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5 Tips from the Trenches: You think you need investment? What you actually need is revenue says Mentor Heath Milligan

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by Heath Milligan

Through mentoring at the Lightning Lab accelerator in Wellington, helping to runStartup Weekend Auckland 2013 (May 10-12, and Nov 22-24), and in our own investment and consulting activities, I meet a lot of energetic and smart entrepreneurs who are focussing on getting seed capital funding or angel investment to go and execute on their idea.

Don’t get me wrong, I admire them for their tenacity and drive — Character is a large part of the decision to invest in this person (and their idea) or not. What gets me is that all too often there’s very little executed to date, so we’re basically talking at the idea stage with a correspondingly low valuation.  Plus, we then have to look into previous work history to see if this person can execute.

There seems to be a pattern emerging in the learnings I’ve been sharing this year, and I’ll sum it up here, as I want more people to succeed in launching their business ideas and creating viable companies, particularly exporting kiwi technologies, products & services to paying customers overseas.

You think you need investment?  What you actually need is revenue.

  • Often I see kiwi entrepreneurs that are engrossed in their solution, rather than the problem, the size of the market, and their sales & marketing channel to acquire the customers. Whereas, pitching the commercial opportunity is what I’ve seen a lot more of in the San Francisco bay area startup scene. Tell this part of the story, and potential investors will take you more seriously. Disclosure: I too have been guilty of neglecting this part in the past, to my detriment.
  • Paying customers are the best form of validation for both your idea and your ability to execute. (See Steve Blank’s free video class on Udacity – the Lean Startup principles are worth thinking about)
  • If you ask customers to pay a fair value for the setup of their trialdeployment especially when it comes complex enterprise systems, you can fund the development of your solution from revenues rather than investors’ funds. (What’s the worst that can happen? They can say no, so you enter a negotiation discussion with the aim of achieving a mutually beneficial outcome… you’re not trying to pull one over on anybody!) Neil Richardson made this comment about Endace‘s growth in the early days in his speech at the SODA Innes 48hr business startup competition in Hamilton recently.  The customer in that case was AT&T.
  • If you get enough of those customers paying you, then you won’t need cash from investors, or at least you’ll be in a better negotiating position with them. Some angel investors mayn’t be very happy that I share this advice. Strategic investors will respect you for the progress you’ve made, and bring more than cash to the table: partner/customer relationships, market access, complementary products/services, or people/skills to round-out your minimum viable team.
  • This can be transformational to your journey as a startup entrepreneur, as you’ll retain more ownership of your company, and without an investor as a ‘boss’ breathing down your neck, you’ll keep more of the creative autonomy that many entrepreneurs crave.  (Though, if you want ‘control’ please readThe Partnership Charter and reflect on why you want that.)