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Raising money for your startup is one of the hardest things you’ll do as a founder. It can be an intense and time-consuming process. It often involves many rejections before a round is successfully closed.

In this unit, we cover some practical tips to help you approach the right investors and streamline the process of raising a funding round.

Create an investor wish list

Most funding rounds involve more than one investor. Two to five investors is typical. It’s common for startup founders to approach dozens of investors before they get the small number of commitments needed to close a funding round.

How do you decide which investors to approach, and in what order?

The first step before you contact any investors is to do research and determine which investors might be interested in your company. Consider the sector focus, stage of investment, and geography. Most investors prefer to invest in companies located close enough that they can meet in person (although this preference has changed markedly over the last couple of years).

After you have a list of potential investors, rank them in order of preference. At the top of the list, are the investors that you most want to have as shareholders in your company. This ranking might be because of their sector experience, networks, or strong brand. Maybe you spoke with the founders they backed previously who told you that they’re great to work with.

At the bottom of the list, are the investors that you would be willing to have as shareholders. They might be less desirable because they have shallower expertise in your sector. Or, they’re general partners who don’t have experience as founders, or the feedback about them from other founders is less positive.

Don’t contact investors from whom you wouldn’t accept an investment; this wastes your time and theirs.

There are two schools of thought on which investors to approach first:

• If you’re confident of your investment proposal and your pitch is polished, start at the top of your list. Pitch the investors you most want to invest in your startup. If they agree to invest, your funding round closes more quickly and you avoid wasting time with less valuable investors.
• If it’s your first time raising a funding round, your pitch is a little shaky, or your company only just meets the investability threshold for your target investors. It might be a good idea to start at the bottom of your list.By pitching less desirable investors, you gain experience in pitching your startup. You also receive feedback and questions from these investors that you can integrate into subsequent pitches. By the time you make it to the top of your list, your pitch will be more solid and you can anticipate many of the questions you’ll receive.The disadvantage of the second approach is that it takes longer. You’ll have more meetings, and you might even receive investment offers from your nonpreferred investors. Many founders find it difficult to say no to an investment offer, because they run the risk of saying no and then not receiving offers from any of their preferred investors.

Make contact with investors

Almost all investors allow startups to send unsolicited pitches, either by cold email or through a form on their website. Well-known investors often receive many hundreds of unsolicited approaches that are of highly variable quality. As a result, your pitch might receive little time and attention.

In contrast, most early-stage investments come via referral from someone whose judgment the investor trusts. These pitches are often taken more seriously and receive a more thorough review.

After you decide which investors to contact, get a warm introduction via a mutual connection if you have one, or through a founder of one of their existing portfolio companies.

Building relationships with investors takes time. Most investors are receptive to having informal discussions with founders well before you begin the process of raising your funding round.

Investors are often happy to share their experiences with early-stage founders as part of their outreach and deal-sourcing activities. By getting to know you and your company, they’re able to offer you some light-touch input and connections to other founders or investors, potentially over a period of a few months.

At the same time, they get to see you in action. They get a sense of the speed and urgency with which you execute, and see whether you follow through on the advice and connections they offer. They can also gauge whether they might be happy in a long-term business relationship with you.

By building relationships with investors in this way, you increase the chances of them committing when you’re ready to open your funding round.

Approach investors in parallel rather than in series

One of the most common mistakes made by first-time founders is to approach too few investors at the outset.

After you contact an investor, it might take several months before you know whether they’re going to invest. If you only contact a handful of investors, you run the risk that all of them will pass on the round. Then you have to restart the entire process with another set of investors, which increases the time it takes to close your funding round.

Approaching investors in series also means you have little opportunity for competitive tension, so there’s less incentive for each investor to offer attractive terms. It can even lead to unfavorable terms if investors know that without their money, your company could run out of cash.

Finally, startups that are on the fundraising trail for an extended period start to look questionable. Investors will ask why your required funding is still secured after many months.

In contrast, if you make initial contact with 10 to 20 investors in parallel, you increase the chances of closing your funding round quickly. The up-front workload is higher, but this approach allows you to treat fundraising like a sales funnel and prioritize your efforts on those investors who appear most likely to proceed. Even if most investors pass on your funding round, you have enough candidate investors in the pipeline that you don’t need to restart the entire process.

You might also be able to achieve some competitive tension as investors realize they need to move quickly and offer attractive terms to not miss out.

Find a lead investor

Most funding rounds involve multiple investors, but in most cases one investor does most of the pre-investment work and is often the first to commit funding. This investor is referred to as the lead investor.

Finding a lead investor is important, because their commitment signals to other investors that someone they trust has evaluated your startup as a worthy investment. This phenomenon is noticeable when the lead investor is a top-tier venture capital fund or well-known angel investor. On many occasions, previously undecided investors commit within days of learning that a lead investor is committed to a funding round.

As a startup founder, one of your objectives is to find true believers who will make an early decision to back your company and help you secure the other investors you need to close your funding round.

Conversely, it’s rarely a good idea to spend time trying to convert potential investors who are on the fence, or who don’t show a sense of urgency in making an investment in your company.

Understand term sheets

A term sheet is a short legal agreement between your company and an investor that sets out the key terms of a proposed investment. Term sheets are normally not legally binding, except for clauses relating to:

• Confidentiality: You can’t disclose the term sheet to other parties.
• Non-solicitation: You commit to proceeding with the investment and can’t shop the term sheet around to other investors in an attempt to secure better terms.

After investors sign a term sheet, they commence due diligence, as discussed in the following section. If no major issues are identified, the transaction is documented in a more substantive set of legal agreements. Funds will only be transferred to your company’s bank account after these agreements are signed.

Term sheets are an important part of the fundraising process. They allow investors to make an in-principle commitment to invest, but without the overhead of negotiating detailed legal agreements. They also allow startups to have some degree of confidence about which investors are committed and on what terms.

The content of term sheets is beyond the scope of this unit. As a startup founder, you should be familiar with the key terminology and concepts contained in term sheets. You should also put some thought into preparing a term sheet of your own.

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In this unit, we explain three of the most common types of startup investors: friends and family, angel investors, and venture capital (VC) funds.

Friends and family

It’s common for startup founders to raise their first funding round from friends and family members.

The motivations of these investors vary. Typically, they want to support the entrepreneur. For example, the investor might be your uncle who wants to help you get started. They also might want to try to generate a return from their investment by getting in early.

It’s worth noting that friends and family are generally the only investors who will fund you when all you have is an idea for a company.

Friends and family can be a good source of early capital if they’re happy to be passive investors and don’t expect to be involved in running your business.

For most founders, the biggest challenge with friends and family rounds is that you have a friend or a family member who’s now a shareholder in your company. They’re financially exposed to the success or failure of your business.

This arrangement can have a profound effect on your relationship with that person. It’s wise to think about how to manage this relationship over the long term.

Tips for raising money from friends and family:

• Before any investment is made, discuss expectations. Ensure that you agree on the likelihood of success and failure, time frames, and how the company should be run.
• Agree on a reasonable valuation. For example, your uncle might not have a grasp on startup valuations. While it might be tempting to set a high valuation, it might cause trouble when you raise your next round from more sophisticated investors.
• Have a legal agreement that sets out the terms of the investment. Is it an equity investment, a loan, or a gift? How will the investor be compensated? What happens if the company fails? What input, if any, will they have?
• Make sure the person can afford to lose their investment.

Angel investors

An angel investor is a wealthy individual who invests their own money, like Melanie in the previous unit’s example. In many cases, they’re successful entrepreneurs themselves.

Good angel investors bring capital along with expertise and networks that can help you grow your company. Angel investors often work in groups. An angel round can have a few or sometimes 20 or more individual investors participating.

Angel groups often invest in a wide range of sectors, with their investment interests influenced by their members’ individual expertise.

Generally, angel investors will consider investing in a startup only after it launches at least a minimal viable product and generates traction in the form of product usage and, ideally, revenue.

Tips for raising money from angel investors:

• Research the investor and ensure that their investment profile is a match for your company. Consider the stage, size, and sector of their investments.
• Find opportunities for warm introductions via other founders who raised money from the angel investor or angel group.
• Speak to founders of portfolio companies to find out whether their experience with the investor was positive.
• Be prepared to send your pitch deck in advance of any meeting. Most angel groups ask you to upload a pitch deck or executive summary via their website before they’ll meet with you.

Venture capital

VC funds are professional investment firms managed by general partners who were often successful entrepreneurs themselves. VC funds generally invest money provided by institutional investors like limited partners such as pension funds. These investors allocate funding to VC firms as part of their diverse portfolio of investments.

Some VC funds invest at seed stage, but it’s more common for them to invest at Series A and beyond. They normally invest larger amounts than is typical for angel investors.

Most VC firms have a 10-year lifespan. They go through distinct phases:

• Sourcing investments and investing, usually in the first five years.
• Managing investments and supporting portfolio companies.
• Making follow-on investments.
• Exiting investments.

It’s important to know where a VC fund is in its life cycle. There’s little point in pitching a fund that’s in its ninth year of a 10-year life.

VC funds generally have a preferred investment stage, like seed, Series A, and Series B. They also often focus on one or more specific sectors, such as blockchain, AI, and health tech.

Generally, VC funds will consider investing in a startup only after it launches a product, generates early traction, and can show strong evidence of product-market fit. At that point, it’s common for the company’s growth to be limited by capital rather than by customer demand. The funding allows the company to rapidly accelerate customer acquisition and growth.

Tips for raising money from VC funds:

• Apply the preceding tips for angel groups, they also apply to VC funds.
• Be prepared for multiple meetings and a time frame of several months from initial contact to investment close.
• Have a comprehensive set of due-diligence resources assembled so that the fund can complete its due diligence without adding extra delays.

Not all money is equally valuable

Good investors can add significant value to your company by sharing their expertise and networks. They can also provide guidance to the founders as they work on growing the business. Recognized investors, such as top-tier VC funds, also add credibility by association. Their involvement might make it easier for you to raise subsequent funding rounds.

