Prototyping · Fundraising

Proof of concept requirement prior to raising seed?

Lucia Guh-Siesel CEO & Founder, Bandalou

May 19th, 2014

We have a prototype product in e-commerce and had plans to begin fundraising with that prototype.  However, I have heard that investors will require some proof of concept data before they invest, i.e. a beta or mini-launch that shows customer adoption.  I understand that investors requesting POC are trying to de-risk their investment, but I actually think that such efforts would increase their investment risk and be detrimental to the business because the product would not be launched improperly and we would lose competitive advantages (along with the idea that the data may not be valid because of a small sampling size).

What experience has this group had with such requirements prior to funding?  Was this something commonly held or depends on the investor?  Your collective wisdom appreciated.

Thanks,
Lucia

Alan Schunemann CTO and Co-founder of eTelemetry

May 20th, 2014

If your idea is so easily replicated that you fear losing first mover competitive advantage by rolling out a beta, then you probably need to reassess its viability as a business. You could also do a friends and family soft launch to get feedback and show viability.

Any e-commerce/membership site/app needs to demonstrate its interest across a large enough member/user base that it's interesting to investors, and you as an owner, for that matter. By not having the initial "pop" number of users, you are asking the investors (and yourself) to bet that it has legs with a large enough audience to be a viable business. Are you so sure it's such a good idea that it will have mass appeal? If so, then why do you need investor money? With today's social media, a viral launch is inexpensive, so requiring funding to advertise and preload a site launch seems unnecessary. Launch it - grow it, and go after investor money to scale it, not to start it.

Anonymous

May 25th, 2014

I have been down this path a number of times, and as a resident of Japan, I live in a conservative investing environment. My modus operandi is to do a friends and family round first, and get the proof-of-concept off the ground first. This not only validates to your angels and other seed round professionals that the product works as advertised, but more importantly it lets you fine-tune it or even pivot to something else entirely if things don't work out.

My experience has been that a working product will bring you about 4-5 times higher valuation and 2-3 times the level of investment interest than a raw idea will. Now, I suppose if you were famous and you had an team with all the right credentials, ideas alone are OK. But as a normal hard-working imaginative entrepreneur, I believe in lowering the hurdles for investors as much as possible.

Anthony Zeoli Digital Strategy and WordPress Consultant and Trainer

May 19th, 2014

Hi Lucia,

Generally speaking, a lot of Angel's are risk averse and yes, they want to see consumer traction. However, there are investors who will invest in a concept, it's the strategy is very well thought out and the go-to-market is sound. I wouldn't let not having a beta stop you from pitching your concept. There may be someone out there that sits in your vertical that will value the proof-of-concept. It's far more rare, but possible. I just met a group from DC with a music project that was funded by an angel with a very rudimentary beta and his funds have helped to further build out the platform. Now, they need to convince their market to use the service and that's going to be where this thing is do or die. If you have a very strong team and a very sound model, you're better off than having a beta with a weak team and traction at all.

Eric Rogness Technical Product Manager

May 19th, 2014

When you say "prototype product in e-commerce", do you mean that you are selling a product online (in which case we need to know more about that product), or are you an e-retailer/marketplace?

John Duffield

May 19th, 2014

Hi Lucia, congrats on getting this far. 

I have a mobile SaaS product for B2B and we're seeking to raise a seed round now. There are some competitors (always are), and my view has been that investors would laugh at me if I couldn't demonstrate traction / proof-of-concept / beta or paying clients prior to investment. My view pretty much has been 100% true, it is not like it used to be. With some many companies and so many products/ideas brought to market the idea is now only as good as its proven ability to get traction (and ultimately make money).

 We are now in private beta and it is helping, but by no means is enough for us to secure funds. You must be absolutely relentless in your pursuit for traction and market validation. We need to show customer demand, we need more paying customers. We need to be able to demonstrate, with factual numbers, that we have made a positive impact on the customer (business)'s bottom line. 

Remember we are a B2B product, not a consumer product... so perspectives may differ in the way you demonstrate traction. e.g. # of paying business vs number of downloads or number of transactions occurring on our platform or amount of money made etc.

Hope that helps. 

Kate Hiscox

May 20th, 2014

Hi Lucia,

I've worked in this industry for 15+ years. If you want to bounce any ideas off me then feel free to reach out. 

Kate

Noam Urbach Founder & CEO at Shmooz

May 21st, 2014

my relevant experience: 
have a well designed mockup, yet for months have been making an effort to produce an actually working Alpha version, and held back on trying to attract seed investments.
Now I feel that this mode of action has held me back. I'm taking what I have at the moment and trying to take seed investments, while simultaneously working on the Alpha.

wish you all the best of luck! 

António Menezes CEO SATA Airlines

May 30th, 2014

For future correspondence, please use menezesa@uac.pt or visit www.amenezes.uac.pt

Candice Hughes, PhD, MBA

May 21st, 2014

I haven't found any investors who will invest without demonstrating customer traction (either sales or at least signing up for free beta). If you are well known with prior successful funded exits or other prominent person then you may get investment without customer traction (because they are looking to past success in getting customer traction) or expect your name will bring in customers if you are a public figure.

Lucia Guh-Siesel CEO & Founder, Bandalou

May 19th, 2014

Hi Eric,

I mean the latter - marketplace.  Hope that helps.