This great post was discovered in Marc Andreessen’s archives. It is still worth your time today. Pass it on to your fellow entrepreneurs.
Marc Andreessen is an American entrepreneur, investor, and software engineer. He is co-founder of Andreessen Horowitz ($4 billion venture capital firm, founded in 2009), a venture capital firm. He is the Board Director of Hewlett-Packard and also a Director of eBay, Facebook, and several private companies.
Until the risk in your startup is reduced to the point where investing in your startup doesn’t look terrifying, investors will continue to say “No” to you for a very long time.
Here are some common startup risks that makes it difficult for VC’s to say “Yes” to your funding request.
1. Founder risk — does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?
2. Market risk — is there a market for the product (using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?
3. Competition risk — are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?
4. Timing risk — is it too early? Is it too late?
5. Financing risk — after we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?
6. Marketing risk — will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition — the cost to acquire a customer, and the revenue that customer will generate — work?
7. Technology risk — can the product be built? Does it involve rocket science — or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?
8. Product risk — even assuming the product can in theory be built, can this team build it?
9. Hiring risk — what positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a high-scale web service will need a VP of Operations — will the founding team be able to hire a good one?
10. Location risk — where is the startup located? Can it hire the right talent in that location?
What you need to do is take a hard-headed look at each of these risks — and any others that are specific to your startup and its category — and put yourself in the VC’s shoes: what could this startup do to minimize or eliminate enough of these risks to make the company fundable?
Some ideas on reducing the risks:
Founder risk — the tough one. If you’re the technologist on a founding team with a business person, you have to consider the possibility that the VCs don’t think the business person is strong enough to be the founding CEO. Or vice versa, maybe they think the technologist isn’t strong enough to build the product. You may have to swap out one or more founders, and/or add one or more founders.
I put this one right up front because it can be a huge issue and the odds of someone being honest with you about it in the specific are not that high.
Market risk — you probably need to validate the market, at a practical level. Sometimes more detailed and analytical market research will solve the problem, but more often you actually need to go get some customers to demonstrate that the market exists. Preferably, paying customers. Or at least credible prospects who will talk to VCs to validate the market hypothesis.
Competition risk — is your differentiation really sharp enough? Rethink this one from the ground up. Lots of startups do not have strong enough differentiation out of the gate, even after they get funded. If you don’t have a really solid idea as to how you’re dramatically different from or advantaged over known and unknown competitors, you might not want to start a company in the first place.
Two additional points on competition risk that founders routinely screw up in VC pitches:
Never, ever say that you have no competitors. That signals naivety. Great markets draw competitors, and so if you really have no competition, you must not be in a great market. Even if you really believe you have no competitors, create a competitive landscape slide with adjacent companies in related market segments and be ready to talk crisply about how you are like and unlike those adjacent companies.
Timing risk — the only thing to do here is to make more progress, and demonstrate that you’re not too early or too late. Getting customers in the bag is the most valuable thing you can do on this one.
Financing risk — rethink very carefully how much money you will need to raise after this round of financing, and try to change the plan in plausible ways to require less money.
Marketing risk — first, make sure your differentiation is super-sharp, because without that, you probably won’t be able to stand out from the noise.
Then, model out your customer acquisition economics in detail and make sure that you can show how you’ll get more revenue from a customer than it will cost in sales and marketing expense to acquire that customer. This is a common problem for startups pursuing the small business market, for example.
If it turns out you need a lot of money in absolute terms for marketing, look for alternate approaches — perhaps guerilla marketing, or some form of virality.
Technology risk — there’s only one way around this, which is to build the product, or at least get it to beta, and then raise money.
Product risk — same answer — build it.
Hiring risk — the best way to address this is to figure out which position/positions the VCs are worried about, and add it/them to the founding team. This will mean additional dilution for you, but it’s probably the only way to solve the problem.
Location risk — this is the one you’re really not going to like. If you’re not in a major center of entrepreneurialism and you’re having trouble raising money, you probably need to move. There’s a reason why most films get made in Los Angeles, and there’s a reason most venture-backed US tech startups happen in Silicon Valley and handful of other places — that’s where the money is. You can start a company wherever you want, but you may not be able to get it funded there.
Try to raise angel money, or bootstrap off of initial customers or consulting contracts, or work on it after hours while keeping your current job, or quit your job and live off of credit cards for a while. Lots of entrepreneurs have done these things and succeeded — and of course, many have failed.
Nobody said this would be easy.
The most valuable thing you can do is actually build your product. When in doubt, focus on that.
The next most valuable thing you can do is get customers — or, for a consumer Internet service, establish a pattern of page view growth.