Raising Pre-seed Investment: How to Prove Your Concept to Investors
Raising Pre-seed Investment: How to Prove Your Concept to Investors
28th April 2022
Investable entrepreneurs don’t simply go into the battlefield without making sure they have everything they would need to convince potential investors and close a deal. They ensure this is the case even at the earliest stage of fundraising for their business, that is, when raising for pre-seed investment.
It’s not enough to be a go-getting entrepreneur with a fabulous idea. Before investors will channel their hard-earned finances into your idea, they’ll expect to see proof that it actually works. Investors want to be sure they’ll eventually be rewarded with a healthy return on their investment. If you go into a pre-seed round with nothing to offer but an intriguing pie-in-the-sky opportunity, you’ll be guaranteed to leave the round empty handed.
On the other hand, if you go into the pre-seed round armed with all the data you need to prove your concept (i.e., you’re able to show investors market validation your idea will be commercial and successful in the real world, not just on paper) you’ll substantially increase your chances of attracting their support and closing the deal.
makes taking the decision to invest in your proposal as easy as possible.
This is one of the crucial differences between being an investable entrepreneur with a must-have product and being an entrepreneur with a great idea who’ll never get it off the ground. Investable entrepreneurs do all the homework necessary to prove their concept and make investing in their proposal a no-brainer.
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The investor wants to see your concept is in demand.
They’ll expect you to show evidence that your product or service solves a genuine problem, and that the problem is big enough that customers will want to pay you to solve it.
They’ll want to be assured that customers will pay a high enough price for your product to generate profits and that enough customers exist to give them a return on their investment.
They’ll want to see proof that your solution will be adopted by the market and preferred by customers more than any other solution that’s already out there.
These four key points are known as Product/Market Fit or Market Validation. The unquestionably best form of market validation is paying customers but, when you’re a founder at pre-seed stage, being able to show paying customers usually isn’t possible. However, the good news is that you can still provide investors with the evidence they need even if you’re not in the position to start generating revenue.
How do you do that?
By performing a series of product/market fit experiments to gather evidence that your product is desired by the market and that you can deliver it to the market in a way that’s profitable. Once you’ve got that information, you can enter it into your business plan and present it to the investor as part of your pitch.
Experiment 1: Validate the problem
Goal: To show the investor that the problem your product solves is significant enough for your customers to invest time and money in solving it.
Strategy: You can validate the problem in a lot of different ways, chiefly by conducting surveys, holding focus groups, and interviewing your ideal customers.
Pitfalls to avoid: Whatever you do, it has to produce enough results to be useful. Don’t just survey a handful of people or bring half a dozen of your friends and relatives in to be a focus group. Don’t simply interview one or two ideal customers.
As an absolute minimum, take a sample of at least thirty people. Anything less and your results won’t bear any statistical relevance. Ideally, aim to gather feedback from a hundred respondents or more. Also, ask them succinct questions with multiple choice answers. That’s the best way to quantify your research to investors.
Goal: To show the investor your proposed solution meets the customers’ expectations, that it’s an improvement on what already exists, and that it is clearly and meaningfully different from anything that’s currently on the market.
Strategy: You can validate the solution via a combination of desk research, user testing, surveys, and focus groups.
Pitfalls to avoid: As above, cast your net wide enough to make sure the results are statistically relevant.
Use your desk research wisely. Concentrate on providing an in-depth analysis of your competitors’ solution, how it’s being received by the market, and why your solution is superior.
Don’t get tricked into thinking you’ll need to spend a lot of money on user testing. One of our clients mapped out the user process on a Microsoft Word document and took each user through the process in a one-to-one interview. He then asked them to fill in a survey that provided him with quantitative feedback.
After receiving their survey, he followed up with a recorded interview asking each user specific pre-determined questions about their experience. With this evidence, he successfully raised his first £50k and developed a basic UX wireframe proof of concept to further validate his solution.
This whole user testing exercise only cost him £10, and he spent the biggest proportion of that on laminating the pages of the user process doc!
Experiment 3: Validate the price
Goal: To show the investor that your solution delivers value to both you and your customers, and that you’re offering it at a price your customer is willing to pay and that will generate compelling revenue.
Strategy: You can validate the price in several ways. You could conduct surveys, hold interviews, or get creative by proving interest in your product and pricing before it even exists.
The ‘getting creative’ approach: A founder we know used a simple free-of-charge website-building platform to create a landing page for their product, even though the product didn’t actually exist.
They included pricing on the landing page and asked visitors to click a sign-up button. When the visitor clicked the sign-up button, they were taken to another page that thanked them for their interest but told them the product was unfortunately not yet available in their area. However, if they enter their email address, they’d be notified as soon as it was.
Using Google Analytics, the founder could see how many people clicked the sign-up button as a percentage of total website visits. To begin with, they shared the landing page on their social media and then, as they started getting results, they invested in Facebook ads, spending around £10 per day. After a short time, they changed their pricing and then tracked the effect it had on the number of people clicking the sign-up button.
With that information, they could actively demonstrate to investors what pricing model worked best for their product. Just as importantly, they’d also started collecting the email addresses of all the interested visitors they could market their product to once it was built.
Experiment 4: Validate the market
Goal: To show the investor who your ideal customer is and prove they form a sufficient percentage of the market to make you a profit.
Strategy: By using the evidence gathered in the three previous experiments, you should already be able to show:
Your product solves a valid problem and offers a valid solution.
How many people need to be aware of your product before one of them will express interest or want to buy.
You’re pitching your product at the best price for your customer, you, and your investor.
By extrapolating that information, you’ll be able to show your investor the level of interest you’d need to hit your targets.
Let’s take the founder who created a landing page as an example.
Google Analytics showed they got four sign-up clicks for every hundred visits to the website: a 4% conversion rate. From there, it became relatively easy to calculate how many visitors they would need before they would achieve a target of one million users.
Using desk research, they were then able to prove whether the market was composed of enough people to achieve their goal. In this case, their product was a dating app. A simple Google search told them that 10.3% of adults between 16 and 64 in the UK use dating and friendship apps, which is about 6.8m people. Based on the 4% conversion rate, this means they would need 25m unique visits to their website to reach 1m users and, with 1m users, they’d have to achieve a 14% share of what is already a highly competitive market.
What this told them is that the UK, on its own, would not deliver the scale required to make their product viable and investable. If they were going to present a credible plan to investors, they needed to readjust their strategy and aim for global growth.
Proving global growth meant going through the same process, but casting their net a lot wider to gather data from the EU, US, and Asia. Once they’ve done that, they were able to show investors they had a large enough market to legitimately reach their sales target.
Pitfalls to avoid: You must conduct these experiments with complete impartiality. Don’t let your own bias skew your conclusions.
The best way to do that is by deliberately trying to disprove your idea. Using this approach, you’ll be able to show that the market actively needs your idea and that you have defined the problem and provided a solution at a value the market is willing to pay. You’ll also have proved, without currently generating any revenue, that your concept is commercial enough to make you an investable entrepreneur.
Something you can do right now
Look at all the validation you’ve received so far and ask yourself if someone outside your business would consider that validation to be credible and trustworthy. Be honest with yourself. Is what you’ve got enough, or do you need more? What different experiments could you undertake to prove to investors that your idea is viable, and your concept is proved?
If you’d like to read a free copy of James Church’s best-selling book, ‘Investable Entrepreneur’, you can download it here.
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