💵 Top reasons to get investors pre-revenue
Before we start here is why my experience may have relevance to you: I am a serial entrepreneur. I started 3 companies (2 failed, 1 is now at an ok revenue of 250k€ ARR). In the process I acquired about 300k€ in funding.
More importantly: By working on OneHundredFounders I interview loads of successful entrepreneurs who created businesses from zero to more than 4 Mill. $ in revenue — multiple unicorns among them. I now share what I learned so that you can hit the ground running.
Can I win investors without any revenue?
Short answer: No. Long answer: Yes, if…
Of course you will find examples for everything. The big question is if it is wise to look for investors in your current state. When you look for investors you need to invest time. If you don’t manage to get anyone to invest, your return will be zero. If you had spent this time working on your business you would have some progress to show.
“Just try and see what happens is not good advice”
Your time is limited, so just try and see what happens is a strategy you can not apply often. Be wise in picking your battles. I am saying this because you may know some examples of successful fund raisers without any revenue. Depending on the industry, world region and general state of the economy you can be lucky. If you count on this luck or know something special about your space, feel free to look for pre-revenue investors. If not, you might want to consider the following insights from many successful founders.
1. Your Business Model Has Been Proven (by others)
Investors a risk averse. Chances are your business model is pretty innovative. That’s a problem because it makes it very hard to predict how it will turn out. For investors it is a lot easier to believe in your success, if the business model already exists elsewhere, be it in a different industry or country.
From the companies I have been talking to this is probably the single most relevant point for securing investments pre-revenue. It is also what Nathan Latka suggests in How to be a capitalist without any capital.
Who did it well
- Delivery Hero managed to build a delivery service with venture capital while a direct competitor pizza.de was already around.
- Rocket Internet is a company builder that specialised in taking successful new business models and transferring the to different countries, Zalando for example.
2. The Problem is Huge
There are a few problems that are intrinsically large. Basic needs such as eating and drinking are a good examples as well as health or home. But it quickly shrinks down. While B2B software is still a large space, Newsletter tools for example are already not relevant for 99.9% of the population.
You don’t have to cure cancer to address a huge problem
You don’t have to cure cancer to address a huge problem, but you have to ensure that it has relevance for a large part of the overall population. If that is not the case, building your business has several built-in growth stoppers such as large losses when marketing your product, sooner reaching the limitations of your country and needing to internationalise etc.
Who did it well
- The German company Flaschenpost (eng. “drift bottle”) re-invented delivery of beverages such as bottled water. They have been acquired for 1 bn. € in 2020.
- The online supermarket Picnic provides grocery delivery and is therefore relevant to almost 100% of the population.
3. You are already well-connected to venture capital or have a track record
You can see this pattern in former venture capital employees. Having credibility with investors helps you reducing the risk for them. An example for this is Outfittery, founded by Anna Alex. Working for Rocket Internet she already was very familiar with VC money and brought her connections into her new company.
The same goes for having a track record. If you have publicly proven that you are good at building companies, then next time you try it will lower the bar. This of course includes multiple benefits like an improved network, a reputation that makes marketing easier and higher credibility in your intentions and abilities.
4. You are persistent as hell
In the interview for One Hundred Founders one founder told us that he pitched to 1.500 venture capital investors in order to raise the first round. This not only worked because he tried his tiny chance so many times but also because he learned a lot about how to do it right. This obviously has cost a lot of time, so it might not be advisable. Hearing 100 times “no” can be very discouraging, so you should be aware of what you are getting yourself into if you want to make it by sheer persistence.
5. Your business is very lucrative and easily convincing
Some things just make intuitive sense. The Pet Rock is not one of them. But sometimes you hear an idea and it becomes apparent that the product or service meets a need that is well paid and immensely underserved.
These kinds of gaps in the market are really rare. Usually when having an idea that excites you, a quick DuckDuckGo search will reveal that you are not the only creature on planet Earth thinking about this. If something is so easily convincing, it often means that many people close to the problem will come up with the solution and one of them sets out to solve it.
A good example for when this is NOT so easy is Zappos. Founder Tony Hsieh was convinced that selling shoes online was a good idea. Today most investors would agree, but back then this was not common sense. Investors had doubts and saw the risk that the whole venture could fail. Tony managed to find a very smart way to prove his business model with minimal effort, but also did not get funded pre-revenue. If you want to hear his story, I recommend reading Delivering Happiness.
Is that all?
You will find examples that don’t fit the rules. The described reasons are no law. But they are good rules of thumb to figure out if you would be wasting time or stand a real chance. The more of those rules apply to you, the better. At the end of the day being at the right place in the right time will be as good as any of it.
From founders for founders
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