There are investors who add limited value, such as friends and family, as we discussed previously. There are also investors who add negative value.

A good rule of thumb is that smart, involved money is better than dumb, passive money, which in turn is better than dumb, involved money.

The benefits of smart money are clear. Smart money comes from someone who has relevant expertise. Being involved means they’re willing to commit meaningful time to helping you grow your company.

Dumb money comes from people who don’t know much about your business or about how startups work. Being passive means they’re prepared to take a back seat, and they have no ambitions to contribute to running your company. Dumb, passive money is fine if you have access to other sources of experienced guidance and the investment is on general terms.

Dumb, involved money is problematic. It comes from people who don’t have much value to contribute, but who insist on having an active role in your company. Sometimes dumb, involved money comes from inexperienced angel investors who created wealth in other sectors, such as retail or property investing, and want to try their hand at angel investing.

It’s wise to avoid these investors. Experience shows that the challenge of managing their involvement frequently outweighs the benefit of the capital they provide.

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At its most basic, raising money from investors means to sell a stake in your company in return for cash. The investor obtains an economic interest in your company. They also gain some degree of control by virtue of the rights attached to their stake.

Bootstrapping vs. funding externally

The difference between a bootstrapped company and an externally funded one can be seen in the following two charts, which show net cash flow over time.

In the first chart, the company is growing organically. The founders self-fund it until it can generate customer revenue. At that point, revenue is the main source of funding for continued growth. This type of funding is commonly referred to as bootstrapping.

A self-funded, or bootstrapped, company can tolerate negative cash flow only to the extent that the founders can fund the company personally. After the company begins to generate revenue and achieves positive cash flow, its rate of growth is limited by the rate at which revenue is generated.

The following chart shows cash flow in an externally funded startup. Such a company can tolerate a greater level of negative cash flow, which allows it to invest more in product development and customer acquisition. After the product is launched, it can achieve a steeper rate of growth.

Higher growth is one of the primary reasons that startup founders seek external capital to fund the growth of their companies.

Why raise money?

There are other reasons that startups raise money from investors beyond maximizing growth.

Having the backing of a good investor brings access to capital and expertise, both of which can greatly enhance your ability to grow your startup into a large and successful business.

In many cases, startups require a large up-front investment to build the product and get it in the hands of users before generating meaningful revenues. In these instances, it might not be feasible for the founders to self-fund the company, so raising external capital is the only option. This is especially true for deep-tech companies or those organizations that develop complex physical products.

If you’re competing in a large and global market, you probably have competitors. If they have significant amounts of capital, you might not be able to compete meaningfully without access to similar amounts of capital. Bootstrapping your company with limited funding might make it impossible to compete in your market.

Why not raise money?

There are some good reasons why raising money from investors might not be a good fit for you.

First, you might not need external capital. If you can self-fund your company or generate customer revenue early enough, bootstrapping your startup can be the best path to take.

You also might not want to start a high-growth company and swing for the fences. Taking external capital from an investor brings with it a set of expectations. As we discuss later, most investors are interested only in backing companies that can experience massive growth and generate a large financial return. It makes sense to want to start a company that grows at a more modest pace. Such companies often provide founders with an ongoing source of income and allow them to be in control of their own work-life balance.

When you raise external capital, you’re giving up some control over your company because you’re no longer the sole owner. The company goes from being my company to our company.

One way to think through this decision is to weigh the advantages and disadvantages. On the downside, you have to give up some control. On the upside, you have the capital to increase the odds that the company grows and succeeds.

A worksheet like the Founder Alignment Exercise is a useful input to help you decide which kind of company you and your cofounders want to build.

Control and dilution

When you raise money from an investor, they want some input on how you run the company. They need this information to protect their investment and ensure that they’re able to contribute positively to the company’s growth.

Their input might take the form of a seat on your board of directors or a board observer position, or it might take place informally through regular meetings with the founders. It can also involve giving the investor voting and veto rights on key strategic decisions. Usually, a separate class of shares is issued to investors with these rights attached.

A good investor isn’t interested in running your company. They just want to maximize its chance of success. Unless something goes terribly wrong, you and your cofounders will still be in charge of the company, making all the day-to-day decisions.

Nevertheless, many founders grapple with the question of giving up some control of their company.

It’s important to separate the concepts of economic interest and control. As a startup raises more capital, the founders’ shares are diluted by the incoming investors. When startups raise large amounts of money over multiple funding rounds, founders sometimes end up with a minority stake in the company they started.

This change doesn’t necessarily mean they lose control over the company. An investor can have a significant economic interest in the company while having only a modest degree of control over it, but they still benefit financially when the company is successful.

By way of example, Mark Zuckerberg retains significant control over Meta (previously Facebook). He holds around 58 percent of voting stock, despite having raised billions of dollars from investors and being diluted to a minority shareholding with less than 20 percent of the company’s total stock.

Funding rounds

When startups raise money from investors, they typically do so in discrete stages, or funding rounds, that align with milestones in the company’s development.

Each funding round is linked to achieving a certain level of de-risking of the opportunity. As the company goes from one funding round to the next, the amount invested generally increases, as does the valuation of the company.

The terminology used to describe each of these funding rounds varies considerably by geography and by industry. The most common terms and their meaning are summarized in the following sections. Each section describes a different funding round.

Funding round	Typical company stage	Typical source of capital
Friends and family	Idea, concept design, prototype, or minimal viable product (MVP)	People you know who want to support you as an entrepreneur and who might not want or expect a large financial return
Seed	MVP or product in market Evidence of problem-solution fit Early traction in the form of product usage and ideally some revenue	Angel investors Seed-stage venture capital (VC) funds
Series A	Established market Evidence of product-market fit Growth in revenue limited by capital rather than by demand	VC funds
Series B, C, D, E	Expansion to other products, markets, and geographies	VC funds, private equity firms

You can plot these funding rounds on a time chart that shows the typical milestones against which each round is raised.

The investor perspective

Why do investors invest in startups? To answer this question, we first need to look at risk and return.

Investors typically have a portfolio of investments. Each investment can be characterized by two factors:

• Potential rate of return: How much money the investor could make for every dollar invested if the investment is successful.
• Level of risk: The level of uncertainty about whether it will generate that return.

The riskier an investment, the higher the rate of return an investor should expect in order to compensate them for taking the risk.

Generally speaking, at the low end of the risk-return spectrum are investments such as government bonds. Property and listed stocks are in the middle. Startups are at the top.

It’s estimated that more than 90 percent of all startups fail and around 70 percent of seed-funded startups fail. So a seed-stage investor who invests in 10 startups can only expect three of those startups to succeed.

Experienced investors have no problem with accepting risk, but only if they can see the potential for a large return to compensate them for all the investments that didn’t make it.

As a guide, early-stage investors look for at least a 30 percent annual rate of return across a portfolio of startup investments. For reference, the average annual return to investors in residential real estate is around 10.5 percent.

Investors need liquidity

Investors typically don’t invest in your company for a dividend or a share of profits; instead, they want your company to achieve a liquidity event, which is also known as an exit.

An exit occurs when your company is either acquired by a larger company or listed on a stock exchange. Acquisitions are more common than listings. At this point, investors can sell their shares and receive a one-off sum. Founders, employees, and any other shareholders generally sell their shares too.

For founders, this means that if you intend to raise money from investors, you need to be clear from the outset that you’re building an acquirable or publicly listable company.

For example, you might want to build a lifestyle business or a company that you hope will remain privately owned forever. You won’t be able to raise money from most mainstream investors, such as angels and VC funds, because there might not be an opportunity for them to exit their investment.

Finally, it’s important to recognize that investors are often themselves successful founders who exited one or more of their own companies. They might want to actively support other founders by reinvesting the wealth they generated. This is especially true in more mature startup ecosystems that have large numbers of successful serial entrepreneurs.

What investors look for

When an investor considers your company as an investment prospect, they’re essentially assessing risk versus rate of return. The following indicators of failure are a good proxy for risk. The success indicators are a good proxy for rate of return. Investors score your company by considering each indicator in the following checklists.

Success	Failure
☐ Non-obvious idea	☐ Building a product that nobody wants
☐ The right team	☐ A derivative idea
☐ Intense customer pain	☐ Competing with free
☐ Scalable business model	☐ Attempting to scale before achieving problem-solution fit
☐ Large opportunity	☐ Too concerned about secrecy
☐ Timing	☐ Not seeking out the right advice
☐ Tailwinds
☐ Inherently shareable
☐ Recurring revenues

Some other factors that investors consider when they make investment decisions include:

• Growth levers: Actions that translate into growth in customers and revenue, such as paid acquisition, content marketing, or partnerships. Investors want to see that the founders have identified growth levers. When you apply capital to growth levers, you should generate more growth. Investors also want founders to prove that unit economics are positive. That means for every dollar you spend pulling a growth lever, you generate more than a dollar in revenue.
• Validation: You’ve validated your riskiest assumptions. For instance, you’ve confirmed what product you should build and what customers you’re building it for. You also have evidence that those customers see enough value to buy it.
• Commitment: Founders need to be able to demonstrate to an investor that they’re 100 percent committed to the company.Many founders take a stepwise approach to committing time to their startup. This approach is reasonable. But when you’re ready to raise funding, investors expect you to be working in your business full time and not as a side hustle. TipBefore you contact an investor, ensure your LinkedIn profile reflects your role as founder of your company.
• Risk mitigation: Investors want to see that you’ve put in place some basic risk-mitigation measures, such as:
  • Founder vesting to protect the company in case one of the founders leaves the company.
  • Employment contracts with all founders and employees, including an intellectual property (IP) assignment to ensure the company has ownership of all relevant IP assets.
  • Good governance practices, such as regular board meetings, even if prior to the investment the founders are the only directors.
  • An employee stock-option program, if you have employees, to ensure maximum alignment of interests and retention of key personnel.

