Every startup has a risk profile which it aims to improve as it grows and develops. For every step a startup progresses a little uncertainty is removed. Ultimately, if everything goes well, the valuation of the company improves. If you are making those first steps and are seeking funding it is important to address the right kind of investor at the right time.
In the beginning you might approach an Angel investor which will help shaping the initial product (more on that later). Seed round VCs typically invest at a stage where you have a working prototype and traditional VCs look for initial traction. Traction means that your product fulfills a customer need and that the customer is willing to pay for the product.
Risk / progress relationship of a startup
From the entrepreneurs’ point of view your goal is to get from one level to the next as quickly as possible. It’s better to fail early on than to invest a lot of time in an idea which will ultimately prove unsuccessful. The currency of an entrepreneur is time.
From an investor’s point of view progress of a startup is ultimately about decreasing risk. The currency of an investor is money which he needs to generate to make his LPs happy. The less risk in an investment for a given amount and market potential, the better for the VC.
So how can you go about it?
That depends on the type of company and founding team: there are usually business centric and technology centric teams.
Business centric teams
A business centric team can show great progress by securing partnership deals. This means you need to get out of the building. If you make great progress on business development by securing key partnerships you will improve your understanding of the customer problem. Further you will also gain a unique perspective on the market and strategic options which might give you a competitive advantage.
Technology centric teams
A great team of technologists might start from a different angle by using the Minimum Viable Product (MVP) approach. The idea is to start as lean as possible and to strip your product down to the point where it it is barely recognizable as the product you actually want to launch. Its sole purpose is to validate the most important use cases. This will give you important information on who your actual customers are and related metrics such as user acquisition channels, customer lifetime, costs and features used by customers.
Final thoughts
Each of the approaches has benefits and drawbacks. Generally speaking a b2b idea is more likely to be addressed by a business driven approach where the nature of b2c ideas may be better validated by a MVP and early metrics. If you go one step further it may also depend whether you resegment an existing market where you can rely more on concepts or whether you are creating a new market where no comparable metrics exist.
No matter what kind if market you address either of the approaches will help you to shape a unique view of the market and to validate your idea. This reduces risk and makes the startup more likely to succeed.