We (four cofounders) had a good amount of our own capital and built a prototype. Most of us still have full-time jobs, though, and we’d need some outside funding to be able to dedicate ourselves to the startup. We feel we’ve built a pretty good product, but none of us come from startup backgrounds, so we don’t know how to showcase our product and potential to seed investors.
What attributes and metrics should we DEFINITELY tout? How heavily should we rely on our prototype to sell our idea to investors? What do we really need to have down pat before we take meetings with investors?
The key is a QUALITY BUSINESS PLAN. As a professor for over 40 years in Finance, Marketing and Entrepreneurship and building the College of Entrepreneurship for (Nova Southeastern University and the International College of the Cayman Islands) and helping thousands of people to find funding from start ups to mega-million dollar companies. The definition of a business plan is different for everyone. A thorough business plan will address investor issues. Ask yourself would you give someone a million dollars if they came to you with what they call a business plan? Did they answer ALL of your questions? If your answer is yes you probably have a good start to getting funding. Otherwise, start over or hire a professional before you burn up all of your time and money with inexperienced people (especially CPA's and Attorneys).
While a good Plan is essential to achieve business success, it is not sufficient. Investors will give their money to an "A" TEAM with a "B" product, over a "B" team with an "A" product, seven days a week. Since none of you have "startup" experience (I'm assuming that you have excellent technical experience), I strongly suggest that you set up and staff an Advisory Board of experienced entrepreneurs. I've done this successfully in the past (and currently). Regarding metrics, investors chiefly care about sales/revenues, or other kinds of "validation". Using a prototype is good. Just make sure your intellectual property is secure (i.e., patents have been filed). You need to have your Pitch down pat. There are four: elevator (10-15 seconds), social (90-120 secs), business (6 mins), and venture (20 mins). Start w/ elevator & work your way up. Best to do a Business Model Canvas first, so you can populate your biz & venture Pitches (don't use any of those crappy book or online BMC templates - do some research). Hope that helps!
The prototype is a good start. You need somebody out there selling/fundraising for you. You probably want a business plan, a product deck but more importantly a good story with conviction. Every investor is unique. Some want to see all these things. Some just want to hear your pitch in 2 minutes. You need to be able to master all of these tools and be ready for an opportunity at the drop of a dime.
Congratulations on setting yourself on this path. It won't be easy.
This is my second start-up. I'm currently negotiating with the most prominent angel and vc funds in NY & the Bay Area, and will share my experience/insights:
1. No professional investor is going to invest a penny until your co-founders (and the rest of the team) are all working full-time on the venture. No side jobs. I know that seems impractical and harsh, but one of the reasons most tech start-ups have very young founders is because they don't have adult responsibilities (wives/husbands, kids, mortgages, medical insurance payments, etc). They can survive living 4 to a small room on a "ramen budget." Sound tough? Tough. An entrepreneur is resourceful and finds answers and work-arounds hacks. If you can't figure this out, you're in the wrong business.
Professional investors have vast experience and are always looking to de-risk their very risky bets. Working with a committed, scrappy team is not a luxury--it's a requirement. What happens if an investor gives you money, and now some of your team decide not to quit their jobs? New risk has just entered the picture.
Next-4 co-founders is too many. You can't make decisions by a team. Typically, investors are looking for one tech/cto co-founder (who they view as the real brains of the company), and a business/sales/marketing fund-raiser CEO-type. Period. You should share almost all the equity initially, because you will be diluted if things go well. If they don't, who cares, then?
Next-as Paul Graham (who founded Y Combinator) always says, a start-up should do 3 things only: write code, talk to its customers and get some exercise. Period. You should ship your product as quickly as you can. As Reid Hoffman (LinkedIn founder) said, "If you are not embarrassed by the first version of your product, you’ve launched too late." Your opinion of your product is meaningless. Doesn't matter what you think, only your customers. Not your friends/mother/girlfriend. Talk to your customers (or would-be customers) and hear what they have to say, and then REITERATE. Let the market tell you what it wants, then build it. Be prepared to start all over if your idea has no MARKET FIT. Test and re-test new iterations, and be prepared to pivot.
Regarding a full-blown business plan, VC's/angel investors no longer are looking for one of these. Pro forma financials are always great and are always bullshit. They start with, "Our market is $10 billion, and if we assume we can penetrate 10%, then..." No savvy investor will listen to that bullshit.
You need to create a compelling, 10-12 slide deck with large headlines, bold graphics and not much small type. There are loads of websites/articles available telling you how to do this. Also create a 1- or 2-page Executive Summary.
And while we're talking about documents, forget about NDA's--no investor will sign one. What you will discover is that good ideas are a dime-a-dozen. Unless you've invented a cure for cancer, your attraction to an investor is a)your team (have you had any good exits, worked at FB/Google, etc?) b) Is it a big market? c)Will users love your product 10x more than existing products d)can you guys execute.
Regarding funding, the typical path for a start-up is for founders to boot-strap as long as possible. No dilution, and when it's your skin in the game, you learn how to be very lean.
Next, do a F&F (friends and family) round. Talk to everyone you know, and get your pitch down pat. Once again, raise as little as possible. It sucks when people are giving you the finger at a family dinner, so treat them very well. These days, start-ups don't sell equity initially, because that path is way expensive lawyer-wise, and requires setting a valuation, which is at best an arcane art. The best /simplest/cheapest thing to do is a SAFE, which is essentially a convertible note without a coupon or term. The valuation gets set in a qualified funding down the road, by a professional investor. You can give your F&F investors a discount on the valuation (say 20%), with a cap on the valuation, so they do better than a professional investor. Take a look at Y Combinator, which makes available a sample SAFE. As a matter of fact, check out Y Combinator for everything start-up (Sam Altman, Paul Graham on YouTube). You'll get all your answers from the smartest guys int he room.
Last thing: there was a time that investors would write checks based upon an idea on a cocktail napkin. That can still happen if you were the third Google employee, or similar pedigree. For the rest of us, all that matters to an investor is: TRACTION Are you signing up paying customers? Are you retaining them. Do they love your product. It's better to have 10 customers that love what you've made than a thousand who can take it or leave it. The 10 will scale quickly.
In summation: quit your job, fire the two weakest co-founders, build an MVP (minimally viable product) that sucks but shows what you're basically doing, learn a lot on-line, max out your credit cards and those of mom and dad, talk to your customers endlessly and listen. They'll tell you what they want/need. Then address their pain.
That's all you have to do.
The best thing that I'd suggest is go and showcase your product in as many places as you can. Get the traction. The money will follow you.
Also give a try with Cracking the funding code (search it in FB). They help you to finetune your story telling techniques and they also introduce many investors.
Would it not be easy to take the prototype to several buyers like Wal-Mart, Target, etc and ask them if they would place an order. That is my experience after selling 106 inventions since 1994