Investors look for outliers

Many early-stage investors see thousands of opportunities a year. They typically invest in only 1 to 2 percent of all the companies they see.

The reason for this low acceptance rate is that investor returns follow a power-law distribution. A few highly successful investments are worth many times more than all the other investments combined. Investors know that most startups in which they invest will fail. The small proportion of startups that succeed need to generate a large enough return to compensate for all the failed companies.

This concept is one of the most misunderstood ideas in startups. This misconception frequently leads founders to underestimate the scale of success their company needs to achieve for it to be considered investable.

Let’s explore this concept further by working through a hypothetical angel investor’s startup investment portfolio.

Scenario: An angel investor’s perspective

Melanie is an angel investor. She decides to make seed-stage investments in 10 companies with an average investment of USD100 thousand in each company. These investments will take place over a period of a few years.

Melanie doesn’t know which of the companies she backs will ultimately be successful, but realizes that each company she invests in must have a chance at being hugely successful. She makes her investments with this idea in mind.

Significant research has been done on angel investor portfolios. One of the consistent findings is that on average, at least half of all early-stage investments lead to no return. This result is typically either because the company fails completely, or it grows slowly and remains a privately owned company but never achieves a liquidity event. Investors sometimes refer to these investments as zombie companies.

As an experienced investor, Melanie knows this outcome is likely for a large proportion of the companies in which she invests. Like any sensible angel investor, she only invests money that she can afford to lose.

Let’s look at Melanie’s investment portfolio and assume from the outset that half of her investments generate zero return.

Investee	Amount invested	Investor return on exit
Company 1	$100,000	$0
Company 2	$100,000	$0
Company 3	$100,000	$0
Company 4	$100,000	$0
Company 5	$100,000	$0
Company 6	$100,000	Unknown
Company 7	$100,000	Unknown
Company 8	$100,000	Unknown
Company 9	$100,000	Unknown
Company 10	$100,000	Unknown
Total	$1,000,000	$0

Research also shows that out of every 10 angel investments, on average two make a one-time return, which is better than zero but not a successful outcome. This scenario sometimes occurs because the founders know the company isn’t working out. They’re able to do an orderly windup and return the investors’ capital to them before the company completely fails.

Similarly, out of every 10 investments, on average two make a small positive return of two times to four times the amount invested. This scenario can occur when the company is acquired, meaning a small acquisition coupled with hiring the team that started the company. Again, this return is better than zero, but it’s not the outcome that Melanie is seeking.

If we now look at Melanie’s investment portfolio, we can populate nine of the 10 investment outcomes. Five failed, which generated zero return. Two generated a one-time return, and two more generated a two-time and a four-time return.

We can see that Melanie’s portfolio return from these nine investments is USD800 thousand.

Investee	Amount invested	Investor return on exit
Company 1	$100,000	$0
Company 2	$100,000	$0
Company 3	$100,000	$0
Company 4	$100,000	$0
Company 5	$100,000	$0
Company 6	$100,000	$100,000
Company 7	$100,000	$100,000
Company 8	$100,000	$200,000
Company 9	$100,000	$400,000
Company 10	$100,000	Unknown
Total	$1,000,000	$800,000

The table tells us that company number 10 must be the one that makes Melanie’s investment portfolio a success overall. It needs to make up for the startups that failed and those companies that made a small return.

How well does company number 10 need to do? We can estimate this amount by working backwards from an expected portfolio rate of return. We noted earlier that seed-stage investors look for at least a 30 percent annual rate of return across their startup investment portfolio.

If Melanie invests USD1 million and holds these investments for seven years, she needs to realize a USD5 million return on her USD1 million invested. A simple internal rate of return (IRR) calculation confirms this return.

A USD5 million return might sound like a phenomenal outcome. That’s USD4 million more than Melanie invested. But remember that she’s investing in risky startups and could’ve made a much safer return by investing in lower-risk assets.

If we know Melanie needs to make a USD5 million portfolio return, and so far nine companies have returned only USD800 thousand, we know that company 10 needs to generate a return of USD4.2 million.

That’s a return of USD4.2 million on an investment of USD100 thousand, or a 42-time return on Melanie’s investment. Melanie’s portfolio would now look like the following table:

Investee	Amount invested	Investor return on exit
Company 1	$100,000	$0
Company 2	$100,000	$0
Company 3	$100,000	$0
Company 4	$100,000	$0
Company 5	$100,000	$0
Company 6	$100,000	$100,000
Company 7	$100,000	$100,000
Company 8	$100,000	$200,000
Company 9	$100,000	$400,000
Company 10	$100,000	$4,200,000
Total	$1,000,000	$5,000,000

Some startup founders might think that a 42-time return sounds egregious, but it’s perfectly rational. If Melanie invests in 10 companies, and she doesn’t know which of them will be successful, every single company she invests in must be capable of generating something like a 42-time return.

Let’s consider what this scenario looks like from the company’s point of view. An investor return of USD4.2 million doesn’t represent the value of the entire company. If we assume that Melanie invested in the seed round, and the company then raised money from other investors, her shareholding will have been diluted. It might have gone from 10 percent at the seed round to 2 percent on exit.

If 2 percent of the company is worth USD4.2 million, the entire company must be worth USD210 million on exit.

As a startup founder, if you’re aiming to raise money from investors, you need to see a realistic path to achieve the sort of growth and scale described here for company 10.

Only if you can achieve this goal will investors see your company as a sound investment prospect.

 Note

The numbers in this scenario are illustrative. Many variables influence the outcome, such as the total amount of capital raised and the time from seed round to exit.

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In this unit, you learn what makes a startup pitch effective.

Attributes of a great startup pitch

By analyzing pitches delivered by large numbers of startups, you can identify several common themes that emerge from the best of them. These themes are covered in the following sections.

Clearly explained

Give your audience a clear, unambiguous understanding of your company in the first 30-60 seconds.

Use basic terms rather than jargon or flowery language. For example, “We provide a dashboard for banking customers to aggregate all of their bank feeds in one place” would be a clearer opening statement than “We’re an AI-powered financial analytics company that’s going to disrupt the consumer banking industry using innovative patented technology.”

If there’s a simple and obvious “we’re the X for Y,” use it here. For example, “Camplify is Airbnb for caravans and motor homes.” Don’t refer to an X unless you’re confident 100 percent of your audience knows what X is.

It’s surprisingly common for an audience to remain unclear about what the company does halfway through a pitch. This isn’t a good situation!

Engaging start

Great startup pitches engage the audience in the first 30 seconds. Then, make a clear argument for why your startup needs to exist, why it solves an important problem, and why your audience should pay attention to the rest of the pitch. If you have a personal, authentic connection to the problem, this is a great time to explain it.

If you fail to engage the audience in the first 30 seconds, people tune out and begin checking their email or phone. Immediate engagement is especially important if you’re pitching at a demo day alongside many other startups.

If you’ve experienced great early traction, or anything else noteworthy, talk about it in the first 60 seconds. Nothing gets investors more excited about a business than telling them that it’s making money and growing fast.

Context

You might have spent the last 10 years of your life deeply immersed in a certain problem space, but it’s likely that most of the audience hasn’t. You need to explain the problem clearly, so that your solution and entire business model make sense in context.

Clear context is particularly important for deep-tech startups or those operating in narrow B2B niches, and less critical for consumer-focused startups.

Incredulity

Many great startup pitches contain an element of surprise, some new fact or insight that has your audience thinking, “I had no idea the problem was this bad. It’s amazing that nobody solved it already!” This can be an effective way to set up your solution.

For example, if your startup is focused on helping nurses prepare hospital operating theaters, you might want to start by telling your audience that in X percent of medical procedures there’s at least one missing item of essential equipment, and this simple oversight leads to Y thousand preventable deaths every year. By starting with this surprising revelation, you give your audience a clearer understanding of the seriousness of the problem and, therefore, of the importance of your solution.

An aha moment

There’s often a point in good startup pitches where an audience realizes that what the company is doing is exciting. You can help them reach this realization by using contrast.

For example, you might visually show the extent of the problem you’re tackling (for example, with a photo showing how large companies still manage complex, high-risk projects by using a whiteboard and sticky notes), and then show the beautiful user interface of your product that will replace this inefficient and archaic method.

Sometimes, startups are based on a unique window of opportunity, such as a fundamental change in consumer behavior, technology, or regulatory environment. This change might be obvious to you, but not yet to your audience. By explaining why this change creates a fantastic window of opportunity for your company, you can help your audience reach an aha moment.

Structure and flow

You can keep your audience engaged by having a logical structure to your pitch, outlining that structure at the outset, and then delivering that structure.

For example, at the beginning of your pitch, you might tell your audience that you’re going to start by giving them some important context for the problem you’re solving. Then, you might explain why it’s important and why no one else solved it. Next, you describe your solution and why your customers are signing up for it. You can then cover the business model and traction. Finally, you can talk about next steps and your funding round.

As you then step through each element of the pitch, your audience remains more engaged, because they already have a rough road map in their minds and can see how each part of your pitch flows logically from the last part.

In contrast, if your pitch jumps around and doesn’t follow a logical flow, or isn’t in the order your audience expects, it’s more difficult for them to absorb.

Design your PowerPoint presentation

Besides a sound message, a successful pitch also needs a polished delivery. An effective presentation includes clear, well-designed PowerPoint slides.

Slides support the message

• Your slides should support the message that you’re delivering verbally, not the other way around.
• Focus on communicating your key points verbally. Support them with images, charts, and other pieces of information, one idea per slide.
• It’s tempting to try to cram a lot of content into your slides in the hope that they convey the key points. However, humans struggle to read and listen at the same time.
• Don’t use your slides as a teleprompter. You’re creating them for the audience, not for yourself.

Simple text and images

If you have a lot of text or complexity on any of your slides, the audience will unconsciously try to read and make sense of it. They stop listening to you, and the important points you’re making are lost on them.

Simple images are much more effective in supporting the points that you make verbally.

