How to Build a Strong Customer Validation Before Fundraising

Success of a business comes down to how well it can sell its products or services.

So, your funding presentation must include information about your target markets and why customers in those markets will be interested in what you have to offer. The less you talk about ideas and guesses, the better.

Most investors are interested in businesses that will be the market leaders in their specific niches.

They are less likely to invest in a company just like everyone else. If you want to become a PLC or future acquisition target, your target market segments must be big enough to let you get revenue of $100 million or more with only a small share of the market penetration.

For example, target market segments that are worth more than a billion dollars and explain how to get 5% to 15% of the market within 5 years – That’s about $100 million a year.

Another way to look at this is that,

VCs who invest in early-stage companies usually want to get 10 times return in 5-7 years.

If the investment is at a later stage, like in the last round before an IPO, the required returns may drop to 3 times because it will take less time to get back the capital plus a profit.

These metrics can only be met if you have strong evidence that a lot of people are likely to buy your products.

Getting strong customer validation and showing that you have “traction” in the market should be one of the first steps you take when making your pitch to raise money.

Spend some time with your team to figure out who your best target really is before you start. Most of the time, the first “customers” are the easiest ones to get, but they may not be the best ones to grow your business.

Investors generally look for these types of validation in the following order:

  1. Customers (paid)
  2. Early Adopter (free)
  3. Business Partners
  4. Industry Experts
  5. Credible insider

However, not all types of validations are the same. For example, weak customer validation is hard to get around, even if all the other groups are positive.

Bottom Line

Focusing on getting at least a few early adopters or paid customers of your product / services before reaching out to investors, that helps a lot.

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