I’ve spoken with 5 different early stage companies in the last week that all seemed to be making the same mistake IMHO:

• Trying to raise a serious seed or Series A round from VC’s,
• no customers / users,
• no revenue,
• and have not tried to pre-sell to target customers.

The discussion was nearly always the same:

Entrepreneur

Let me give you a more specific example from this week.

Entrepreneur: We want to do a small raise.

Me: For what?

Entrepreneur: We basically have the product done and have bootstrapped until now.  We need money for purchasing email lists, going to trade shows, travel, advertising, etc.

Me: How much are you looking to raise?

Entrepreneur: Small amount.  Maybe $100,000 - $200,000.

Me: How many customers do you have today?  How much revenue?

Entrepreneur: 0 and $0

Me: Wow, there must be a lot of unverified assumptions and risks in your financial model.  Have you thought about some "baby steps" first to de-risk your model?  If I said you have as a goal over the next 7 days to get 10 LOCAL customers in the Philly area (the company is based in Philly), do you think you could meet that goal without spending any cash on marketing?

Entrepreneur: Yes, I could do that.

Me: And would they all be paying customers? (I've learned to ask that question: people have different definitions of a "customer" which have varying levels of importance based on the revenue model.)

Entrepreneur: We could get 10 customers to sign up (sign up is free); probably 50% would start paying $1,000 each per month. (Note: Company revenue run rate = $5,000 per month.  Also note, multiple assumptions being made here that could be vetted quickly, easily, and cheaply).

Me:  Okay.  I bet you could give those new customers a spiff of $100 if they refer someone else who signs up and starts paying.  So, you’ll give them a $100 credit for your service and you would be happy to pay it as I’m guessing that your cost of customer acquisition is probably north of $300 and you would be happy to pay $100 all day long for referrals that turn into paying customers. (I wonder if the company modeled their viral coefficient?)

Entrepreneur: Absolutely we would do that!  And I think we would get referrals. (Assumption, and I bet it's in their financial model).

Me: And if I asked you in 4 weeks from now do you think, just in the Philly area, you could have a total of 50 customers signed up (including a few referrals), and half of those companies would be paying customers?  No email marketing.  No travel. No trade shows.  Just good old fashioned "drag a bag and go make some sales."  (This is not the way to scale a company, but a way to de-risk, learn, and get started.)

Entrepreneur: Yes, I think that’s really doable.  (Note: Company monthly revenue = 50 x 50% x $1,000 per month average purchase = $25,000 per month).

Me:  I know you’ll learn a ton trying to get those customers on board.  You’ll also learn a lot about the assumptions you have in your financial model.  Now, if in 4 weeks, you can be at a run rate of $25,000 per month, why are you out trying to raise $100,000 - $200,000 now?  How about this: Set measurable stretch goals for the next 1, 2, and 3 months.  Get your revenue up to $50,000 - $100,000 per month (Note: $1.2 million annual revenue run rate), THEN go out and try to raise money.  In 3 months go to investors and say, “I have a problem:  I’m at an annualized run rate of $1.2 million, I just started selling 3 months ago and I have a solid gross margin of x%.  My problem is that my lack of capital is limiting my ability to grab profitable market share and grow my business.”

Now when they go to meet with investors, they would end up having an entirely different conversation.  It's still not a slam-dunk that they'll get outside funding, but their chances have gone up dramatically.  Investors will see that they have greatly de-risked their model, have a lot less assumptions, and they’re off to the races.

We'll be spending a lot of time this summer working with the DreamIt Summer 2009 portfolio companies to roll out early versions of their products and get feedback as well as meet with customers, potential customers, and potential partners as early as possible.  We'll help them make this happen in an accelerated time frame by leveraging our experience and connections.

The above may not fit your situation, but I urge you to try to think outside the box of how you can get to sales, product/service adoption, or potential customer feedback as quickly as possibly so you can learn the realities of the marketplace, and then look to raise funds.  If you're a Web 2.0 company, maybe you'll do this by getting an early beta out onto the web, and attracting traffic via Google Adwords, Twitter, Facebook ads, blogging, PR, etc.

