The credibility you need to fundraise

You need an idea, a team, and money to build a startup. The idea and team usually come first (more about them another time). Then, to get money, you do “something” to enable fundraising. I’ll focus here on deciding what that something is. It will often be either initial validation of some assumptions, initial progress in tech development, or a combination. This leaves a wide range. Your resources are the most limited at this point, so making a good choice is crucial – it will determine your likelihood of getting more, and continuing your journey.

There’s plenty of advice on the internet on this topic, even if the question is phrased somewhat differently. The most basic (and wrong) suggestions are static: e.g., the one thing you must do is build a tech demo, or the one thing is discovery calls with customers, etc. Don’t believe anyone claiming there’s a single answer for all companies.

Better suggestions focus on de-risking your idea. This is based on the “lean startup” framework: your idea starts as a collection of assumptions. Each of those may be wrong, and is, therefore, a risk. Early company building is the process of removing those risks, to develop your company’s value. Following this model, you’d aim to remove as much risk as possible with your resources. 

The de-risking approach is great in theory, but hard to implement. How do you compare vastly different risks, and decide which is more important? There are two challenges here. First, we are much better at identifying risks in our areas of expertise, so those get excess attention. Second, there’s a human bias towards prioritizing actions in our comfort zone, leading to a similar result.

The alternative I propose is the “Credibility” approach, a re-framing of de-risking. The change – rather than focusing on the idea while ignoring the team behind it, de-risk the combination. To do so, prioritize efforts that increase your credibility in asserting that your team can get your idea to the finish line. This forces you to consider risks due to your team’s limitations, which are precisely those outside your comfort zone.

The results are profoundly different. Consider an example of a founding team of strong engineers (these suffer the most from this issue). To de-risk the idea, they may identify a tech risk and develop a prototype to validate their approach to it. If they focus instead on credibility – they may conclude that building the prototype isn’t necessary to credibly claim they can address the tech challenges later. Then, they could invest in user research and marketing experiments. To be clear, I’m not saying engineers should never start by building – but they should consider the alternative. Many teams don’t.

Working out of your comfort zone has a natural advantage. You’re demonstrating an understanding of the challenges beyond your original discipline, and starting to address them. However, the gaps in your team and the work out of your comfort zone are rarely where you’ll do your best work. And building credibility is also about demonstrating excellence. So, I’m not suggesting swinging the pendulum all the way in the opposite direction. Finding balance is more art than science, so here’s a way to think about it I find helpful:

• Do something that demonstrates excellence.

• Identify gaps in the idea/team combination as comprehensively as you can. Honestly evaluate their importance, and focus on those essential to your success. Make progress on the highest impact one you can afford to.

• For all the others, if you can’t move them forward yet, study them enough to discuss them thoughtfully, and have (at least an initial) plan for addressing them later. The goal: when asked, you’re never surprised in a core area, and are always knowledgeable and thoughtful on those.

Over 90% of founding teams I met, including very strong ones, didn’t initially meet this standard.

I’d love to hear your feedback or suggestions — please respond directly to this email!