Darren Herman

I have met with many entrepreneurs over the years and the one question that keeps coming up (especially recently) is, “What makes an interesting early stage investment?� This is a very good question to ask but in the same breath, it is very broad. The question is almost like saying, “What type of car would you recommend?� Without knowing too much about driving preferences, terrain, budget, etc – it’s hard to recommend a car.

Working into the investment equation backwards isn’t ideal either. You should not incubate/build something just to raise capital. It really isn’t that cool. Honestly.Â

Now that I’ve gotten that out of the way, there is one major thing that makes an early stage company interesting to a potential early stage investor (venture capitalist, angel, institution, or other). It may sound simple or may sound difficult depending on your needs as an early stage organization… it is called traction. For any deal that I’m reviewing or any idea I’m incubating, I’m looking to generate as much traction as possible before I get any investors involved in the equation. There are solid reasons for this line of thought:

1. Prove to the world that you can develop a product or service
2. Test the early product/service in the marketplace and receive feedback
3. Help boost your valuation (if and when you take money from an investor or sell the company)
4. Generate excitement from potential business development partners

Each of the above reasoning’s could be a blog post on their own but for simplicity sake, I will keep them short and concise.

1. Prove to the world that you can develop a product or service: If you are a first time entrepreneur, you’ve got a lot more obstacles in front of you than you would if this was your second or third go around. Those obstacles are mainly around experience and knowing that whatever could go wrong, will. It’s very hard to imagine what that is like until you’ve actually experienced it. As that first time entrepreneur, if you can successfully develop a beta, preview, prototype, or even v1.0 of a product or service before taking any outside investor funding, you’ve demonstrated proof that you can accomplish what you’ve set out to do. However you need to get this product or service off the ground is totally up to you, but where there is a will, there is a way. Get creative. It can be done.
2. Test the early product/service in the marketplace and receive feedback: There is no better research around a product or service than what your customers and clientele tell you. Whether you’re releasing a customized clothing chain or a news content website for a foreign country, listen to your audience. The feedback that they give you will be tremendous and it will help you raise your public profile and show investors that you actually care what your prospects think. Remember to not just read the feedback but act upon it as well.
3. Help boost your valuation: There is no doubt that doing as much as possible without funding including the above mentioned will help boost your valuation. How much actually depends on the market you are in and the actual quality and team of what you’re building but the more things you do on your own, the less you will have to give up. For those of you who do not know much about valuations, please refer here.
4. Generate excitement from potential business development partners: Early on these partners may not give you the time of day, but they are ultimately the partners you want to concentrate on. Spend a bit of your time talking to them and getting feedback from them on how you can put together a mutually beneficial relationship but at the end of the day, these potential partners will want to see a finished product and some traction in the marketplace. Do what it takes to excite them and there is no reason why they may not make a strategic investment in your new burgeoning company.

Traction is execution. A great idea that sits is worse than a mediocre idea that is executed. At the end of the day, the mediocre idea has gained traction in the marketplace and will attract potential clients. For investors, we want to see traction. As you see above, it comes in all forms and helps your organization in many ways. Some people say traction is a “chicken or eggâ€? issue.  You can do a lot without money, just get creative. May you have to give up a small token of equity or options? Possibly. May you have to spend a few thousand dollars on a mockup or prototype? Potentially. However, the little you give up now is peanuts in comparison to what you may give up on your first round of funding.Â

Investors want to see traction in the marketplace and we are drawn to that. If you’re being talked about or written up in multiple places (by 3^rd parties), we take notice. It’s highly unlikely that you’ll get substantial press without some version of a product or service… so go bang that out! You can do it – just set your mind to it.