De-risking yourself for pre-seed

4 minute read

There are a couple of important decisions an entrepreneur should make before crossing the chasm from idea to implementation one should ask, namely what type of entrepreneur are you for this idea, and which level of customers (b2b/b2c) do you need? This article will assume you’re an iterative (customer prioritized) entrepreneur, as inventing and innovating take a lot of privlege, so these options are limited to select few. This will also assume b2b customers, as b2c is challenging in the iterative space.

At founders coffee, my Decision Tree co-founder and I have spent at least 6 months vigerously debating what can be done to improve success on the entrepreneurial front-end, and this article explains what I’ve come up with.

Everyone agrees with the Steve Blank and Eric Reis mantra of get out of the office and talk to the customers, and I argue this is not only the most important thing, the (potential) customers need to be willing to pull money out of their pocket right there and then, or at least sign an MOU (memorandum of understanding), or in a worst case, an LOI (letter of intent). This is necessary for validating how good your idea is, otherwise your champions have no skin in the game, and you’re very likely going to be taking feedback from “tire kickers” who are just leading you on to think they’ll maybe be a customer some day. Your family and friends have no risk in telling you your idea is great, as they have no skin in the game, so never trust the feedback of people not willing to pay for the product or service, they are dangerously distracting.

If you find potential customers, who are willing to pay, they’re going to give you the time you need to go deeper into the next stage, which is identifying the pain point, the job to be done, and/or answering the 5 whys. I speculate the ideal range is finding a pain point amongst 5-7 potential customers, to ensure you’re not solving a problem for one company – unless that one company is willing to pay you to solve their problem, and you prepare the business model to add other customers once you’ve bootstrapped yourself to a position to do that.

I suggest there is nothing more important than your first half-a-dozen customers. If it helps, consider that your ideas sucks until you can find 6 businesses willing to pay for it. Every time you share your idea, you must observe why you haven’t articulated your idea in a way that the person is eagerly and emotionally asking you to take their money.

A business idea only becomes a great idea when you have paying customers, not because people tell you it’s great.

This is the hardest part of moving outside of ideation – is finding people with a pain point, their having the money to pay to resolve the pain point, and their choosing you to be able to solve that for them – and that is based on the trust they have with your leadership team.

The other big thing to be aware of, that every level of investor examines under a maginifying glass – and pre-seed investors offer the same level of scrutiny if not more, is the due diligence around the team. Investing pre-seed as an investor is mostly about the team – investors are betting on the right horse. So as a founder or co-founder you need to ensure you can demonstrate a pattern or likeliness of success in terms of your leadership (team) both in terms of sales/closing (MBA type) and the ability to execute or operationalize (technical co-founder). An investor wants to know the co-founders can pull off both of these on their own – any other role(s) required to get to product-market fit are a notable busines risk.

There are a lot of other factors involved, but I’m focused on repeatable processes and metrics that minimize the risk for entrepreneurs, or more importantly, improve their odds of success. On the investment side, I want to help de-risk those considering pre-seed investment – the first $50k-200k investment where there is not yet product-market fit, and perhaps not even a working product or paying customer.

While we have a Decision Tree template for evaluating the odds of success at the beginning of one’s startup journey, what I’m looking for now is investors willing to pay for access to a SaaS app that has entrepreneurs documenting each of these success criteria, which helps you as an investor improve your odds in picking the right “horse” (team). Each investor in your shared pool/fund can add their own success criteria, and by using our app you can see the gaps in value alignment of success criteria amongst your co-investors that no other app I’m aware of, can demonstrate.

There are a lot of other factors that investors look for in a startup, such as impact, total addressable market (TAM), time to market, etc, but I’m focused on prioritizing the most important factors towards increasing success in making it from ideation to product-market fit. Minimizing the odds in the lottery ticket of entrepreneurship is worth more exploration. This is a hard problem that I’ve not yet seen solved well, by anyone. We have accelerators, incubators, and unlimited books offering the aspiring entrepreur improved success, but very few are able to backup their hypothesis with more measurable success than their competitors. I’m happy to continue the conversation on Twitter or via email, if you have experience or observations of minimizing the risk between ideation and product market fit.

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