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Proof of concept requirement prior to raising seed?

We have a prototype product in e-commerce and had plans to begin fundraising with that prototype. However, I have heard that investors will require some proof of concept data before they invest, i.e. a beta or mini-launch that shows customer adoption. I understand that investors requesting POC are trying to de-risk their investment, but I actually think that such efforts would increase their investment risk and be detrimental to the business because the product would not be launched improperly and we would lose competitive advantages (along with the idea that the data may not be valid because of a small sampling size).

What experience has this group had with such requirements prior to funding? Was this something commonly held or depends on the investor? Your collective wisdom appreciated.

Thanks,
Lucia

18 Replies

António Gomes de Menezes
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CEO SATA Airlines
For future correspondence, please use [removed to protect privacy] or visit www.amenezes.uac.pt
Anthony Zeoli
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Anthony Zeoli Entrepreneur • Advisor
Digital Strategy and WordPress Consultant and Trainer
Hi Lucia,

Generally speaking, a lot of Angel's are risk averse and yes, they want to see consumer traction. However, there are investors who will invest in a concept, it's the strategy is very well thought out and the go-to-market is sound. I wouldn't let not having a beta stop you from pitching your concept. There may be someone out there that sits in your vertical that will value the proof-of-concept. It's far more rare, but possible. I just met a group from DC with a music project that was funded by an angel with a very rudimentary beta and his funds have helped to further build out the platform. Now, they need to convince their market to use the service and that's going to be where this thing is do or die. If you have a very strong team and a very sound model, you're better off than having a beta with a weak team and traction at all.
Eric Rogness
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Eric Rogness Entrepreneur
Technical Product Manager
When you say "prototype product in e-commerce", do you mean that you are selling a product online (in which case we need to know more about that product), or are you an e-retailer/marketplace?
Michael Brill
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Not sure I can beat the collective wisdom of auto-responders... there's no one answer. Angel/seed investors often don't have the time to become black belts in what you're doing so they look for as much proof as possible. Traction is among the best, even though you can argue about short-term/long-term tradeoffs. Traction is a much bigger deal in consumer internet where success often seems like a dart board.

But start investor conversations now with a prototype if it's sufficient to communicate your story. Of course if it's feasible to build a MVP of what you want to build with current resources, crank on that as well. Worst case, you nowcan go back to prospective investors in a few months and show the progress you made (http://www.bothsidesofthetable.com/2010/11/15/invest-in-lines-not-dots/). Best case, you raise money on the back of your idea, team and market potential even before you've built anything... this happens every single day.



Kate Hiscox
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Kate Hiscox Entrepreneur • Advisor
Boss at Venzee
I think you will struggle to get investment without an MVP that has a track record. Unless, of course, your team has that track record. However, an accelerator may take you with a prototype so that is an option.
John Duffield
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John Duffield Entrepreneur
Sr. Manager, Interactive Program Management at SapientNitro
Hi Lucia, congrats on getting this far.

I have a mobile SaaS product for B2B and we're seeking to raise a seed round now. There are some competitors (always are), and my view has been that investors would laugh at me if I couldn't demonstrate traction / proof-of-concept / beta or paying clients prior to investment. My view pretty much has been 100% true, it is not like it used to be. With some many companies and so many products/ideas brought to market the idea is now only as good as its proven ability to get traction (and ultimately make money).

We are now in private beta and it is helping, but by no means is enough for us to secure funds. You must be absolutely relentless in your pursuit for traction and market validation. We need to show customer demand, we need more paying customers. We need to be able to demonstrate, with factual numbers, that we have made a positive impact on the customer (business)'s bottom line.

Remember we are a B2B product, not a consumer product... so perspectives may differ in the way you demonstrate traction. e.g. # of paying business vs number of downloads or number of transactions occurring on our platform or amount of money made etc.

Hope that helps.
Lucia Guh-Siesel
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Lucia Guh-Siesel Entrepreneur
CEO & Founder, Bandalou
Hi Eric,

I mean the latter - marketplace. Hope that helps.
Eric Rogness
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Eric Rogness Entrepreneur
Technical Product Manager
Thanks, Lucia. It will take a long time for your e-commerce marketplace to gain a scale which would prove the concept. And in order to even start on that path, get noticed and attract customers, you'll need capital. It will not be possible to attract investment in your business at an early stage. But instead, you'll need to find people with money who believe in you. So if you and your team have made impressive accomplishments in your careers that make you a credible bet to execute on your startup vision, that's what to focus on in these investment conversations.
Alan Schunemann
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Alan Schunemann Entrepreneur
CTO and Co-founder of eTelemetry
If your idea is so easily replicated that you fear losing first mover competitive advantage by rolling out a beta, then you probably need to reassess its viability as a business. You could also do a friends and family soft launch to get feedback and show viability.

Any e-commerce/membership site/app needs to demonstrate its interest across a large enough member/user base that it's interesting to investors, and you as an owner, for that matter. By not having the initial "pop" number of users, you are asking the investors (and yourself) to bet that it has legs with a large enough audience to be a viable business. Are you so sure it's such a good idea that it will have mass appeal? If so, then why do you need investor money? With today's social media, a viral launch is inexpensive, so requiring funding to advertise and preload a site launch seems unnecessary. Launch it - grow it, and go after investor money to scale it, not to start it.
Kate Hiscox
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Kate Hiscox Entrepreneur • Advisor
Boss at Venzee
Hi Lucia,

I've worked in this industry for 15+ years. If you want to bounce any ideas off me then feel free to reach out.

Kate
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