Large font size

Make the font size large enough for everyone in the room to read. This is especially important for pitches to large audiences, such as at an accelerator demo day. If possible, go to the venue before the event, stand in the back row, and step through each of your slides on the screen. If anything is too small to read, enlarge it or remove it.

The same principle applies to online pitches. Verify that everything in your slides is large enough to be read on a typical laptop screen while using whatever video platform will host the demo day.

Polished design

The more important the pitch, the more attention should go into making the design polished and consistent with your company’s brand. If you need the help of a designer, this small investment more than pays for itself.

Make it shareable

If you’re pitching at a public event or one that will be recorded and posted online, put your name, company name, and website URL on every slide. Doing so makes it easier for people to find out more about your company and share it with others.

Display your product

If you built a great product, be sure to display it in your presentation. It’s been said (only somewhat facetiously) that the likelihood of a live product demo working is inversely proportional to the importance of the meeting. If you feel brave, do include a live demo in your pitch, but be prepared with at least one fallback solution, such as a prerecorded video walk-through of your product or a few attractive photos.

Deliver a compelling pitch

After you create your pitch and an accompanying PowerPoint deck, it’s time to make sure you can deliver it in as convincing and compelling a way as possible.

Here are some practical tips for delivering a great pitch.

Slow down

Speak more slowly than you think you should. You’re asking your audience to process a large amount of new information, so make it easy for them by talking at a relaxed pace.

It’s easier to speak slowly when you know that the content you’re going to deliver fits easily within the available time. When you’re practicing your pitch, make sure that you consistently finish comfortably within the allotted time, so you don’t feel pressured to rush through it.

If you have an accent that might make your speech difficult to understand, speak even more slowly and deliberately.

Project your voice

All good performers learn how to project their voice. Although delivering a pitch should be more about the content than being theatrical, it’s still important to know how to project your voice so you can be heard and understood.

Exude confidence

Smile and show confidence and sincerity, but not so much that it appears manufactured. Smiling not only helps you appear confident, but it can actually help you feel more relaxed and confident.

Knowing the content of your presentation thoroughly also makes it much easier to feel confident that you can deliver it without any missteps.

Use inflection

Great presenters use inflection in their voice to convey meaning and emotion. By learning how to vary the volume, pitch, and timbre of your voice, you’ll keep your audience much more engaged.

To learn how to use your voice to better convey meaning, view this TED talk by Julian Treasure.

Pause at key moments

A deliberate pause can help you to underscore important points. It can also give you and your audience an opportunity to gather their thoughts before you move on to the next point.

Identify and fix bad habits

Most people exhibit one or more bad habits when they present. These habits can be vocal, such as frequently saying um or you know or go right ahead and or allowing their voice pitch to go up at the end of every sentence as if they’re asking a question. The habits can be physical, such as wringing their hands, swaying from side to side, or bouncing up and down on their toes as they speak.

Such bad habits can be distracting for your audience, make you look nervous and unprofessional, and diminish the impact of your presentation.

Many people are completely unaware that they’re doing these things, so the first step to fixing bad habits is to identify them. Consider practicing your pitch in front of some friends and asking them to point out any bad habits, or recording and playing back a video of yourself delivering your pitch.

By consciously practicing your pitch with your habits in mind, you’ll be able to gradually remove them and improve your delivery.

Avoid creating doubt

If you say something during a pitch that your audience doubts, even unconsciously, it triggers the part of the brain, called the ventromedial prefrontal cortex, which processes doubt. When it’s activated, this part of the brain remains in a heightened state of activation for several minutes. During this period, everything else you say might be processed through a heightened sense of doubt.

Doubt can be triggered by something obvious (for example, if you were to claim, “We’re building a social media company and we’re going head-to-head with Facebook!”), and at other times the trigger might not be obvious.

You can identify non-obvious triggers of doubt by delivering your pitch to someone who’s not involved in your startup and asking them to raise their hand the moment they begin experiencing even the slightest feeling of doubt.

After you do this with a few test audiences, you’ll be able to identify any points that consistently trigger their ventromedial prefrontal cortex, and either modify what you say or provide some supporting evidence immediately following.

Call out the elephant in the room

If there’s a potential major issue or obstacle of which your audience is likely to be aware, address it early in your presentation. For example, let’s say one of your cofounders previously founded a company that’s now being sued. Acknowledge the issue up front rather than let your audience wonder whether you’re going to bring it up. Taking it off the table in this way allows everyone to focus on your presentation rather than on the elephant.

Leave breadcrumbs

If there’s something you want your audience to ask you about, mention it briefly in your presentation and note that you’d be happy to give more details at the end if time permits. This technique has been used by many startups to effectively guarantee that the first question they’re asked is the one to which they’re ready to give a great answer.

Anticipate questions

You should be able to anticipate most of the questions that come up from investors. Doing so allows you to have answers at the ready, and perhaps even have a backup slide or two that address the questions. You can do this by road testing your presentation on a friendly investor audience (such as a mentor who has also been an investor), or even someone who’s low on your investor wish list, and noting the questions that come up frequently.

Iterate and practice

The biggest mistake that startup founders make with investor pitches is to not prepare sufficiently.

Unless you’re an extremely practiced presenter, it’s likely that your presentation will improve with each cycle of delivery > feedback > editing, up to about 20 iterations. The most useful feedback will come from people who’ve seen a lot of pitches (such as investors or experienced mentors), and the least useful comes from friends or family.

Practicing your pitch helps you to memorize it, allowing you to deliver it in a more authentic and relaxed way, rather than using all of your mental energy just to recall the content and delivering a stilted, nervous presentation.

Practicing also helps you to resist the temptation to repeatedly look at the slides on the screen while you present. A good rule of thumb is to test, refine, and improve your presentation at least 10 times before you deliver it to an investor audience, and to practice at least one hour for every minute of your pitch. That is, to prepare a 20-minute investor presentation, you practice it at least 10 times, for a total of about 20 hours by the time you’ve settled on a final version.

 Tip

A great way to quickly familiarize yourself with the presentation content and practice thinking on your feet is to play the slide shuffle game with a friend. You print your presentation slides, shuffle them, and hand them to a friend. The friend holds up a slide at random, and you immediately begin presenting the content that’s relevant to that slide. Continue through the entire deck.

Some people are tempted to script their entire pitch. This is generally not helpful, because few people can memorize an entire 20-minute presentation. Presenters tend to lose their train of thought partway through, and it can be difficult to regain it. Even if you do memorize the script, it might sound like you’re reading something rather than speaking authentically.

Most people find it’s helpful to script the first couple of sentences of a pitch. By doing this and rehearsing them until you could say them in your sleep, you can start your presentation with confidence, knowing exactly what you plan to say at the outset. After the first couple of sentences, you’ll relax into a more natural speaking style.

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There’s no single right or wrong pitch deck format to use, although experts generally agree about the topics that should be included in a good investor pitch deck.

 Note

Work that you completed earlier feeds directly into what investors are looking for:

• Checklist of attributes of successful companies
• The Value Proposition Canvas
• Experiments to test core assumptions
• Revenue model selection

The following outline contains a checklist of key topics that most investors want to see covered, along with comments about what should go on each slide. As a business founder, you should feel free to reorder the topics to suit your delivery.

Investor pitch deck outline

Use your own judgment and be sure to address the points that are most relevant for your startup.

Company overview

• A one-line description of what your company does.
• A brief summary of your company’s current status and key facts to help put the rest of your presentation in context. For example, include the launch date, current revenues, growth rate, previous funding received, and notable milestones.
• Why are you pitching to this audience at this time? For example, you might be raising a $750,000 seed round.

Problem or opportunity

• What is the main problem that your business solves?
• How serious or real is it?
• How is it currently being solved?
• Why are current solutions inadequate?
• How did you validate the severity of the problem with customers?

Solution

• How does your business solve the problem?
• What is your product?
• Status of your product development.
• Screenshots, demo, or short (10-15 seconds) video walk-through.
• What’s special about your product?
• Summarize your company’s value proposition.

Why now?

• Why is now the right time for this idea?
• Is your target market at a tipping point? Is there a technological development, such as machine learning, that recently made this idea feasible? Are consumer behaviors changing? Are there new regulatory drivers?
• Why has no one tried this idea before? Is it too difficult, complex, capital-intensive, or counterintuitive?

Team

• Who are the key people in your company?
• Demonstrate founder-market fit. What’s your authentic connection to the problem you’re solving? Do you and your cofounders have deep domain knowledge or hands-on experience in this sector? Do you live and breathe the customer problem you’re solving? Is it something that affected you personally?
• What projects did you undertake before? How do you know you can function well as a team? If you have previous startup experience, what did you learn from it?
• What unique insights do you bring? Why has nobody else seen this opportunity?
• List any current investors or advisory board members.
• What gaps exist?

Market

• Addressable market size.
• It’s better to derive an addressable market figure from the bottom up (for example, we sell our product for A x B) rather than from the top down (for example, by referring to a market research report that says the total market is $X and we hope to capture Y percent).
• Is it a huge current market that old companies dominate and is ripe for disruption? Or a nascent market that’s about to become huge? Why?

Validation

• How did you validate your hypotheses?
• Customer hypothesis.
• Problem hypothesis.
• Solution hypothesis.
• (Revenue always trumps feedback from customer interviews.)

Revenue model

• How will your company make money?
• Unit economics.
• How did you validate pricing with customers?
• Projections and assumptions.

Customer acquisition

• How do you or will you acquire customers?
• Economics: Is customer lifetime value (LTV) much larger than the cost of acquiring customers (CAC)?
• What’s the rate-limiting factor on growth? Hopefully, it’s at least in part access to capital.

Competition

• Who are your competitors?
• What are they doing well?
• What are they not doing that you do extremely well?
• How will you compete? Connect back to your unique insights.

Traction

• What traction have you achieved so far?
• User engagement? Growth? Retention?
• Revenues? Profit?
• Brand-name customers or noteworthy testimonials?

