What investors mean when they say 'too early'
It’s been about 6 months since launching Galileo and we’ve been overwhelmed by the quality of the founders that have applied to us.
Over 400 applications, hundreds of calls and personalised feedback emails later (each 300-600 words…) we've seen some common themes emerge in our feedback.
In fact, we proud ourselves on giving personalised feedback to every founder that applies to Galileo online, regardless of whether we invest.
Part of our accelerator ethos is candid feedback and honest support which we believe should extend into why you say ‘no’ to a founder in the earliest of stages.
We think clarity about why a VC isn't saying yes right away is important. Knowing what investors are thinking can help you refine your go to market strategy and your pitch in the future.
We encourage any founders to get on our radar early – we aim to get back to you within 72 hours. We accept applications on a rolling basis (no deadline! We invest all year round!) – and we like to meet you early and follow your progress.
So, what's a common piece of feedback we provide?
Typically we see a lot founders apply early that simply need to show more progress before we can consider investing. This is not a bad thing, just a ‘not right now’ thing. We say this as a fund targeting very early stage investments – we aim to be your first investor.
Here’s what we investors typically mean when they say you’re ‘too early’.
What do VCs mean when they say a startup is ‘too early’?
A common piece of feedback founders get from investors is that they’re “too early”.
Unfortunately this can actually mean lots of things. Essentially it often means ‘come back when you can show there are real customers out there’. They want to see more sales or users signed up.
But this is also extremely frustrating: how do you get customers if you don’t have money to build anything?
In our opinion, this is a pretty vague bit of feedback so we try to avoid using the phrase, but instead relate it to where you are in your stage of business, what you’re building and what market you’re going after.
If you’re building an online business then getting customers early is (relatively speaking) so easy these days – it looks suspicious when you can’t! If you’re building a medical device, then getting customers early looks very different.
What we care about, and what we think you need to communicate, is how have you validated or proved there are real customers out there that are willing to pay for your product or service. Further, how can you prove there’s lots of them*?
The easiest way this is to show real paying customers. The next best way is to show a commitment of some kind from people that are willing to pay, and how much.
What investors like to see in order of “interestingness”:
- Growth of paying customers or users (e.g. in marketplaces or social networks^)!
- Pre-commitment to buy e.g. downpayment or pre-order
- Commitment to buy e.g. signed MOU (with a dollar value on it…)
- Willingness to use e.g waitlist
- Validated problem area e.g. 50+ customer interviews or expert insight into a problem and solution needed
Intentionally not included there is general noise (press, awards etc) or social media followers – they are generally not signs people want to actually buy your product, and may well be a sign of something else (an amazing founder story etc).
Also not included is surveys – our preference is for founders to have deep qualitative insight into their customer segment(s), not high level survey data that can obscure the underlying meaning of responses.
The more of the above list you have, the easier it will be when talking to investors, including us, about getting funding earlier in your journey.
Founders often ask if they need paying customers for us to invest – the answer is no. Paying customers is just the “best” kind of validation to show us that you understand the market you are going for, and that you can execute/build.
Should you raise funding pre-product and pre-customers?
Raising funding before you’ve built anything or have any customers is getting more common – particularly when you read about US startups on TechCrunch – but it's still a difficult path, particularly for first time founders.
Building prototypes, whether using tools like Bubble or hacking together a Frankenstein of Typeforms and Zapier for software MVPs or hardware prototyping with Arduino boards, is becoming so much easier that both technical and non-technical founders have the tools to get anything out there to test the market’s response (or whether it’s even possible to build!). The cost, effort and technical barriers are much lower and founders should take advantage of this when building prototypes and proof-of-concept products.
Not to mention how easy it has become to render high-fidelity mock ups of apps or physical products to get customers to commit to buy through a waitlist or pre-order list.
For technical founders who have the skills in-house, this means actually launching your product and getting into customer hands early. For non-technical founders this is learning a prototyping tool or recruiting someone to help you build an early version before you have funding (tip: don’t use dev agencies to build your prototype!).
