Thursday, March 11, 2010

Startup Advice - running short of funds for initial product release

Last week I received an email from an entrepreneur here in the SF Bay area with a really good question:

I needed some advice on our product - our current funding will allow us to complete the initial release, but with limited content and with a few features missing - and since its a product where content drives the experience and value - it is critical. We need some more funding to get the product out in all its glory and don't want to be rushed and want to deliver good presentation quality.

Should we trust that it will all work out fine and go ahead and try to find outside money before launch through publishers/investors?

The whole team believes in this product and if we were to do a smaller release first, the energy would be lost. The truth is the team really believes in this - and we wouldn't be able to execute if we tried to just deliver something un-innovative.

What is your opinion on this?

This is a great question, and here was my response:

Obviously I have very little understanding of exactly what your team is building, so my response is going to be somewhat generic.

Each time you accept outside capital you will dilute the shareholding and need to focus on fundraising instead of working on the initial release. This can also result in a loss of energy and focus and is why it's best to get more money that you need each time to keep a "buffer" in the bank.  Experienced investors will know that software development is an art as well as a science, and there are always unforeseen risks.

Of course you could initially try to raise more from existing investors - this should be much easier, and if they believe in the team, should be willing to increase their investment.

Great to hear that your team all really believes in the product, but how have you validated this with potential customers?  Your risk profile has to be based on how much potential customer validation you have - this is the best measure of potential success.  Remember that with advertising supported businesses, your paying customer is the advertising agency that sends you a check (e.g. Google).  They are the ones who get the value from the customer traffic driven.

Is there is any way you can do a limited release of some functionality to a small number of users? I've participated in many traditional product and web services betas and they can be extremely tightly restricted to a smaller audience until you have the right product - this can also build up demand for the final product.

Sometimes it's good to step back and re-validate that you absolutely need all the features in release one - the key is to get the minimal viable product (MVP) in the market as quickly as possible, and then build momentum. A good example here is the Apple iPhone - the first version couldn't even do 3G, but it didn't stop their success.

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