Plans (next 12-18 months)

• Describe the critical path.
• What milestone will you hit before you run out of money that will enable you to raise more money or become profitable?
• What are the top one or two risks, and how are you addressing them?

Funding round

• How much are you raising?
• What will you use the funds for?
• How much runway does that give you?
• What is your target close date?
• List any current investor commitments.
• Do you have any other needs, such as introductions, key hires, or advisory board?

Closing slide: Summary

• Restate the two or three key points that you want the audience to remember.
• Provide contact details.

Backup slides

• Produce any slides that address topics you predict are likely to come up as questions, such as financial forecasts or in-depth competitor analyses.

Task: Create a rough investor pitch deck

Create a rough investor pitch deck by following the preceding outline. This exercise is useful even if you’re a long way from being ready to pitch investors. It can help you to think through and articulate the key elements of your business. By sharing the pitch deck with others, such as mentors, you can get valuable feedback and sanity check your thinking.

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In this unit, we explore the principles of pitching. We look at the purpose of pitching, your various prospective audiences, and the formats you can use.

Why are you pitching?

Every time you deliver a pitch, you should have a clear purpose in mind.

It’s common for company founders to view investor pitches as an opportunity to get an immediate commitment for funding, as you might see on shows like Shark Tank.

However, this scenario rarely plays out. Most of the time, a pitch is just the start of a conversation. By getting people interested in what you’re doing, you’re encouraging them to connect with you afterward to find out more.

If you give your pitch at a public event such as an accelerator demo day, the purpose of your pitch is to act as a short teaser that gives your audience some small nuggets of information and makes them want to know more.

If you pitch an investor such as an angel group or a venture capital fund, it’s likely that most of the people in the room know little about your company, and your pitch is the first of many meetings before you actually have money in the bank.

Who’s your audience?

The most impactful pitches are delivered at just the right level for the audience. By understanding your audience’s objectives and their current level of knowledge about your company and sector, you can deliver a pitch that’s informative without being condescendingly simple or overloading them with unfamiliar terminology.

Most people underestimate the gap between their own knowledge and that of their audience. This gap can result in the audience missing key points because they don’t understand the industry, the technology, market dynamics, or terminology.

If you lose your audience early in your pitch, it’s likely that they’ll switch off and you’ll struggle to keep their attention for the remainder of your presentation.

 Tip

Road test your pitch on people who aren’t involved in your startup and don’t work in your sector. Doing this can help you identify concepts that need to be explained up front, and it ensures that you’re not using jargon, technical details, or names of other companies that are familiar to you but not to others.

A good rule of thumb is to refer only to things that you’re confident that at least 90 percent of your audience knows about.

Pitch formats

Startup founders need to be familiar with several pitch formats. Let’s review some of the most important ones.

Elevator pitch

An elevator pitch is a short, pithy description of your company that you can use in casual conversation.

Let’s say you’re at a networking event. You meet an investor, and they ask: “What does your company do?” What do you say? Try it right now. Can you, in one or two sentences, give a clear and compelling explanation of what your company does? Do you think your elevator pitch would get a potential investor interested to know more?

Unless you’ve had significant practice at this, it’s likely your elevator pitch needs work. Many startup founders find it helpful to script their elevator pitch and memorize it rather than attempt to come up with something on the spot.

One format that’s proven to be a good starting point is the Gaddie Pitch, named after marketing expert Anthony Gaddie. It comprises three sentences:

• You know how <target-customer><problem>.
• Well, what we do is <description-of-how-to-solve-the-problem-or-deliver-benefits> by <solution>.
• In fact, <facts-and-examples>.

Here’s an example of a Gaddie Pitch for Canva:

You know how good graphic design is important to every company?

Well, what we do is provide simple online tools for anyone to make professional presentations, social media graphics, and more in just a few minutes.

In fact, since we launched in 2012, our customers have created over five billion designs using Canva.

Demo day pitch

Startups that pitch at an accelerator demo day are typically asked to deliver a pitch ranging anywhere from one minute to five minutes. Demo day pitches generally have a firm time limit, allow for a small number of PowerPoint slides, and might or might not allow time for questions from a panel at the end.

Some demo days are delivered to a public audience, which can amount to hundreds of attendees (or many thousands if it’s delivered online), or they can be restricted to an invitation-only list of mainly early-stage investors.

Investors who attend accelerator demo days are usually there for one reason: to find new investment opportunities. Investors, like everyone else, suffer from FOMO (fear of missing out), and an investor’s worst nightmare is attending a demo day event and not following up with a startup that turns out to be the next unicorn.

Therefore, your primary aim at a demo day pitch should be to convey that your startup has a shot at huge success, and investors would be wise to follow up with you.

Since the beginning of the COVID-19 pandemic, almost all accelerator demo days have moved completely online, and this trend is likely to continue. Your pitch might exist online in perpetuity, which means you should avoid disclosing anything that’s highly sensitive or that could jeopardize fundraising opportunities in the future.

Video pitch

Many accelerators and other startup programs require a short video pitch as part of their application process. These pitches vary in length, but 60 to 90 seconds is typical.

Distilling the essence of your startup into a short video can be challenging, but remember that your objective is to convey briefly why your startup should be accepted into the program ahead of others. Later, you can go into detail about your product, the size of the market, or the backgrounds of your team.

Accelerators usually invest in the startups they accept so, as in a demo day pitch, it’s important to convey in the video pitch that your startup has a shot at building a hugely successful business.

Accelerators also look for startup teams that are coachable. They want to know that you’re genuinely interested in the advice and guidance available from the accelerator, and that you recognize that certain aspects of your startup need outside help.

 Tip

As you build an accelerator application video, take advantage of the following tips:

• Stay within the requested time limit.
• Upload your video to YouTube and provide a link. The video can be marked as unlisted but not private or password-protected.
• Don’t use slides or fancy graphics, only the founders talking.
• Use clear audio (use an external mic if possible).
• Keep it informal, not as though you’re reading a script. Of course, preparing your thoughts in advance is a good idea.

Here are two video examples worth checking out:

• Teespring application video for Y Combinator
• Flip application video for Y Combinator

Task: Create your own Gaddie Pitch

If you don’t yet have millions of users like Canva, you can use the in fact sentence to describe your early traction, the size of the market, or a recent customer anecdote.

When you’re happy with your pitch, test it out on some friends. Ask them to pitch back to you, describing what your company does in their own words. If they can describe your company reasonably accurately, that’s a sign that your pitch is on target. If they struggle with it, you have more work to do.

Investor pitch

An investor pitch is one where you’ve been invited to present to a certain type of investor, such as an early-stage venture capital fund, or to a group of investors, such as an angel group. This opportunity ordinarily comes after the investor has reviewed some preliminary information and has met informally with the founders.

A typical investor meeting might run for 30 to 60 minutes, and it’s common for the first half of the meeting to be used for you to deliver your pitch, followed by time for questions and discussion.

To prepare for an investor meeting, it’s essential to know:

• To whom you’re presenting, so that you can research the backgrounds and roles of key individuals.
• The length of the meeting and how long they expect your presentation to run.
• For online meetings: The video platform to be used, to ensure that you’re familiar with it and the audio and video are set up for good quality.
• For in-person meetings: The exact location, so you can plan your route and parking arrangements and be there on time.
• What audio-visual facilities are available. If you’re using your own laptop, you might need to bring adapters. If you’re using their equipment, you might need to send the presentation in advance.

Types of pitch decks

There are two distinct types of pitch decks that your startup should prepare before your talk with investors. For each type, you also need to write a short executive summary.

Presentable deck

A presentable deck is the one that you’ll use when you deliver your presentation either in person or online. It should be light on words and display the key graphics or images that support the points you make verbally, rather than trying to describe them in writing.

If you were to send a presentable deck to someone, it’s likely that they wouldn’t be able to glean much about your company from it.

Readable deck

Many angel groups and venture capital funds ask founders to submit a pitch deck online before they’ll consider inviting you to present.

The deck that you send to an investor should be self-contained and have enough detail that someone who knows nothing about your company could read it, make sense of it and, most importantly, conclude that your company is a candidate worth meeting and investing in.

It’s always a good idea to be cautious about who you send your readable deck to, because it’s likely to contain confidential details about your company.

Executive summary

It’s useful to write a one-page executive summary that complements your pitch deck.

The executive summary is an excellent way to follow up with a potential investor whom you meet at a networking event or demo day. It presents a brief, high-level overview of your company and can include the following information:

• Company overview: a brief description of what your company or your product does.
• Current status, including any recent notable milestones.
• Key metrics, including traction, revenue, conversion rate, growth rate, churn.
• Ideal target customer.
• Total addressable market (size of opportunity).
• Leadership team, including names, LinkedIn profiles, and skill sets.
• Previous funding amount (if any).
• Current funding round: how much you’re raising, what you’re using it for, any funds already committed, terms.

https://cosmicnext.com/design

At this point, you’ve validated your core business model assumptions with customers. You’ve built a product or at least a minimal viable product (MVP) that can be monetized. You’ve also selected a revenue model. Now, you’re in a position to start generating revenues.

Ask yourself a crucial question: To whom should I try to sell my product? Keep in mind that your customer might not be the same person as your user, especially if your startup is business-to-business (B2B).

Focus on user happiness

Here’s a thought experiment: Think about all possible users for your product and imagine their level of satisfaction with your product on a continuum.

At one end of this continuum are users who find the product useful enough that they’re willing to use it and pay for it. They know that it might not be exactly what they need, but because it goes some way toward solving a problem for them, they can see value in it. We can think of this group as your good enough customer.

At the other end of the continuum are users who derive immense value from your product because it’s exactly what they need. It solves a painful problem and does it comprehensively. It delivers value that they haven’t been able to unlock in any other way. After they start to use your product, they can’t imagine ever doing without it. We can think of this group as your ideal first customer.

It’s tempting to take the view that any sale is a good sale. You might think your aim is to capture as many customers as possible and span the entire continuum of satisfaction. Revenue is revenue, right?

