Raising Startup Money: PRODUCTS that CUSTOMERS will PAY for

Periodically, I get asked some variation of the following:  “What’s the best way for me to raise money for my startup?”  “How should I approach investors/angels/VCs for funding?”  “Can you introduce me to an angel/VC?”

My answers:  “Demonstrate that you have a product that customers will pay for.” “Demonstrate that you have a product that customers will pay for.”  And “have you demonstrated that you have a product that customers will pay for?” respectively.

This is usually followed by a short discourse on product/market fit, what constitutes a product, what constitutes a target customer, what constitutes a meaningful dollar commit, and why acceptance of free samples by customers is not substitute.  (I love free samples at Costco, but that doesn’t mean I’ll buy.)  Of course,  if you can’t get someone to take your product when you’re giving it away, there’s a learning opportunity embedded in there….

After today, I can now just say, read Steve Blank's blog post here: http://steveblank.com/2009/11/05/raising-money-with-customer-development/ . 

For those who may not be familiar with Steve Blank, he is the developer of the Customer Development methodology⁽¹⁾, a rapid, iterative, learning oriented feedback process by which minimally sufficient feature sets of increasing refinement are delivered to target customers for validation as defined by a sale or other dollar commitment.  It is analogous and complementary to the Agile methodologies used in software development.  At the end of the process, you have a (1) defined product (2) identified target customers and (3) idea of what they will pay validated by a P.O. or other dollar commit that can be used to help you raise money.

While particularly applicable to software development, Customer Development can also be applied to services and hardware products, although it is not a universal cure all.  What dictates the methodology’s applicability is the total cost (dollars, time, resources) of iterative prototype trials.  The cheaper the cost of trial, the faster the iteration cycle time, and the lower the consequence of failure, the greater the reasons for using Customer Development.

For example, because software can be rapidly and cheaply deployed in small functional chunks, not only can iterative cycles be turned around quickly, multiple “split tests” can be run concurrently.  And the consequence of failure is usually small. This greatly accelerates the learning and subsequent convergence of fit between product and customer.

However, in medical devices, for public safety reasons, the deployment of new products is highly regulated.  Validation time by the customer can be lengthy, and the consequences of failure much more severe.  This limits the number of prototype iterations which reduces the benefits of using this methodology.

Nevertheless, if you’re involved in technology commercialization and aren’t familiar with Customer Development, it would be well worth your while to become so. 

Want funding?  Think products that customers will pay for.

References:

(1) Blank, Steven, The Four Steps to the Epiphany, Cafepress.com, 2005.