Defending Your MVP or Prototype Stage with Investors

defendingWhile you are still in the idea phase, investors tend to focus on vision, promise, potential and personality traits of the founder(s) because that’s all you have for them to evaluate.  Once you’ve got an established business model, starting management system and initial track record of paying customers, investors will naturally give those things focus when considering an investment.  But when you’re in between these two phases with a yet-to-be-launched MVP (software) or ugly-but-working prototype (hardware), the conversations and debates are often more challenging.  You have something tangible (MVP, prototype) but can’t yet connect any dots of real customer traction.  This article describes a method for helping the investor understand where you are currently and how their money will effectively be used to continue your pursuit of building a great product and eventually a great company.

Minimum viable products (MVP) and prototypes are often ugly and functionally deficient in many ways.  But that’s OK because there are two key motivations behind building an MVP or working prototype:

  1. Prove that it can be built in the first place
  2. Use to gain highly-valuable feedback from potential customers, business partners and others you’re depending on to build a company around your product

The problem comes when investors have difficulty seeing past the ugliness and functional deficiencies.  It is possible their investment strategy is better suited for post-launch companies with a more finished product and initially established track record (see related article titled “Having Trouble Raising Money“).  But don’t give up that easy.  Instead, see if you can help them extrapolate from where you are today to where you’ll be when you’re ready to officially launch into the market.

This article focuses on the product-specific challenges you might face while fundraising during your MVP/prototype phase.  But don’t take that to suggest there aren’t other things you should be highlighting with investors during this same phase.  Specifically:

The Methodology

My suggested method follows this very basic pattern:  “It works but ________”.  Let’s break out the two key components of the method and explore further.

It Works

If you built something complex or overcame meaningful challenges to create your MVP/prototype, then you deserve some credit from the investor because it’s your first competitive barrier.  Lots of startups go for the easiest thing they can build rather than solving a problem they have genuine passion for solving, even if the resulting solution is difficult to build.

But It’s . . .

This is where you admit your product is deficient in one or more ways.  For example:

  • Software:  It’s ugly, it only has two out of three important features, it’s only in English, it only works on Chrome/Android/OpenStack/etc, our special sauce isn’t yet patented
  • Hardware:  It’s large, it’s expensive, it only works for 2 hours without recharging, it has a lot of exposed wires, our special sauce isn’t yet patented

Guess what the investor’s money is partly going to be used for?  To solve for some/all of the “but’s” you listed.  But the key is to already have evidence (validation) that solving those “but’s” is key to unlocking the revenue potential you need to start growing a great company.  I’ll come back to this again later because you actually need to have evidence for all pieces of your claim, but I want to expand the claim a little bit first.

Expanding Your Claim

Now that you understand the basic version of the method, let’s expand it for a little more investor impact:  “It works and is______ but ________”.  This expanded claim gives you the opportunity to differentiate and/or define unique value from what you’ve built.  Here are some examples to help you see what I mean:

  • It’s significantly better than ______
  • It’s different than _____
  • It’s the first _____
  • It’s the only _____

Software example:  “After just 3 months since inception, our SaaS MVP works and is significantly better than the offerings from Microsoft and Oracle but it’s still a little ugly and only works with Chrome browsers.  Part of our $350K seed round will go toward hiring a UX agency for improved design and converting a developer to full-time so she can modify our XYZ module to support all browsers.”
(see related article titled “Comparing Yourself Publicly to the Market Leader“)

Hardware example:  “Using only bootstrapped funding, our prototype works and is the first pair of mind-reading eyeglasses but it’s currently too expensive to bring to market and only works for 2 hours without recharging.  Part of our $350K seed round will go toward already-scoped cost reduction and miniaturization, which will also expand the battery life to 16 hours.”

Proving Your Claims

Just because you say it doesn’t mean the investor will automatically believe it.  Each element of your claim should be substantiated with proof (see related article titled “The ‘So What’ Rule“).  And although it’s possible the investor won’t believe your proof or still won’t like your idea even with the proof, you should pursue it anyway just to know you aren’t on a dead end trail.  Let’s break down our claim into its key elements and review the type of proof you can/should pursue:

It Works
It’s probably obvious that the sure way to prove that it works is to do a demonstration for the investor. The next best thing would be a video recording of a demonstration.  That probably works OK for hardware products but for software the investor could easily think they’re looking at animated GIFs or UI prototyping output.  And for certain types of unique products like medical devices, advanced algorithms or big data analytics, you might best offer the proof via a lab test or independent review of some sort.

And Is
To prove that your product is (or will be) better, different, the only, etc, you will likely need documented feedback from customer prospects, business partners, industry analysts, blogger pundits, etc.  The more the better.  And perhaps an opinion from a patent attorney regarding the possibility to secure a patent will help regarding claims of being the first/only.

But’s
The key proof you need regarding “but’s” isn’t that they exist, because the investor can see that it’s ugly, large or has exposed wires.  And they will believe your claims that it only works on Chrome or is too expensive.  So where you should focus your energy is on gaining proof that solving the “but’s” unlocks something important, which probably means sales (or a dramatic increase versus your initial sales of the MVP/prototype).  For this you should look to the same constituents as mentioned above in the “And Is” section – customer prospects, business partners, etc.  If they are saying “I’d buy 1,000 of these if they were 30% smaller and 20% less expensive”, then you’re on the right track.  In fact, can you get them to give you a purchase order for 1,000 units as soon as you’ve solved their two issues?  If not, how about a non-binding letter of intent (LOI)?  That’s obviously a hardware example but you get the idea.

Summary

Raising money in between your idea phase and early sales growth phase is challenging because you’re past the pure vision/hope/promise phase but not yet connecting dots with financial and operational metrics.  But that doesn’t mean you can’t be highly successful.  In fact, using a proposed methodology like I’m suggesting here helps demonstrate that you’re definitely beyond the absolute riskiest phase of evolution (the idea phase) and actually have some real things to look at and talk about.  Prepare early to prove your claims as you reach this phase and you’ll reduce your risk of having to slow down or, worse yet, pause while you to raise money to continue your pursuit.

Related Reading

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Author: Gordon Daugherty

Over the past 15 years Gordon has seen nearly 1,000 startup pitches, advised more than 200 entrepreneurs and been involved with raising over $45M in growth and venture capital. Throughout his 28 year career in high tech, serving twice as President and three times as CMO, Gordon has both an IPO and a $200M acquisition exit under his belt. Now his emphasis is purely focused on helping startups and early stage tech companies. Through his Shockwave Innovations advisory practice and as Managing Director for Austin’s Capital Factory startup accelerator, Gordon is an active angel investor, VC and startup advisor.