Generally, it’s best to focus on the ideal first customer. This user is the one for whom your product is a good fit. You want to make them happy with your product before you broaden your reach to a wider group of users, even if you make a small number of sales initially.

The benefit of targeting this group of users first is that they’ll be evangelists for your product. They’ll recommend it to others in their networks. They’ll talk about it on social media. As a result, you’ll get great reviews and five-star ratings. Your customer lifetime value (LTV) will be high because these customers are “sticky.” They’re likely to continue using and paying for your product. Your cost of acquiring new customers is driven down because referrals are the cheapest form of customer acquisition.

In contrast, by trying to target the entire continuum, you’ll inevitably pick up customers who won’t like your product. It won’t comprehensively solve a problem for them. They won’t be advocates for your product and won’t bring other customers via referral. You’ll get a range of reviews, some of which will be lukewarm or negative. You’ll also have to provide ongoing customer support to a growing number of dissatisfied customers. Dealing with this customer segment drains resources from your team and could negatively affect team morale. Worse, it could create a lasting suboptimal impression of your brand at a time when you’re working to complete product development and establish your company as a new entrant in the market.

From a financial perspective, even though you might generate more upfront revenue, you’ll have a lower customer retention rate. You’ll also have a lower customer LTV. Ultimately, your cost of customer acquisition will be higher. You’ll have to rely on paid channels to reach new customers and counteract the effects of negative reviews by your existing users.

A good rule of thumb in the early days of your startup is to focus on selling only to those users who you believe will love your product. Don’t try to sell to a larger number of users who will merely like your product.

As you refine your product, add features, and improve the onboarding process, you can broaden your focus to include users who were marginal at the outset.

You can see this approach in practice by studying successful companies. You can observe which customer segment they focused on in the beginning and how they broadened this focus over time.

Example

Let’s take Calendly as an example. The company started out focusing on power users who needed to schedule many meetings. At the time, these users relied on sending emails back and forth to find a time that suited all parties. By making scheduling a simpler task for these users, Calendly became an indispensable tool that saved time and reduced frustration for meeting organizers.

These users regularly included a Calendly link in their emails. By demonstrating their reliance on Calendly, they convinced many new users to try the product. This type of practical endorsement contributed to Calendly’s viral growth.

Over time, Calendly added features such as payment gateways for paid consultations, SMS notifications, website embeds, custom branding, and polls for multi-person meetings. In parallel, the company broadened its marketing and customer-acquisition efforts to attract a wider group of users. It continued to be mindful of the importance of focusing on user happiness.

Early adopters

Early adopters are willing to use and pay for your product before anyone else will. They’ll do so even when it’s incomplete, buggy, and unstable. Often, early adopters of your product are also early adopters of many other products. They tend to have an inclination to try new things.

Here are other common attributes of early adopters:

• They experience customer pain more acutely than anyone else.
• They’re willing to take the risk of trying and paying for a new and unproven product. They’ll persist even if it’s imperfect.
• They relish the opportunity to try new products before anyone else.
• They’re happy to give you candid feedback and genuinely want you to succeed.
• They’re likely to have experimented with alternatives. They might have created makeshift solutions themselves, such as a spreadsheet or a database.

 Tip

When you conduct customer interviews, ask whether the person will try your product before it launches and give you some feedback. If they say yes, you can tag them as a potential early adopter.

Early adopters aren’t the same as ideal target customers, though there’s often a significant overlap between these two groups.

Early adopters are the users who are willing to try your product before anyone else. Ideal first customers are the people you most want to try your product before anyone else.

You can combine the attributes of your ideal first customer and early adopters to create a persona. This persona represents the users who are a good fit for your product (ideal first customers) and the users who are likely to try it after your initial go-to-market (early adopters).

 Tip

The time that you invest in creating an ideal customer persona helps you to define this target user.

Consider other factors when you decide which users to target first:

• Is this person well known in their sector or recognized as a thought leader? Would their use of your product influence others to do the same?
• Would they be willing to provide a customer testimonial or a short video?
• Do they have a large following on social media?
• If the customer is a business, is it a trusted brand? Will it confer credibility when listed as a reference customer on your website and in your marketing materials?

Find and convert early customers

If you’ve done some customer interviews, it’s likely you’ve built a list of prospects who are interested in your product. Even better, if you have a live landing page and have run experiments such as a mock sale, concierge, or Wizard of Oz, you might have a substantial mailing list. You might also have information that can help you categorize prospects based on their tendency to be an ideal first customer or an early adopter.

Some startups can grow with zero-touch sales, even in the early days. However, most startups benefit from having the founders engage directly with early customers and close the first 50 to 100 sales in person.

This approach might seem inefficient and manual, but it’s highly beneficial. It allows founders to acquire a deep understanding of their customers’ needs. They also hone their ability to communicate the value proposition and address any common objections.

Pursuing a direct sales approach at the outset allows you to describe your company and product on your website and in marketing materials in a way that resonates with your ideal target customer. This true-to-life description improves conversions after you start to automate customer acquisition.

If you don’t have a list of potential customers, there are many ways you can find and convert early customers. Here are some examples:

• Post on Product Hunt and ask everyone you know to upvote your product.
• Join or create a LinkedIn group for people who represent your target customer. Use it to post relevant content and respond to questions. Establish yourself as a voice of authority and encourage members to try your product. Don’t spam the group.
• Post to relevant communities on Reddit or other social networks that make sense for your product and your target audience.
• Talk about your product launch, and more generally about the problem space, on Clubhouse and X Spaces.
• Experiment with different customer-acquisition channels. Try paid ones like search ads and social ads and unpaid channels like social media and content marketing. By tracking uptake data and conversion metrics, you can identify channels that work and focus on them.
• Have a short prequalification form on your website for potential customers. Ask a few key questions aimed at identifying whether they fit your ideal-first-customer persona.
• Email or call people you know and ask them to refer you to five people they think could be a potential customer. Give them a discount code they can pass on to people in their network.
• Go to relevant conferences and exhibitions either in person or online. Talk to people who represent your target customer. Get a speaking spot if you can.
• Talk to every customer who signs up or buys your product. Try to understand how they’re using the product and whether they’re satisfied. Aim to learn more about what customers need, and at the same time minimize churn. If they love your product, ask them to refer you to people in their network who they think would also benefit from it.
• Incentivize users to share your product with others via an affiliate or referral program.

Tips for founders without a sales background

It’s common for founders who haven’t worked in a sales role to struggle with establishing a strong sales ethos and sales processes. This situation is especially true in B2B companies that need to engage in some form of direct sales on an ongoing basis.

Often, founders who lack sales experience will lean toward hiring someone to take care of sales early in the life of the company. Generally, this strategy isn’t a productive one. Founders have a better understanding of the problem and the product than anyone else. They have more passion for the problem than a salaried sales executive. They’re best placed to evangelize their product with customers.

Founders also need to continue learning about what customers need. The best way to learn is to engage directly with them in a sales context.

Here are some tips to help founders overcome a lack of sales experience:

• To make a sale directly with a customer, you have to ask them for money. If you find this question uncomfortable, recognize it as early as possible. Sales coaching or discussions with other founders who have a strong sales background can help you overcome your reluctance.
• Be prepared to hear “no” a lot. Be willing to persist with sales calls even if you get a low conversion rate. You shouldn’t think of not closing a sale as a failure. It’s an opportunity to learn which types of customers are high-quality versus low-quality prospects. It’s also a chance to better express your proposition and overcome common objections.
• Learn about sales pipelines. Create a basic pipeline by using one of the many free or low-cost sales and CRM tools available.
• Automate and document sales processes and gather any required collateral. Then, when you do start to build a sales team, those employees can quickly get up to speed and be effective.

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It’s important to test your assumptions with customers before you spend time building a product.

You can—and should—apply the same principle of testing assumptions to other parts of your business; for example, how you select the revenue model that you’ll use to generate sales and grow your business.

A revenue model is a strategy for how to:

• Assign value to your product or service.
• Target customers to buy your product or service.
• Determine what to charge those customers.
• Deliver the value of your product or service in a way that yields increasing sales.

In other words, a revenue model encompasses all the factors you need to consider when you think about how your business will generate and scale revenue.

Companies can have more than one revenue model. Generally, each product or service has its own revenue model. Your choice of revenue model affects every aspect of your business, so you need to:

• Think through the pros and cons of each option.
• Test your assumptions with customers before you lock anything in.

There are many ways in which startups can generate revenue. For this module, we’ll disregard traditional brick-and-mortar revenue models like retail and focus on models that tech startups use.

Common startup revenue models

The following are the 10 most common models that tech startups use.

Revenue model 1: Usage

Description: Customers pay based on the frequency or volume at which they use or consume your product.

Ideal for: Infrastructure businesses that provide services that users can’t afford to own but need to access; examples are Azure or Twilio.

Practical considerations:

• Requires a large, upfront investment.
• Allows you to offer new users a cheap or free plan, then charge more as their usage increases
• Requires patient investment, because revenues from each customer are tied to the customer’s growth rate.
• Often requires providing education and support to ensure customers gain maximum benefit from the service and can access more advanced functionality as they grow.

Revenue model 2: Subscription

Description: Customers sign up for your product. In return for ongoing use, they pay you a recurring subscription fee. This type of delivery is known as software as a service (SaaS). The fee can be annual, quarterly, monthly, or weekly.

Ideal for: Software products that customers use regularly and continue using for an extended period; examples are Microsoft 365 or Adobe Photoshop.

