Amit Karp of Bessemer is (IMHO) one of the better bloggers over here in the Startup Nation, and as I read his latest post, The startup’s version of “Beat and Raise,” I thought I could add a small tweak related to very early-stage startups.
Amit describes the ways startups should “guide” potential investors, the same way publicly-traded companies provide financial guidance to stock market analysts. He correctly cautions eager startup founders to set reasonable projections they can beat, rather than lofty projections that might initially entice investors but will just come back to bite if they’re not met. Hence “beat and raise” — set reasonable expectations, beat them, and then raise them further and beat them again.
In the pre-seed, pre-Product/Market Fit space where I invest, I’d advocate a version of this that I’d call “beta and raise.” Pre-launch, a founder has the burden but also the benefit of a clean slate. Nobody’s bought or used anything from your startup — so your next potential investors will as much be looking to you to guide them about what you think is attainable, as trying to guess on their own. So, here are two pieces of advice on how to implement “beta and raise”:
- When discussing your live launch, speak to investors in terms of “betas,” not customers. This communicates to them that you understand — and they should expect — your initial commercial foray to be experimental. This gives you wiggle room if pricing is thought to be low, or high, or if sales or adoption cycles are lumpy, or if anything else happens that is partially positive but not exactly what you’re hoping for long-term. It allows you to use your beta data (say that ten times fast) to accentuate to potential investors how you’ve created something from nothing, and focus on the positive indicators and lessons learned from your beta users, and how they indicate a rosier future, without setting specific expectations based on that initial data.
- Pick a target number of beta users that you think you can reasonably capture by a given near-term date, and then divide that number in half. That’s the number you should project to investors. Again, with no track record of traction, it’s unlikely that investors will have formed their own specific expectations of a traction number. And they will probably be very impressed when you exceed the number that you projected.
So, if you are pre-Product/Market Fit — “beta,” then raise.