What founders can build and test before they raise money is a test of your resourcefulness, ability to deal with constraints and raw hustle. The more you can do the better – you will forever be operating with limited resources so it’s not like it magically gets easier.
As investors this means that we’re seeing more startups that already have V1 products in the market which is a great test of the founders’ insight into the customer and market, and early demand.
I don’t recommend selling your equity (one of the most important levers you can use) just to get going when barriers of entry have become so low.
Either your solution is amazing and no one knows about it or your solution is bad and you don’t know it. Either way launching and selling early solves both problems. Keeping a product or idea secret because you're worried someone will steal it just isn't a thing – there is no such thing as a new idea, and execution is everything in startups.
For Galileo, our sweet spot is companies that have some kind of minimum viable product in the market and have real live customer feedback. That might mean early revenues, a successful product in proof-of-concept stage or just a lot of customers, depending on the type of business. For the reasons above, we're generallyless excited to invest purely on concepts or ideas pre-product.
We would be delighted to have a back-and-forth about various ways you might prototype or build your MVP though! But you may well end up with us asking to stay close in touch so we can track your progress of building and launching the MVP.
3 common scenarios we hear
Founder: We’ve signed up lots of people to an email list, once we launch we’ll get customers straight away!
Me: If the willingness to pay is so high (in theory) – charge them now! Or at least onboard a small group of your customers to test their intent. Typically you'll find once you ask for money they'll come up with their 'real' objections to buying as opposed to easy aspiration answers of buying something in the future. I always recommend pitching your first customers on the phone or Zoom call to judge their reaction to the paid features and products.
The ‘real objections’ is what you need to learn as a product owner. Don’t waste your time with noisy user feedback.
Founder: We’ve made our first sales with our V1 product, how many customers do you need to see before you can invest?
Me: This is a great situation to be in as we may and do invest at this point! But if investors say ‘no’ don’t ask for a number, ask for a reason why they’ don’t believe this is a good investment.
If you’ve made first sales it’s very likely the investor still doesn’t believe this will grow very big or your first sales are into a ‘bad market’ i.e. customers who will churn or won’t pay much. Be careful with investors that give you a milestone revenue to meet (e.g. number of customers or revenue) before investing as they’re very likely not going to invest anyway – those numbers are usually the point at which they will simply give you a "proper look".
When we tell a startup ‘not right now’, we try and give you some pointers as to what we would like to see. This isn’t usually some ‘single magical number’ - "if only you get to 300 signups we’ll invest" - because we don’t want to set you arbitrary numbers when it’s not about some arbitrary threshold before we invest. We want to see how you are growing users or shipping product over time, and what you learn from the early customers you are gathering (where they're from, willingness to pay, …).
Founder: My product is super technical and I need to spend lots of money before I can build and deploy.
Me: Great, I love deep-tech or complex products solving big problems. But this is almost never true.
- For deep tech products you need to work out the milestones you need to hit for investors to have enough confidence to invest. Often it’s also about finding the right investors that understand your market or educating them as much as selling your business.
- For hardware products don’t just build for the sake of building, work out what you need to ‘prove’ to validate the market and which investors will invest at each stage. This might be pre-orders for example, or proof of the part of IP that is the "hardest" or most unknown.
- Put another way, work out what your proof of concept needs to be to convince investors to jump in early! This is non-trivial, sometimes it’s around the core invention or showing a result you need that shows the potential.
Most of the time we just want to keep seeing you develop before revisiting your application. This could mean signing up more users, getting more paid customers or just launching your solution to test demand.
Typically I recommend founders:
- Go out there and get more customers or users!
- Ask for feedback from the investor if they did not provide any
- Keep them updated! Put them on an update email list so they can see your progress. Include asks – we always try and help founders regardless of whether we invest.