Practical considerations:

• Allows you to generate recurring revenues, which provide many benefits.
• Tiered pricing plans enable customers to pay based on the features they need, their volume of usage or the number of licenses required, or the size or type of their organization.
• Allows you to offer new customers a free trial that converts to a paid plan after a set period. A free trial can be a good way of getting customers to start using your product, particularly if they’re uncertain about the features, value, or pricing. It can also be a distraction if too few users convert.
• Allows you to deliver a free version of your offering in which users can access basic features for free (usually forever) and unlock premium features by paying; examples are LinkedIn Premium, Strava, or Spotify. You need to ensure that a large enough percentage of users convert to paid plans and that free users can be serviced at very low cost.
• As long as you have a higher new customer sign-up rate than churn (unsubscribe) rate, your company will be growing.
• For inexpensive products, it’s common for some customers to keep paying even after they no longer use the product. For higher-priced products, this practice is less common.

Revenue model 3: Direct sales

Description: Make sales by directly contacting potential customers (outbound sales) or enabling customers to contact you directly (inbound sales).

Ideal for: High-value products or services. Enterprise customers where relationships are crucial or sales requiring interaction with multiple decision-makers and influencers over time; an example is SAP.

Practical considerations:

• Requires a sales team with relevant industry knowledge and a deep understanding of your product. These sales reps are usually paid a salary plus commission.
• Not suited to low-price products or services, because the cost of maintaining a sales team is too high relative to the average sale price.

Revenue model 4: Commission

Description: Get paid a commission from a set fee or a percentage of the transaction value every time a transaction takes place.

Ideal for: Marketplace or platform businesses that connect a buyer with a seller; examples are Airbnb or Upwork.

Practical considerations:

• You don’t need to own the inventory, as with Airbnb, or employ the workers, as with Upwork.
• For two-sided marketplace businesses, you need to attract both sides of the market before you can deliver value and make any transactions. This issue is referred to as the cold start problem for platforms.
• Marketplace transactions can drop off via platform leakage. This situation occurs when buyers and sellers decide to work together directly. Marketplaces often work best for one-off transactions like hiring a freelancer to do a specific job. They’re also good for transactions with a heavy reliance on insurance or safety like booking a place to stay on holiday. Marketplaces don’t work well for low-risk, recurring transactions like booking a math tutor.

Revenue model 5: Transactional

Description: Make one-off sales and get paid a set price for each transaction.

Ideal for: Physical products that can be purchased online via an e-commerce store; an example is most Shopify stores.

Practical considerations:

• Revenue generation is an isolated event and only occurs when the customer makes a purchase. There’s limited scope for recurring revenues. Exceptions are products that are purchased often, like groceries or subscription boxes, such as Dollar Shave Club or meal-delivery services.
• Customers can compare prices easily. Unless you have a highly differentiated offering, competition can drive down prices. This issue leads to low margins and a need for high transaction volume.
• You need to produce each product (or deliver in the case of wholesale). Beyond a certain volume, there’s limited scope to reduce the cost base significantly.
• A good checkout experience can provide opportunities to upsell by recommending complementary products or drive repeat purchases by offering a discount code for returning customers.
• Can be associated with high customer-acquisition costs, because it’s difficult to find customer-acquisition channels that are profitable.
• Doesn’t work well for most high-value purchases. These purchases might require multiple sales touch points and trust developed through relationship-building before the customer is comfortable completing the transaction.

Revenue model 6: Service delivery

Description: Deliver a service in-person or online and get paid an agreed amount or a fee based on dollars per unit of time.

Ideal for: Consulting, graphic design, web development, educational instruction, or any service that can be delivered to a customer.

Practical considerations:

• Limited scope for recurring revenues, because each customer job is an isolated event.
• Cheap to start and can be profitable, especially if you have a rare skill set or one that prospective clients value highly.
• Limited scope for passive income, because you stop getting paid when you stop delivering the service.
• Doesn’t scale well. A time cost is associated with every occasion that you deliver the service, and there are only 24 hours in a day.

Revenue model 7: Rental

Description: Get paid for renting a physical product to a customer. Can be on a flat fee per-use basis or based on time or distance.

Ideal for: Any item that users want to use sporadically, but not enough that it makes sense for them to buy and maintain their own; an example is Lime electric scooter rentals. Works for expensive items or those items that require complex maintenance; an example is UberAIR helicopter rental.

Practical considerations:

• Can be capital intensive if you need to purchase the assets upfront and generate rental income over time.
• It’s essential to make it easy for people to find and use your product. Otherwise, they’ll look for alternatives.
• Some customers will eventually buy the product themselves. For example, people will rent electric scooters before they eventually buy their own.

Revenue model 8: Licensing

Description: Get paid a license fee for granting another company the right to use your intellectual property (IP) for an agreed purpose.

Ideal for: Advanced technologies that multiple licensees could use, or in applications where your technology is only part of a solution and relies on an existing product or infrastructure that you don’t own; an example is image-correction software for use on MRI scanners.

Practical considerations:

• Licensees generally make a build-or-buy decision, in which they weigh the cost of creating the technology in-house versus acquiring the right to use your existing technology.
• You generally need to demonstrate the efficacy of your technology in the licensee’s setting via a proof of concept, demo, or trial.
• It’s often important to have IP protection in the form of patents.
• There’s a risk that your IP could be copied, particularly if the larger company is willing to risk patent litigation and knows you don’t have the financial means to pursue legal action.

Revenue model 9: Channel

Description: Indirect sales made by third parties that you appoint as agents or resellers.

Ideal for: Products or services that naturally sit alongside another company’s offering as an upsell or specialist product; an example is companies that partner with Microsoft via the Microsoft Partner Network.

Practical considerations:

• You don’t need to build a sales team, although you’ll still need a channel account person or team to manage the relationships with your channel partners.
• You can take advantage of an existing sales capability and customer base.
• You’ll have limited control over the sales process. You don’t own the customer relationship, and you might never interact directly with the customer.
• You might not have access to customer data or metrics unless explicitly agreed in the channel agreement.
• Resellers have many different sales incentive structures. It might be challenging to ensure that your channel partners are sufficiently motivated to promote your product or service alongside others they offer.

Revenue model 10: Advertising

Description: Sell advertising space to companies that want to promote their product or service.

Ideal for: Websites that attract a large number of visitors.

Practical considerations:

• Reliant on huge traffic volumes, typically millions of visitors per month, because of the low click-through rates on most ads.
• Can be viable if you have a niche focus and a homogenous audience with common needs and interests, and if your site is a dominant player in that niche.

Task: Evaluate a revenue model

Select the revenue model that you believe makes the most sense for your startup. Write a list of pros and cons for how this revenue model would work in your startup. Ask yourself what assumptions need to hold true for this revenue model to work. Consider how you can test those assumptions with customers, either through customer interviews or by running experiments.

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We discussed how customer interviews can be a useful way to test your assumptions. Customer interviews are, in fact, a type of experiment. In this unit, we discuss several other types of experiments that help you expand on the insights gleaned from customer interviews.

Experiments range in complexity from simply asking users to provide their email address to observing them as they interact with your minimum viable product (MVP), or asking them to purchase or prepurchase your product.

Startup founders can use experiments to test a specific hypothesis by providing an input to users and measuring the output. The output is usually in the form of user actions.

Each experiment should have at least the following elements:

• Hypothesis: A concise, falsifiable statement that represents one of your core assumptions.
• Actions: The steps you take to test your hypothesis.
• Data: What you measure or observe in the experiment.
• Success criterion: The minimum response that you need to validate your hypothesis.

It’s generally a good idea to run multiple experiments to test each of your critical hypotheses. In most cases, start with the cheapest, quickest experiments to generate some initial data, even if it’s imperfect. If the results of these initial experiments are promising, you can progress to more complex experiments. The complex experiments might take more time and effort to complete, but they give you a greater level of confidence in the strength of your hypotheses.

At the end of every experiment, evaluate what you learned and what decisions you can make based on that information.

The following examples of commonly used experiments start with simple, low-fidelity ones and move on to more complex, high-fidelity ones.

Experiment type: Online ad

Description: Create an online ad (search-based ad, display ad, or social media ad) based on your proposed value proposition. Focus on customers who match your ideal customer persona.

Purpose: Test whether your target customers respond to a call to action such as visiting your website.

Pros: This experiment type produces a simple-to-track click-through rate and conversion rate, if you correctly set up analytics before launching the ad.

Cons: This experiment type demonstrates only relatively weak interest. Getting users to select a link might not translate to interest that’s strong enough to use or pay for your product.

Practical tips: Search term ads are valuable for testing interest among users who are already aware of the problem and are searching for a solution. Display ads and social media ads are better suited to users who have yet to reach this point of awareness.

Experiment type: Landing page

Description: Create a basic website (usually a single page) that describes your product and value proposition, and that asks customers to respond to a call to action. This call to action might be a request to provide their email address (weak evidence of interest), complete an online form (stronger evidence), or prepurchase your product (even stronger).

Purpose: Test whether your target customers respond to a call to action.

Pros: This experiment type is inexpensive to set up and run.

Cons: You need a suitable domain and sufficient design input to ensure that the page looks professional.

Practical tips: Ensure that your call to action is above the fold, because not all visitors scroll through the whole page. You can drive traffic to the site by using methods like online ads, email campaigns, social media, and posting in relevant online forms. Use quotes from your customer interviews to highlight customer pain points. Ensure that you’re always up front about the status of your product.

Experiment type: Clickable prototype

Description: Create a realistic mock-up of key screens from within your product by using a tool like Figma, InVision, or Microsoft Visio.

Purpose: Observe users interacting with something that resembles your final product and collect their feedback afterward.

Pros: This experiment type can be a great way to find out what features customers get excited about. The length of time that a user spends engaging with the prototype can be a good indicator of interest.

Cons: This experiment type requires design expertise and an investment of time in capturing individual feedback. It requires users to commit a meaningful amount of time to engage with your prototype.

Practical tips: A clickable prototype is best delivered in person. You provide users with context at the start and invite their feedback at the end.

Experiment type: Concierge

Description: Deliver an outcome to customers manually. Walk customers through the steps that your software product is going to ultimately automate. For example, if the outcome is a report that you provide to customers based on their inputs, you might be able to capture the inputs via a simple form. Then, manually create the report and send it to them.

