No matter what stage your startup is in, you’ll always be looking for money.
Ben Lopez, a University of Utah alum and senior associate at Mercato, a growth-stage venture fund, hosted a Lassonde for Life workshop where he walked through what every founder should consider before jumping into a round.
Understand the funding ecosystem
“It’s important to know who is doing this investing,” Lopez said.
He envisions Utah’s funding ecosystem as a merry-go-round, with limited partners, venture capitalists, and private companies rotating capital.
“Limited partners, like foundations, endowments, and high net-worth individuals, give money to venture capital, who then invest in private companies,” he said. “Once those founders exit, they return money to the VCs, which then goes to the limited partners who continue the cycle.”
One investor’s attention can help boost your profile and possibly secure more or better funding.
“It’s a herd mentality sometimes,” Lopez said. “There’s a signaling effect that’s triggered by investment – if there’s a VC firm invested in you, it signals to the market that you’re good, you’re worth looking into.”
Realize investors know startups aren’t guaranteed to succeed
“There isn’t a perfect time to build a startup,” Lopez said. “And they can fail for a variety of reasons: lack of market demand, you run out of cash, poor team dynamics, product issues, and timing.”
Lopez pointed to the power law distribution.
“In this type of distribution, a subset of activity accounts for a large percentage of outcomes,” he said. “When it comes to entrepreneurship, this is a small number of investments that represent the majority of the returns.”
In a risky business, what is an investor looking for? A founder who “can improve the odds.”
Know what matters most
According to Lopez, this kind of founder knows what matters to investors and capitalizes on it.
“In the early stages, what investors care about the most is the executive team,” he said.
Lopez put half the importance on the impression that the founder and their teams make initially.
“After that, I’d say 20% is product, 10% unique value proposition, 10% current traction, and 5% for the business model,” he said.
The final 5% is for the target market – a hotly debated component that Lopez said probably doesn’t deserve so much commotion.
“You’ve probably heard that market is very important, but I’ve put less emphasis on it,” he said. “At the earliest stages of a startup, the market might not yet exist for what you’re building. You might be creating this market, or it might be on the cusp of being established. Think about Zoom and video calls – that market wasn’t really there before.”
Identify what you’re selling
“Every job is a sales job,” Lopez said. “You just need to know what you’re selling.”
Each stage of funding requires a different strategy.
“When you’re bootstrapping and pre-seed, you might not even have a product or service to show,” he said. “What you’re selling is the idea of being a first mover. You’re selling a vision.”
By the time you get to Series, you’re selling your abilities almost as much as the actual product or service.
“Investors want to see that you can make the transition, that you can go to market,” Lopez said. “That’s consistent with nearly every investor: the focus on you and your proficiency.”
