself into with your tech start-up.
Sizable User Base/Customer Base: For ad-supported web businesses, you’ll get much better terms if you give your pitch after you’ve already acquired your first 1,000,000 users and you are still showing a nice growth rate. For enterprise or retail tech businesses, you’ll want to be able to show a reasonable cluster of customers with steady (or even better, exponential) growth, and proven distribution channels. As a fellow Minnesota tech entrepreneur and mentor of mine once told me, “it’s all about distribution channels”.
Respected Board Advisors: Another key milestone which definitely establishes credibility for an early stage tech entrepreneur is having an outstanding set of board advisors. Many top-tier tech superstars are too busy with their own dreams to formally sit on your board, but many will volunteer to be a board advisor for you, allowing you to occasionally check in with them and leverage their professional networks. This is ideal when you are searching for the all important referral to angels. You will likely fail with angels if you are not working off referrals.
At Least One Partner: A very basic but important milestone… If you can’t convince at least one other entrepreneur to join your tech start-up, then what does that say? If there was no Page, would there be a Brin in Google? Nope. Every great tech start-up had at least two founders.
Your Own Capital: Finally, show that you’ve put your own skin in the game. Investors want to see that you’ve mortgaged your house, worked two full-time jobs, and poured nearly all of your money (and your heart and soul) into your blossoming tech start-up. There are a lot of smart people in the tech industry, and being smart is not enough without tenacity.
Got any other key measures, metrics, or milestones to add? Post them in the comments!