- Understand if they’re a good fit** or not e.g. ifthey don’t invest in your industry, then it doesn't matter what you do
What investors wont say but you most definitely can do:
- Find another lead investor – you only need one yes before other investors will write a cheque (investors can be herd animals and move in packs). You will get many no’s for every yes, this is unfortunately the way it works in the early stages as much as the later ones.
- Consider raising less money – your size of investment ask will change the type of investors you attract – often we’ve see founders invest their own savings or raise $50-100k just from close contacts to get going
- Sell more stuff! The tried and true strategy of any business, selling stuff to customers means you’re in control and can raise on your terms when you want***
Why do VCs like to speak to startups early yet then say you're 'too early'?
Okay, so this is 100% something that is a hugely valid critique of VCs.
You read all the websites talking about how they are cradle to grave investors, writing cheques from pre-product pre-pre-pre-seed through to some insanely big growth round pre-IPO – yet, they say you're too early?! What gives?!
The reality is that ultimately every fund or investor has a sweet spot in cheque size. For some, that's really small (angels might have a sweet spot of $25k!), and others need to be investing millions at a time in a "typical deal". This kind of thing is driven by fund size, investment strategy or mandate, and even where they are in their fund deployment cycle [likely topics for another post].
At a very high level, one thing to keep in mind with investors is that we are in the business of seeing as many investment opportunities as possible. Nobody ever says no to more "deal flow" (investment opportunities), so your marketing aims to get everyone to the point of having a conversation with the investor so that they can see if it's something that fits their strategy and mandate. For founders, this sucks because it makes it hard to pre-qualify the investors that might actually invest versus the "tire kickers" who will have a conversation and get you excited only to say you're too early anyway.
The converse of this is that some investors like to get to know the founders and track you over time before investing, so they are wanting to be on your update list and then pounce at the opportune time (when you fit into thesis/mandate/strategy/etc). Again, to founders this can be aggrevating – it's like a free call option! However, it's just the way that some people invest and a part of some funds' strategy.
A good question to ask an investor is what round or round size they commonly invest into startups, and what that translates to in terms of initial cheque size. There will be exceptions to every rule, but they should be able to tell you that. You can also ask for information about the last 3-5 initial investments they've made and they can hopefully tell you so you get an idea!
You will often see an investor say no to a company as it's too early and then "bizarrely" invest in some kind of pre-product-pre-revenue business. The reality is that the reasons they invest in the second business are very different to the reasons they don't invest in the first (e.g. a multi-time founder that they want to get on to the cap table early, perhaps it fits a certain topic/thesis area they're looking for investments within, …).
So you should absolutely discount the "we want to speak to you from when you have the first idea" message – that doesn't mean you should not reach out and have the conversations (perhaps you are the exception), but that you should take those conversations with a grain of salt.
Investors often use the phrase ‘too early’ to mean lots of things and a quick way to pass on an startup. We think this is short-changing founders and providing honest feedback is important in the early stages.
Keep in mind that any investor's feedback is their opinion. Look for patterns in the feedback you receive and treat every investor conversation as free consultation. They will never know as much as you about your business, but sometimes we do actually know a few things here and there ;)
As a founder, aiming to hit one of the investor ‘interestingness’ factors above will go a long way in selling your startup to investors (and customers), especially if you’re a first-time entrepreneur.
- *We like to fund solutions to big problems, not things that just impact a few people [if it's a small group now and a big group later, that can still be a big problem! It is great to start in a niche, clear group of ideal customers]. This is where the type of business you’re building comes into the equation. We’ll cover this in the next edition!
- ^We have not cover this but marketplaces and social networks will mean different validation metrics, namely showing network effects – in particular its all about the growth of your network in the early days. Within consumer type applicants, typically you want to show thousands if not tens of thousands in the very early days, not hundreds.
- **Our next post is around founder-investor fit which is an important aspect, you should aim to get investors that have real founder experience at the stage you're at and a bit beyond, and who can support you as you grow.
- *** There’s a whole other article on bootstrapping vs raising money that will we share soon…