If you are building a new product or service that will be very capital intensive (e.g., a new hardware device, new type of robotics, new medical device, very large scale software application, etc.), then it will be hard to actually sell something to a customer without having cash up front to develop the product.  If this is the case, meet with companies / potential partners to get their input and reactions to your ideas.  Have meetings with companies that meet your target customer criteria and ask them the right questions to find out if they would buy your product, how much they would be willing to pay, the potential objections, etc.  Check out my BarshBits blog post: When can I start speaking with potential customers?  Take your learnings into your meetings with investors and you'll have a lot more credibility.

Now, not every company I meet with are like the ones described above.  As a matter of fact, quite a few of the companies I know that tried to sell first and build revenue before raising outside cash: nearly 50% of them have gone on to raise outside money or are growing without it. 

Entrepreneurs seem to think that when they have a new idea the first thing they need to do is put together a plan and go out and raise money.  I’m a big believer that you should go out and try to sell, get adoption, or get marketplace feedback first, and then try to raise money.

It’s okay to “ask for the money.”  Just TRY to start the “old fashioned way” by selling something to a customer or getting user adoption, rather than selling a vision and a set of assumption-riddled numbers to an investor.  I think you’ll have more success with the former, and just pound your head against the wall with the latter.

I spent time last week speaking with a number of the new DreamIt 2009 companies.  In several emails and conversations, I was giving the same advice that applied to very different situations: meeting with a VC, getting press coverage, delivering a new beta release, pitching to angel investors.  The advice was around learning as quickly as possible, to help companies accelerate.

If you want to build a great company and accelerate your growth, you need to learn as quickly as possible.  3 easy questions will get you there following every meeting, positive win, negative loss, event, product release, code release, sale, etc.

1. What went right?
2. What went wrong?
3. Where did you get lucky?

Whatever went right, make sure to keep doing that in the future and make sure it's baked into your process.

Whatever went wrong; figure out how to prevent that from happening again and put it on a checklist to make sure it does not happen again.

Wherever you were lucky, figure out how you can make luck happen "on purpose".  By the way, it's this last question I find very few people ask.  Asking "where were we lucky?" often generates some of the best learning that can really accelerate your company.  Again, bake luck into your process so it happens on purpose.

3 simple questions.  Tons you can learn.  It's fast and easy.  Start using them today.

Over the weekend I watched 11 different companies demo or discuss their products at DreamIt Ventures' Kickoff Event.  These are brand new companies many of whom have never demoed or pitched their concept in front of a large audience.  Without any guidance or coaching, they did a very nice job.

Watching their demos reminded me of a trend I often see where people completely miss a great opportunity to showcase their solution and really connect with the audience. Often when demoing a new product (software, hardware, device, physical product, etc.), the person giving the demo misses the boat on getting the right message across effectively.

Too often, I see demos where the person just goes through feature after feature, but never "brings it home" to show the value that those features bring.  Remember, during a demo, you are selling benefits, not features.

So, for your next demo, think about the following demo checklist:

1. What are your top 3 key messages / benefits you are trying to show/prove/sell?   During the demo make sure to hit your "top 3" multiple times.
2. Think about using "use cases."  Talk about the problems your target customer typically has ("use cases"), and use those problems to drive the demo making sure to clearly demonstrate how the problems are solved using the product.  Once you show how a problem is solved, wrap that up by saying something along the lines of "... so, the benefit is ____."
3. What are your core differentiators?  Make sure to demonstrate them clearly.  Often demos don't clearly show what truly makes your product unique and different.  Make sure to highlight what makes you special.
4. Make sure to connect with your audience as you go through the demo.  Don't talk TO them, instead have a "conversation" and pull them into the demo.  Ask leading questions like "Do you have this problem too?"  "What are your top problems?"  "Would this work for you?"  Generate buy in by having a conversation.
5. When you are done the demo, what do you want your audience (whether it's an audience of 1 or 1000) to think, say, do, or ask?  Create a list of answers to those in advance, and create your demo to drive your desired outcomes. 

Other terrific blog posts on how to deliver great demos can be found here, here, and here.

Let me know what works for you and add to the conversation in the comments below.