“There’s nothing wrong with raising venture capital. Many lean startups are ambitious and are able to deploy large amounts of capital. What differentiates them is their disciplined approach to determining when to spend money: after the fundamental elements of the business model have been empirically validated.” Eric Ries
This quote by Eric Ries, Silicon Valley entrepreneur and pioneer of the “lean start-up movement”, reflects the expectation that venture investors have today when considering investing in early stage companies and their founders. VC’s expect Founders to have empirically validated the critical building blocks of any business:
– the value propositions of their product,
– the market fit for the product,
– the size of the addressable market,
– who the customer is and who makes the buying decision,
– the cost of customer acquisition,
– a repeatable sales cycle,
– a scalable business model, and,
– a clear strategy for where and how to play to win.
It comes down to a question of which Founders have de-risked their business plans through intensive customer discovery, market assessment, competitor analysis, and solid business planning. Those that have gone through the empirical testing to validate major business assumptions are perceived to be more efficient, lower risk users of capital by the venture community. These Founders are effectively positioning their companies to shorten the duration and depth of the proverbial J-curve effect of venture investing.
I can’t count the number of times that promising entrepreneurs have told me about reading venture capital announcements where similarly positioned early stage companies have received large amounts of capital and they wonder why they have struggled to obtain similar backing. In many cases, it is because the successful VC backed company has gone through the methodical steps necessary to reduce investment risk to the VC.
Remember, venture capital is not adventure capital. Take the time to undertake the empirical approach of the lean startup method and increase your chances of receiving capital support.