Last week, I started telling the cautionary Tale of Yellow Shoes, the founder of a very promising start-up which was funded while still in concept stage by a couple of angel investors… who proceeded to take over control of the company in the process.
Yellow Shoes had confessed to me that were she to do it over again, she and her partner would have waited to take on angel investors. You may have been wondering why.
Well, you see, if Yellow Shoes and her partner had waited before they had accepted money, they may have been in a better position to negotiate with their angels, and maybe (just maybe!), they might have been able to keep control of their company.
The reason is that if they had waited and managed a few months of operations on their own, Yellow Shoes and her partner may have been able to show their potential investors a customer or two or some customer interest that would show some proof that their business would be viable and that is key.
The more proof of your business’ viability, the better off you are in negotiating with your soon-to-be investors.
And that makes sense. The more likely that your business is viable, the lower the risk for an investor, and of course, the better the chances the he or she will make money on an investment in your business.
What shows proof of viability? The best proof of viability hands-down is an actual customer, preferably multiple customers. Real people willing to pay real money for your product or service is always the best way of showing that your business not only has potential but that you are on your way to realizing it.
But what about if you don’t have customers already?
What if you need funds before you can even have a product or operate your service?
All is not lost! You can still show investors a proof of market through things like building a test site which could still show customer conversion or a Kickstarter project that can show folks are interested in a product you want to build. Really, anything you can do to show that a paying public will be interested in what you have to sell when it IS ready.
In the case of Yellow Shoes and her company, their angel investors put money in when they were still in concept stage before they had customers or even anyone indicating they would become customers. In other words, they were at their absolute lowest leverage point for negotiations with an investor.
If they’d waited a few months and been able to get some indications of interest from customers, perhaps even been able to do a very soft launch and test their service with some initial customers, they’d have been in a much much better place and probably been able to keep control of their business.
Be smart! If you can bootstrap it and hold off for a few months while you’re gathering customers or proof of a market, do it. Chances are, you will be in a much better place when you do finally take that investor money.
Are You Wondering If There Is Anything Good About Yellow Shoes’ Situation?