Here’s how they give startups the resources they need.
Congratulations, your startup has traction! You’ve solved a problem, and people are paying you for the solution. However, you’re not quite a viable business yet. If you want to continue to grow, you’ll need some cash—a lot of it.
Investors make businesses grow. Unless you’re Jeff Bezos or Elon Musk, you can’t just write a check and get moving. You need to convince others of your startup’s value.
Raising money can be the most frustrating part of creating a successful startup. There’s pressure coming on all sides—the team, the angel investors, the office rent, the expenses, the salaries. Moreover, any major next steps in your business plan hinge on whether or not you can get investors.
When you’re courting investors
Under all this pressure, you’ll pitch for your cause. And through the many weeks and months of this, you’ll likely hear a lot of opinions—many valid, many not. You’ll spend hours explaining why people should invest and even more hours waiting to hear if they’re interested. You’ll be frequently pushed on terms and timing. And sadly, investors might have unknown biases against things you can’t change, like your age, gender, education, or ethnicity. All in all, it’s exhausting, and some startups don’t make it past this stage.
There are only so many routes you can go when it comes to big money. So let’s explore the most famous of them all, the venture capital firms (VCs), and compare those with the newer experience of a startup studio. How do they go about their investments differently, and what does this mean for you, the entrepreneur?
What is a VC looking for?
VCs like partnering with startups because they want a high return on their money. However, investing in early startups is one of the riskiest forms there is. More than 70% of startups fail even after being vetted and funded by VCs. This is one reason VCs typically don’t invest unless the business plan is to achieve ten times the investment within seven years. They need the payoff to balance the risk.
The risk is high. At first glance, it may seem like it’s not even worth it for investors. However, when startups succeed, they often succeed spectacularly. For example, the VC firm Sequoia Capital invested $58 million in WhatsApp in 2011. By 2014, their shares were worth $3 billion. That’s nearly a 50x return in three years.
What does a VC want to see from you?
They’re pressured to bring in businesses that will thrive, and thus they’ll be focused on your potential bottom line. They want to determine if you’ll be a part of the 30% that will succeed—and succeed immensely.
If a VC has taken steps to invest in you and your team, you’ve proven that your minimum viable product (MVP) has chops. You’ve likely dazzled them with a pitch deck that illustrated the potential in your market space. When a VC wants to invest in you, you must have your ducks in a row. Your key performance indicators will need to be on an upward trend, and you’ll need a solid plan for how your startup will use the VC’s money.
How will a VC help you?
If you win the investment of a VC, they won’t leave you in the dark. They’ll network for you, give you the financial means to secure the expertise you need, and will likely advise you on financial matters.
However, they’re not pulling up their sleeves deep in the trenches with you. Likely, they’ve done a little research on what you’re doing, but by no means are they deeply involved in your product’s evolution. These are brilliant business people, but they’re not engineers, designers, or chemists.
They’ll support you, and they want you to succeed, but how much support they give depends on the likelihood of a good return and less on the brilliance of the product. If you look at it from their perspective: their investment is a gamble. And if the odds are no longer in your favor, or if you’re just not moving as quickly as they want, chances are they’ll say goodbye.
What is a startup studio looking for?
When you catch the attention of a startup studio, they look at your product a bit differently than a VC. First, they’re often interested in your startup earlier. Whether you’re in the ideation stage or the test-and-measure-the-MVP stage, startup studios aren’t necessarily looking for a beautiful, awe-inspiring pitch deck; they’re looking for a good idea. And it can still be half-baked or even a bit messy.
They’re also looking at you and whether they see future CEO material and how well you can manage a team of smart people. Of course, startup studios crunch the numbers, but they’re interested in the problem your product is trying to solve. In a startup studio, people are far more product-focused, and their business choices are made accordingly.
Startup studios provide infrastructure and resources
Like VCs, startup studios have significant funds supporting them. However, a large part of the investment comes from actual infrastructure and resources oriented towards companies with potential for exponential growth. At a startup studio, the initial investment looks like a multidisciplinary team of experts ready to get your business started. Instead of a big chunk of change, you’re given human capital—which is likely what you would have spent your big chunk of change on anyways.
The human capital will be in the form of digital marketers, researchers, scientists, industrial designers, web designers, branding gurus, financial advisors, and recruiters, helping you hire the talent you need as you grow.
Unlike VCs, startup studios are knee-deep in your organization. In many ways, certain parts of the team might know their segment better than you! This empowers you in several ways. First off, it saves you time. By partnering with a startup studio, you don’t waste months trying to interview the right people to get your business rolling. Instead, you work with experienced professionals in-house, ready to help you grow. Startup studios are efficient in a way that isn’t possible with VCs.
Secondly, it gives you an incredible ability to focus. Since you’re not wasting energy on finding the proper infrastructure or mastering the ins and outs of a supply chain, you will have the power to examine your product in a way that you wouldn’t otherwise. This kind of focus is invaluable and will give you major returns.
What can you expect when a startup studio invests?
When a startup studio invests in you, the return on investment is important, but that’s not the main focus. The team focuses on the product, the constantly evolving business plan, and the product-market fit. Thus, your conversations with these investors will take on a different tone. There will be less explaining, less presenting, and much more doing. Your business isn’t a gamble as much as an action item.
Launching with startup studios
After you’ve partnered with a startup studio, hired your independent team, and are starting to gain real attention, your relationship with the startup studio doesn’t end. Maybe you’re out of their day-to-day office, but they will provide you guidance on next steps along with the financial know-how on what kind of investment you may or may not need next.
The best part? At this juncture, VCs and other investors might be even more interested than they would’ve been before. You’ll be coming to the table with much more power because your business will likely have a stronger outlook. After a startup studio, you look much more like the 30% of startups that succeed.
For more information about the P&G Ventures startup studio or a chance to share your game-changing innovation, visit www.pgventuresstudio.com.