Allentown Economic Development Corporation

Why startups need to focus on generating sales and less on fundraising

I had the pleasure of escorting Kirstie Chadwick, CEO of the International Business Innovation Association, around the greater Lehigh Valley during Global Entrepreneurship Week. During her trip, she got to visit nine entrepreneurship centers from Scranton to Philadelphia including the Bridgeworks Enterprise Center in Allentown and Ben Franklin TechVentures in Bethlehem. At two of the three stops for which I joined her, well-meaning economic development folks ask her for guidance:

“How do we help our entrepreneurs raise venture capital or angel funds? How do we create an investment community in our area?” they asked.

Kirstie graciously provided some guidance, encouraging us to engage and try to organize the high net worth individuals in our respective regions, as well as to approach existing groups in and around our regions to broaden their scope of potential deals as well as being accepting of our potential investors. There was no reason to reinvent the wheel if there were already angel networks and venture capital firms close by doing deals.

At the same time, Kirstie dropped a couple of bits of data, almost as an aside, that may have been missed by those not paying full attention but which were quite sobering:

  • Only 0.05 percent of startups receive venture capital
  • Less than 1 percent of startups receive angel investment

Let that sink in for a minute.

The Hype

So how did we get here? Why do entrepreneurship centers, university programs, and the various grassroots startup programs like Startup Weekend spend so much energy focusing on pitching investors? The answer, despite how unproductive it might be, is that it’s the sexy part of startup culture.

No one wants to open their favorite entrepreneurship magazine or click their way to their favorite tech blog and read about how the founders are on a midnight call with their overseas developers for the fifth time this month because the code is six months behind schedule and still buggier than picnic in a swamp (and about as user friendly). Who wants to read about how the manufacturing equipment is down again and the repair manual only comes in a foreign language that no one can read? Much less discuss how you can avoid the landlord for another week because the rent is late and the last of grandma’s retirement funds that she invested in your “sure thing” are just about all used up and you need every cent you can scrounge up to complete this next prototype of your product.

That’s not sexy.

What’s sexy is how the college dropout spent a month holed up in his apartment jacked up on Red Bull while he coded the coolest app ever to share cat videos, got a million users “overnight” (hey… c’mon… they’re cat videos!), sold it to “Instatwitbook” for $2 billion, and is now Richard Branson’s next door neighbor.

Maybe I’m being a bit snarky. Okay, okay… maybe more than a bit.

But our Shark Tank startup culture has glorified these deals where anyone with any idea can get on TV, pitch an idea in 60 seconds, take some abuse from a few “professional investors,” and walk away with $100,000 for just 75% ownership in their company. By the way… no one takes that deal… NO ONE! But it makes for great television.

Show me (grandma’s) money!

So, if angel investors and venture capitalists are funding less than one percent of the startups out there, where does the money come from? Even traditional financing like bank loans only make up about 1.4 percent of the funding capital in startup ventures.

The reality is that the founding teams provide much of the capital to launch their companies, be it by draining their savings and retirement funds, mortgaging the equity in their homes, or in many cases running up the balances on their credit cards. About 57 percent of startups are funded by the personal savings and credit of the founding team.

Another 38 percent get funding through friends and family. So, my joke about grandma’s retirement money isn’t that far from the truth and not all that funny when it comes down to it.

This is what keeps entrepreneurs up at night. I see it as I walk through the halls of our incubator each day. They’ve gone all-in on their ventures. They’ve convinced their friends and family to take a chance on them. Many of them aren’t drawing a paycheck or if they are, it’s less than minimum wage while they work 60-70 hours per week. Others are still working their day jobs just to keep food on the table. And that’s a whole lot of pressure to live with.

Sell, sell… and then sell some more!

At Bridgeworks, we consistently preach to our clients that they need to get their revenue engines running as quickly as possible. Sales generate cash and you don’t need to be an entrepreneur to know that cash is king. Sales revenue is the only thing that offsets the steady burn of cash that occurs in the early days.

Does this mean startups should sell at all costs? Of course not! Selling a product or service that is of inferior quality will quickly have a negative impact on the company’s reputation and considering that this is probably the company’s first impression with customers, if it gets screwed up they’re like not going to get a second chance. And sleazy sales tactics certainly won’t win you loyal customers in the long term.

However, that doesn’t mean the product needs to be perfect before you go out and try to sell it. The product may not have every feature that you want to include in it. It may not come in every color or size that you’d like to offer. But if it has the basic features and requirements that your customers need, a “minimum viable product” in startup jargon, just get out there and sell it to them.

Selling that minimum viable product will do a lot for an early stage company. First, it obviously starts to generate incoming cash flow. Second, it gets the founders over the hump of making that first sale which boosts their confidence exponentially. Third, it gets the product out into the market where the founding team can start generating some feedback. They may learn that certain planned features are not needed while others should be bumped up on the implementation schedule. They’ll also learn a lot about the sales cycle such as that the end user may not be making the buying decision and that they need to craft their sales pitch differently for each.

Putting it all together

Angel and venture investing is certainly the sexy part of the startup world and depending on what type of company you’re trying to launch, it may even be a necessary step. However, that doesn’t mean every ounce of energy should be focused on identifying those folks and making pitches. In fact, for 99 percent of startups, it’s not the right thing at all.

Get your product or service packaged up and ready to sell, and then get out there and sell it. Sell it as much as you can to everyone you can. Hey… maybe even grandma needs one.

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