Derisking Buckets: How to identify and deal with investor hesitations
'When should I raise money, and how much?'
This is a frustrating question to get - common, and impossible to answer with real confidence. Every business is different. Every investor is different.
But one way to think about this is with de-risking buckets.
Investors fund startups when their excitement outweighs their hesitation. Hesitation comes from perceived risk. And for a startup, we can group these risks into some buckets:
- Team risk: can these people work together to build a huge business?
- Technical risk: can this be built in a reasonable timeframe and with reasonable resources?
- User risk: will people actually want to use this?
- Revenue risk: will people actually pay for this?
- Scale risk: will people use or pay for this in large numbers?
- Partner risk: will any required strategic or distribution partners come on board?
- Customer risk: will they be able to sell to important customers?
- Funding risk: will anybody else fund this (esp seed stage, for many investors)?
I can think of four steps to deal with this:
1) Know which buckets matter for your business.
Consumer internet startups (Instagram etc) might need team, technical, user and user scale proof points to de-risk for investors. SaaS startups (Expensify etc) might need team, technical, partner, customer and revenue proof points to de-risk. Know what matters.
2) Know what’s impressive.
For Instagram, 50K users isn’t impressive, but for Expensify it may be. Calibrate what is impressive with related startups.
3) Derisk with proof points.
Can you hit some of these proof points before raising? Are you close to securing your first strategic partner? Closing the first 2 investors? Launching viral features? Don’t wait forever, but if you’re close to hitting important proof points, wait and weave that into your fundraising narrative.
4) Tell a credible story about how you’re going to de-risk in the next phase.
It’s often ok if you haven’t de-risked everything - no angel/venture investment is without risk. But tell a credible story about how you’re going to de-risk and validate the important buckets after the raise.
Before launching a fundraising push, think about these risk buckets, whether you’ve dealt with them, and what narrative you can build around how you’re going to tackle them next.
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