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VIRAL Level 3: Validating your Product
You’ve validated that a customer wants your product or service.
You likely have a little bit of revenue.
People are buying what you are selling, and you’re starting to think through turning your product into a business.
What investors at this stage are likely to like about your business:
Your team has likely spent a great deal of time with customers, either with this company or in the past. Talk about how your team works together–who does what–and talk about the level of experience you have with your customers (we’ve done 100 customer interviews; we’ve made 20 sales calls). Put numbers to your experience whenever possible.
- Your ability to solve the problem. If you’ve sold a product, you’ve likely cleared a number of technical hurdles (legal, regulatory, prototype development, design). If an investor asks about “traction,” talk specifically about what these hurdles are, and how you’ve cleared them (many entrepreneurs haven’t!)
Your differentiation (to your initial customers) .
Talk through the customer who bought your product. Give them a name. Why did they buy your product? What was different and better about what you did for them? Tell a “before and after” story about what their life was like before they met you–and now that they’ve bought your product. Take a minute to write out this “Mad Lib” before an investor meeting: “We sell A to B. B has a problem, and it is C. We solve C through D.” Let’s take, for example, Google. “We sell consumer data to advertisers. Advertisers have a problem, and it is that they don’t know how to reach the right audience online. We solve this problem through the world’s best search engine, which gives advertisers highly customized information.”
What investors at this stage are likely to ask questions about:
Your team’s ability to scale.
Many companies who make it to this stage are able to sell a product or service at a small scale but have difficulty managing growth. Make sure to explain how your team has a clear understanding of how the market operates. What are sales cycles like (and how long are they)? What are the technical product and development skills you need to grow (and who on the team has them?) What are market comparables, and how are you better? If you don’t know the answers to these questions, you would do well to find them before engaging seriously at investors.
- What is your differentiation (at scale)?Any charismatic team can sell something to somebody once–which you’ve likely already done. To grow, you need to quantify how you are 10x better than the competition. Are you 10x cheaper–and how? Are you 10x faster–and how do you measure that? Do customers like you 10x more–and how do you know? Use numbers whenever possible to explain to investors why you are better than the default option.
- What’s your market size?An investor will want to know that you are able to sell to a large enough market to justify investment. Basically, you’re going to need to generate enough free cash flow, one day, to pay back investors without hurting your business. What investors often call “lifestyle businesses” are profitable businesses that are not ever large enough to pay back investors. Can you explain how your market is big enough to justify investment? (If you’re raising venture capital-style equity, the market likely needs to be $1B+).