Purpose: By delivering an outcome to customers, you can test whether they perceive the outcome as valuable. In many cases, this assumption is more important to test than anything to do with the process by which you achieve the outcome.

Pros: You can often do this experiment type quickly and cheaply, because you can deliver an outcome without having to build the product. It allows you to collect feedback from customers after they receive the outcome and derive the value. This experiment can also be an opportunity to make sales, as long as customers see sufficient value in the outcome. Walking customers through the process is a good way to test it and to ensure that you integrate any learnings when you actually begin building the product.

Cons: This experiment type doesn’t scale well, so you’re only able to deliver an outcome to a limited number of customers. Depending on the complexity of the process, you might need to set expectations so that customers know when they can expect a response.

Practical tips: It’s often a good idea to have at least a landing page that customers can visit to start the process of signing up and to provide any required inputs. Make sure it’s easy for customers to leave written feedback and a testimonial if they found the outcome valuable.

Experiment type: Wizard of Oz

Description: A Wizard of Oz experiment is similar to a concierge experiment. The critical difference is that here, customers are unaware that the process is being completed manually “behind the curtain.”

Purpose: A Wizard of Oz experiment allows you to test both the perceived value of the outcome and the process by which you deliver it.

Pros: This experiment type provides a more robust test of pricing than the concierge method, because from the customers’ perspective, they’re buying and using your product.

Cons: This experiment type generally doesn’t scale to a large number of customers, because the process is manual. The experiment is suited to products that create a single output for customers (such as a report or actioning something), but not to products that require significant customer interaction.

Practical tips: Be prepared to deliver an outcome to customers quickly, because they’re unaware that the behind-the-scenes process is being done manually. It’s generally a good idea to price your product so that you can deliver it profitably by using Wizard of Oz. Then, you can continue to deliver value manually for as long as you like. When you automate the process, your profit margin can only improve.

Experiment type: Mock sale

Description: In a mock sale experiment, you’re positioning your product alongside plans and pricing information. You’re also testing customers’ interest in buying, without actually taking any payment. When customers select a pricing option, you can tell them the product isn’t available to purchase yet and ask them to provide their details to be notified when it is.

Purpose: A mock sale is ideal for testing whether customers perceive value in your product, because selecting a pricing option signals an intent to purchase. It’s also useful for testing various price points or plans.

Pros: You can use this experiment type before the product is built by placing mockups of screenshots and other information on a landing page. It can be a valuable way to create an email list of prospects who show strong interest.

Cons: An intent to purchase doesn’t always equate to actual purchases when the product is live.

Practical tips: Make sure you’re not taking payment or giving any misleading information to customers. Track various traffic sources to establish which are most likely to bring paying customers to your site.

Experiment type: Minimum viable product (MVP)

Description: Create a basic functioning software product that delivers the minimum feature set (usually a single feature) to test a core assumption.

Purpose: Deliver sufficient value to customers through an MVP to meet a particular customer job, solve a pain point, and enable you to learn about customers’ needs and experience.

Pros: An MVP experiment can convert users from a free trial to paying customers. Paying for a single feature is a strong signal of customer interest.

Cons: For some startups, a significant effort is required to create an MVP that actually delivers value. In some industries (for example, healthcare and cybersecurity), there might be an unacceptable risk of the MVP failing or not complying with regulatory requirements.

Practical tips: Keep the MVP to one feature that best represents the core job that your product needs to do. Focus on attracting users for whom the limited feature set is likely to solve an important problem. Make it easy for users to provide written feedback. If the feedback is positive, invite them to supply a customer testimonial. It’s usually a good idea to create your MVP based on learnings from a lower-fidelity experiment such as customer interviews, followed by a clickable prototype, concierge, or Wizard of Oz experiment.

It’s easy to think of an MVP as “version 1.0” of your product, but this thinking can easily lead founders to build more than they need to. For many products, an MVP is better viewed as a disposable tool with the sole purpose of testing assumptions with customers.

It’s often possible to build an MVP quickly and cheaply by using low-code or no-code tools and still deliver value via a single feature. In these instances, you can throw away the MVP after the experiment is completed. You can then start building your product based on your learnings, rather than try to use a rough MVP as the basis for your product.

Task: Plan an experiment

Select at least one experiment type that makes sense for your startup. Map out the steps for completing the experiment. Remember to consider what hypothesis you intend to test, and express it as a concise, falsifiable statement. Spell out what you plan to measure or observe in the experiment, and the minimum response that you need to validate your hypothesis.

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So far in this module, we focused on capturing and prioritizing your assumptions. In this unit and the next one, we focus on testing critical assumptions by using customer interviews and experiments.

Planning and conducting customer interviews

Interviewing customers is a powerful way to get inside the mind of your target customer. By interviewing, you can test your assumptions before building a product. It’s also inexpensive and time efficient.

To get the most out of customer interviews, it’s important that you construct well thought out questions and avoid falling into common traps.

Best practices for customer interviews

Do:

• Ask open questions. For example: “How do you currently manage your finances across multiple bank accounts?”
• Ask for stories. For example: “Can you tell me about the last time you tried to do this? How easy was it? Was there anything you wished you could do more easily?”
• Let them do 80 percent of the talking. (That means you do 20 percent of the talking and mostly listen.)
• Reflect back. For example: “It sounds like you generally export your bank feeds into a spreadsheet and manually combine them. Have I understood that correctly?”
• Have a prepared set of interview questions that you ask every customer.
• Delve into unexpected responses. For example: “That’s interesting. Why did you decide to do it that way?”
• Ask what other solutions they tried and what they liked or disliked about those solutions.
• Ask how much time and money they spent trying to solve the problem.
• Invite them to suggest others you should speak to. This question is an efficient way of recruiting more customers to interview.
• Finish each interview with “What else should I have asked you?” in case they have other insights that your questions didn’t elicit.

Don’t:

• Ask closed questions. For example: “Have you ever tried to calculate your financial position across your various bank accounts?”
• Lead the witness. For example: “Do you think it would be helpful to have a dashboard that allowed you to see all your banking information in one place?”
• Pitch your product. For example: “I’m building a great, easy-to-use dashboard product that makes your life simpler and will be available for a small monthly fee. Do you think you’d use it?”

As a guide for business-to-business (B2B) startups, it’s important to interview at least 50 customers. For business-to-consumer (B2C) startups, aim for at least 200.

Wherever possible, frame your questions as falsifiable statements. Set a minimum success criterion above which you consider your hypothesis to be validated, and below which you consider it invalidated.

If an assumption is validated, continue on your current path. If an assumption is invalidated, consider a pivot or change in direction.

Scenario: Top five assumptions

Emily is working on an idea for a personal banking product that consolidates multiple bank feeds into a streamlined dashboard interface.

First, Emily completed the Value Proposition Canvas and the Lean Canvas. These tools helped her identify more than 20 assumptions. Next, Emily used an assumptions matrix to narrow down the list. She then had five assumptions that she believed were highly important and about which she had relatively little knowledge. She also made sure that she had at least one assumption in each category of desirable, feasible, and viable.

Emily listed her top five assumptions as falsifiable statements. She used a success threshold that she believed would give her some confidence to proceed. Along with each statement, she identified whether the assumption was about desirability, feasibility, or viability.

Emily’s top five assumptions:

1. I believe that at least 25 percent of banking customers have personal bank accounts with more than one bank. (Desirable)
2. I believe that at least 50 percent of these customers experience regular frustration with being unable to view all of their finances in one place. (Desirable)
3. I believe that at least 25 percent of these customers would be willing to pay $10 a month for a product that consolidates their bank feeds. (Viable)
4. I believe that it’s possible to create a product that accesses bank feeds in close to real time from all major banks and presents them in a simple dashboard. (Feasible)
5. I believe that at least 50 percent of these customers would be willing to sign up for a free trial of the product. (Viable)

A note of caution about online surveys

It’s tempting to believe that you can capture meaningful feedback from customers by sending out an online survey and analyzing the results. Surveys are quick and easy to create, but unfortunately, they’re one of the least useful methods of capturing customer insights. Many people complete surveys with little thought about their responses. Even with well-constructed questions, you have no ability to delve deeper into interesting points that the respondent raises.

Surveys can play a useful role in capturing factual or numerical responses, such as demographic information, alongside customer interviews.

Building user personas

A user persona, or customer persona, is a fictional character created to represent a specific type of user that you plan to serve.

User personas are important because they help you develop empathy for your users and create a product with their specific needs in mind. The process of accurately defining user personas also helps you make decisions about product functionality and design.

User personas are based on the insights that you glean from customer interviews. If you plan to serve multiple customer segments, it’s helpful to have a different persona to represent each segment.

When you’re creating your user personas, ask yourself: Who’s the target customer for this product? Why would it be important to them? How will they use it? What barriers are they facing that we can remove?

It’s a good idea to include a few fictional details to make user personas feel as realistic as possible.

A basic user persona should at least include the following details:

• Personal information, such as name and location, plus any details that help you identify with the persona. If your startup is B2B, include a job title, company, and role description.
• Demographic information, such as age, gender, family status, and income.
• A photo to represent the user and make them seem like a real person.
• Motivations that describe them as a person.
• Personality type.
• Goals for using your product (drawing on jobs to be done, pains, and gains, as discussed in previous units).
• Frustrations that they encounter while trying to do the job that your product focuses on.
• Brands that they currently use in relation to their goals.
• Technology that they have access to and regularly use.

Scenario: A user persona

Emily decides that based on her customer interviews, her most important target users are busy professionals aged 40 to 55 with above-average income and multiple banking relationships. She constructs the following “busy professional” persona to represent a target user.

She incorporates some of the common themes that arose in her interviews with customers, such as the banking brands with which they currently associate and the software products with which they’re familiar and typically use.

Task: Create your own user persona

Create a user persona that represents what you believe is your primary target user. Give the persona a name and description. Complete as many details as you can by using what you currently know about your target users. Check out the resources at the end of this module for some user persona templates.

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