5 Things Startups Need to Do to Maximize Their First Funding Round
by Matt Howard
There was a time when investors would rush startups to market, but a shift has taken place during the past 20 years where the pace has slowed a bit. Now I find myself increasingly advising entrepreneurs to avoid putting a product to market before it is truly ready.
Seed funding and Series A rounds are intended to help startups tease out their big idea and begin laying the product development groundwork. But it seems best practices for customer validation/product management are being frequently tossed out the window. This is so counter-productive that it will almost certainly place the next funding round at risk and can sink the full enterprise.
Over 30 years of operational and investment experience, I have refined a list of five critical things entrepreneurs should do to maximize their first round of funding. Keep in mind that these goals don’t have to be addressed in a particular order.
Take a look at these five important things you should be doing now.
1. Let customers dictate products
While “fail forward fast” may be good self-improvement advice, it is a recipe for disaster in the world of business. At the same time, one can’t over-build the product and never take off from the runway. This is why the single most important goal at the outset is customer validation. Your time and reputation are your most important assets, and you don’t want to squander either of them on wrong ideas. Burning customer prospects can just about send you back to the Stone Age of productivity.
I often see product development charging ahead without best practices and customer validation, so you need to keep your developer-happy tendencies measured. Resist doing material coding until your prospective customers have weighed in and you have built a product requirements document (PRD) based on their input. You don’t want to build something that ends up requiring substantial alterations.
Enterprise and infrastructure startups in particular should identify about 20 broad-based prospective customers. The number of prospective customers for consumer startups needs to be exponentially higher. They all must be cultivated over multiple engagements, mined thoroughly, and consulted with regularly throughout the life of the business. Every conversation and interaction should produce gold nuggets of insight.
2. Borrow experience
While you are working on your product and business model, start assembling an advisory board. Members might include customers or prospects, former startup CEOs, consultants, and other qualified individuals who become a collection of experts at your company’s disposal. Collectively, your advisory board helps you stay customer-driven and focused, while it also lets you learn from mistakes others have already made and keeps you firmly grounded in market realities.
3. Hire the smartest people you can
Hiring is where first-time entrepreneurs often need the most help from their mentors, and getting the right people on board during these initial stages will immensely shape the company and product.
I like to advise founders to think of themselves as owners of an NFL team trying to hire talent. The NFL is so competitive that a single compromise can make a team non-competitive.
4. Counsel patience
Startups face tremendous odds. According to the U.S. Bureau of Labor Statistics and the Kauffman Foundation, about two-thirds of startups last less than three years, and only one-third make it to 10 years.
As we continue to examine failed companies, we find that some or most of these five important things were never achieved. Careful mentoring, planning, and hiring during the seed round stage are critical. Although taking a shortcut may save time now, it will only cause more pitfalls down the road.
5. Put the customer first
Whether you are in the early stages of developing your first product or preparing your company for an IPO, everything should be tested against your customers. During intense and chaotic times of building the business, sometimes we lose sight of the most basic principles. Chiefly, entrepreneurs must follow this critical commandment: “Thou shall always put the customer first.”
Matt Howard is a Managing Partner at Norwest Venture Partners (NVP).