Looking For Investors? Answer These 3 Questions First…
By Anna Johnson on April 23rd, 2009If you have considered – or are considering – raising angel or venture capital for your business… are you nuts? Don’t you know that no-one’s investing in anything anymore? These days its bootstrap… or get booted out…
Just kidding.
There IS capital out there. Whether in the form of five-figure seed amounts, angel capital or, yes, even venture capital.
But it’s also much more scarce than it has been for a LONG time. Venture capital, in particular, is more scarce than in the pre-dotcom crash days in fact.
So how do you hope to get funding for your business?
Well, if you’re looking for angel or venture capital, you’d probably do well to take note of Reid Hoffman’s three questions when considering potential investments.
Reid Hoffman is the founder, and chairman and products president of LinkedIn, and has, as an angel investor, invested in Jaxtr, Wikia and Facebook. Although he says he is firmly focused on building LinkedIn, his views about what would make for an attractive investment probably don’t stray too far from the views of many other angel investors and VCs.
In short, Reid’s three questions for startups – and the reasoning behind them – are as follows:
1. ‘How will you reach a massive audience?’
Reid says the key to success online is ‘distribution’. In relation to consumer Internet companies, he wants to know how a company plans to get to a million users… then how will it get to 10 million users… and then how will it achieve deep engagement with those users.
2. ‘What is your unique value proposition?’
As Internet marketers we all understand the need for a unique value proposition or USP, right?
In Reid’s view, a product needs to achieve a balance between being innovative and unique… and appealing to users. And sometimes incremental improvements can be profound. For example, Google didn’t invent the search engine… but it improved it in a major way.
Ultimately, Reid wants to see ‘innovation that is categorically distinct from existing propositions.’
3. ‘Will your business be capital efficient?’
Reid says this third question may be the most important. Basically because having the biggest audience and the most remarkable USP won’t mean squat if you don’t have cash flow.
So although you might not be profitable, you definitely need cash in the bank to keep the company going. That doesn’t just mean raising enough initial financing, but getting financing later on when – and ideally before – it’s required.
Source: Reid Hoffman, “Reid Hoffman: My Rule of Three for Investing,” TechCrunch, April 19, 2009
