Demo Day Fundraising and The Lean Startup

Fundraising is one of my least favorite topics. But I get asked about it often enough in my office hours so here goes…

The questions invariably go something like this

If I say I’m a lean startup, will I be able to raise money more easily?

No.

Aren’t fundraising pitches all about the vanity metrics that lean startup warns against?

Maybe.

How can lean startup help me raise money?

It can’t. Sort of.

Lean Startup is about taking our biggest business risk and finding ways to reduce that risk. If we’re unsure that the customer wants our product, we can design a smoke test to test that. If we’re unsure about the user experience, we can test that with a Wizard of Oz test.

If we’re unsure about whether or not investors are interested in funding us, we can probably test that too. So let’s go through a simple way to practice and improve your fundraising pitch with lean startup methods.

Demo Day is Not the Solution

Let’s start by eliminating demo day as the solution to our fundraising issues. Joining an accelerator just to get access to a few dozen investors at demo day is not a great idea.

Yes, access is great. Yes, social proof from our accelerator’s brand (e.g. Y-Combinator) is great. However, there are two big problems with this.

Long Tail Pitching

First, it doesn’t seem like a great idea to put ourselves in between 20-30 other pitches. That tactic is going to be great for the 10% of companies at the top of the pack. Those are the ones that will be memorable and really stand out.

While I’m sure that 90% of startups think they’re in the top 10%, odds are that we’re in the 90% that will be forgotten.

Just like we can’t all be “better than average” drivers, we can’t all be the best pitch at demo day.

This is an identical situation we face when trying to decide on a marketing channel. We could choose a highly competitive, high volume channel such as a booth at a convention or we can choose a lower volume, less competitive channel.

When we use adwords or SEO to drive traffic as a startup, typically we don’t go for the most popular keywords with the most competition. We generally want to go for the less competitive keywords with less traffic where we have a chance at being #1 and building up from there.

If we’re in an accelerator, demo day is a free channel and we should certainly try and make use of it, but we shouldn’t rely on it. We might crush it at demo day, but it makes a lot more sense to start on the long tail and work our way up.

That means carefully targeting select investors who are interested in our industry and problem space.

Iteration is King

The second issue with demo day is that it only happens once. That means zero iteration.

If it doesn’t go well, we catch a cold, or just have an off night, that’s it. No second chance.

We wouldn’t launch our startup without testing market demand and testing the messaging on our landing page. So why do we do that for our fundraising efforts?

How can we test our pitch prior to demo day?

Testing with the Wrong Target Market

The only iteration for demo day typically happens behind closed doors with mentors, accelerator staff, and guests. And who are those mentors and guests?

We’d like to think that they’re people with massive fundraising experience who will give us the perfect feedback, but the only thing these guests can offer are opinions which will most likely be contradictory and based on personal preference and idiosyncrasy.

Why? Because they are not the target market!

I know this because I get invited to these things constantly. In the last three weeks I’ve given pitch advice to startups from three continents. So what gives me the authority to say if a pitch is good or bad?

My (Lack of) Experience in Fundraising

A disclaimer. I don’t like fundraising as a topic and wish fewer people would ask me about it. I have minimal personal experience with fundraising.

So, does it make sense to ask me what metrics and benchmarks investors are currently looking at? No.

Does it make sense to ask me what valuation to set? No.

But these are the questions people are asking me. I’m the wrong target market.

If we were selling running shoes with extra traction for snowy conditions, we wouldn’t ask the opinion of people living in Panama. There’s no snow there.

However, I do however have experience in:

• Getting up on stage for the last 20+ years to perform and tell stories as a musician and a speaker;
• Getting over stage fright as an introvert;
• Hearing hundreds upon hundreds of pitches from all over the planet over the past 7 years;
• Lean startup.

So there are things I could be useful for. Stage presence, getting over stage fright and so forth.

Comprehension Testing Your Pitch

Something you can use almost anyone for is to Comprehension test the pitch. This is a basic lean startup tactic to make sure a message is comprehensible, regardless of whether it is de
sirable.

In other words, while we can’t use most of the regular pitch coaches, mentors, and friends to understand which metrics and benchmarks investors are looking for (a.k.a. validate the value proposition), we can use those same people to ensure that our pitch is understandable.

So try this:

1. Find a person with roughly the same level of education and vocabulary as your target audience (the investor)
2. Pitch them (we can do this verbally or give them a written pitch)
3. Ask them to explain the pitch back to us in their own words

If they succeed, success! We’d like at least 8 out of 10 people to be able to explain the idea back to us so that we can understand it without confusion.

Anything less than 8 out of 10, stop. Redo the pitch, and try again.

We can try listening to how others describe out pitch and using that vocabulary. They may have a better idea of how to describe our idea than we do!

Investors Don’t Care About Lean Startup

Next, let’s try testing with real investors, but first, just assume that investors don’t care about lean startup. It doesn’t matter if you use concierge testing, picnic in the graveyard, or ritualistically chant “lean” in front of a candlelit image of Eric Ries.

Let’s accept the fact that we don’t know the value proposition of our startup to investors. (Hint: It’s not always “make more money.”)

If we don’t know the value proposition and we don’t understand the customer needs as a lean startup, we’d have an easy next step…

Customer Discovery

We could just go talk to the customer. Investors, particularly early stage investors, are not the rare beasts of legend. There are plenty of them listed on AngelList and LinkedIn and it’s very easy to start reaching out to them.

We can email them, set up meetings, ask their advice, and flatter them by doing so. Many investors are happy to take meetings with startups, it’s called deal flow and they need it.

(Note: If you’re not familiar with customer discovery, please read The Mom Test by Rob Fitzpatrick. The same tactics work for investors, I’ve used them first hand to get meetings with people long before I had anything to pitch.)

Of course, it might be hard to get a second meeting with Marc Andreessen, so we shouldn’t call him first.

Start a Funnel

Browse through LinkedIn & AngelList and make a funnel of 60-100 investors. Then divide them into three buckets:

1. Top tier: Ideal investors with huge amounts of added value such as reputation & network access,
2. Bottom tier: Never heard of these guys but they have money and are interested in our sector,
3. Middle tier: Everyone else.

Start with the bottom tier. These are ideal people to practice customer discovery with and even smoke test our pitch.

Smoke Testing

If we were testing market demand on our startup, we might throw up a landing page with our value proposition and see if we can convince anyone to sign up with their email address or credit card info. So we can do the same for our investment pitch.

However, it’s not a simple transaction such as a typical consumer internet startup. It’s much more similar to a complex sales process familiar to B2B startups where the purchase decision might involve several parties.

So we need to be clever…

…but this post has already gone on long enough. Let me know if you’d like to know how to smoke test your investor pitch in the comments below.

Or you can just yell at me on twitter and I’ll keep writing:

Lessons Learned

• Comprehension Test a pitch with mentors, coaches, and colleagues.
• Use customer development to understand what investors want.
• It’s a sales pitch, so iterate, iterate, iterate with real customers.