Lean startup · Fundraising

As a company that takes a Lean Startup approach, what fundraising collateral should I put together?

Ben Provan Cofounder at OpenDoor, MBA, MechE

January 6th, 2015

My startup takes a lean approach, focusing on experiments and validated learning to evolve our product and work towards our vision. Standard business plans and pitch decks with 5 year projections don't really fit for us, and aren't how we manage ourselves internally at this point. I'm wondering what experience people have had fundraising and using alternative frameworks / approaches? Any resources or outlines would be helpful as well. Thanks!

Near Privman Googler, Startup Advisor

January 6th, 2015

I'll add a small point to the discussion: whether or not you have a detailed Q by Q plan for the next 5 years, make sure you can at least explain what you're going to do with the money you're asking for right now. If you're only asking for $200K and can explain where this money is going to go (and where it's going to get you before you have to go asking for money again), it might be enough for some investors. If you can't explain where a sum is going, perhaps you should be asking for less, just make sure you can reasonably make enough progress with it to have a higher valuation on the next round.

Sanjeev Rao

January 6th, 2015

I follow Lean Startup and similar concepts in my own ventures.

That said, investors are interested in making sure they get their money back several fold. At best, they will want to know how Lean Startup will accomplish that, but I'd do you a disservice if I did not warn you that some people, especially money people, look at the lack of a 5 year plan as a lack of foresight and business understanding, as incorrect as that may be. 

So, challenge yourself with this exercise: paint the investor a picture of a few ways where you could make money and make sure they are well researched and cannot be shot down. Then, continue this thought exercise and account for costs and cash flow. The point is to show that you know how to run a business, not just how to build a product. Show the investors the level of detail that gives them that warm fuzzy feeling that their money has a good chance of getting paid back many-fold in a matter of years. 

Investors may be current or prior entrepreneurs or executives and some might have good or bad experiences with Lean Startup as they implemented it. Best to be prepared to talk in the language investors speak. 


Michael Libes Serial Entrepreneur, Mentor, Advisor, and Educator

January 6th, 2015

The reality is that the Lean philosophy has permeated entrepreneurs, and its outcome is well-appreciated by investors, but in terms of pitching, has yet to make any difference. They still want to see financial projections, a road map, etc., not a list of validated learnings. While this may feel stupid, the underlying reason is that the popular investment thesis has not changed in decades. - A huge opportunity - A high growth business plan - A great team to execute Lean lets the team prove that plan on less money in less time with less risk. Investors like less risk. Meanwhile, 99.99% of investors are not going to invest until the market risk is greatly reduced, and at that point, the next milestone for investable companies is a high growth model, with associated funding, and an associated set of projections. Remember, Eric said every startup has TWO HYPOTHESES to prove. 1. Value Hypothesis - Someone cares enough to buy your product/service 2. Growth Hypothesis - Many customers care From your question, it sounds like at best you have proven #1. For #2, investors expect you to put some expectations down on a spreadsheet on how much growth there will be. They want to ensure their money will be spent toward growth, and want to understand how much growth is needed before no more funding is required. *Luni* Founder & Managing Director of *Fledge*, the conscious company accelerator - fledge.co Creator & Global Director of *Kick*, our pre-accelerator - kickincubator.com Entrepreneur in Residence at *Pinchot*, a university for the common good - pinchot.edu Author of *The Next Step*: Guiding you from idea to startup - lunarmobiscuit.com

Michael Brill Technology startup exec focused on AI-driven products

January 6th, 2015

Great advice Sanjeev!

Nothing sucks more than being in an investor pitch, getting a basic question about the economics of your business and not having an answer... except maybe working on something for a year only to realize that the math doesn't work. Vision is easy; iterating is also pretty easy; thinking through what connects those two is hard. Do the hard work. 

As an aside, I think in 2015 "lean" is officially a throwaway word - 100% of companies pitch themselves as carbon-based, GAAP-compliant and Lean. ;-)

Mathieson Sterling Senior Software Engineer at Apprenda

January 6th, 2015

To me they're two different things - Lean is how you work, but what you're working to, the vision, must be there.  If you don't have a product, you don't have a company.  And if you can't put a business plan together, it sounds like the product might not be there yet?

Near Privman Googler, Startup Advisor

January 7th, 2015

I completely agree that showing your ability to understand the market, make plans, identify risks etc. is super important. For a seed / mezzanine round, investors are primarily investing in the team (they know everything else is likely to change drastically), so they want to know about your capabilities. I pointed out that plans should have as long a life-time as the current investment as a minimum. You should definitely put together a collateral that shows off your insights and vision.
Good luck!

Ben Provan Cofounder at OpenDoor, MBA, MechE

January 7th, 2015

Thanks everyone for the responses - incredibly valuable & helpful.  

@Near - sounds like a clear product & company vision, 18 month roadmap with specific milestones and budget (that justifies the investment) could be a good starting point.  Our product is far enough along that we can make financial projections, however it is highly likely that we will be adding new offerings & revenue streams that are not predictable at this point. But that being said, I see the value in just showing that we are capable of making pro formas and financial projections, even if there is quite a degree of uncertainty how the future will play out. I also see that value in showing the overall market potential.

@Luni - extremely helpful as well. We can definitely make predictions as to how the funding will fuel growth with our currently business model, and you are correct that the growth hypothesis is the area in which we are seeking investment to prove out.  I think framing it in this way to investors will tell a clearer story and show what risks we've taken off the table thus far, as well as those that remain.

Anonymous

January 6th, 2015

Investors do not make sure they get their money back, at least in Silicon Valley. They want to have a small chance of getting a huge return on investment. For instance, for angel rounds (first round, between 100k to 1m), they know if they invest in 20 companies, 19 will fail and will not return a single dollar. But that 20th has the potential of returning 20x-100x, so then it is worth their investment.

So focus on your potential, total market size is really important. Besides that, no matter what round you are in, show traction, that you have an excellent and dedicated team and that you know how to run a business.

Any investor that asks for a 5 year business plan while you are in your first year of business, you should run away from.

Michael Brill Technology startup exec focused on AI-driven products

January 6th, 2015

Dirk, I really don't think a 5 year financial plan is a red flag. It shows whether you're thinking big or small, and how well you understand the value you provide... in most cases. Nobody cares about accuracy, but simply whether you're thinking big or deep enough. Not needed in all cases, but imho always worth a half-day's effort.