When raising capital, it’s important to focus on raising enough money to get your company past big value inflection points. An easy way to think about it is that value over time doesn’t go up and to the right in a straight line like this:

value-time1

Instead, it’s more of a stair step like this:

value-time2

So, what are the value inflection points that create the stair steps, and how does one think about it at the earliest stages? Often, when I speak to very early-stage founders, the conversation around value focuses on achievements. These might include:

  • Bring on a technical co-founder
  • Get a working version of the product
  • Get three paying customers
  • Launch a successful Kickstarter campaign
  • Etc.

These are not bad things to shoot for. But I think it’s more helpful to focus on value creation or risk reduction, not so much achievements. What an investor (and I think an entrepreneur) really wants to know is:

  1. Is this something people want?
  2. How hard is this going to be to sell (or get traction)?
  3. Can this team do it?
  4. Does it matter?

These are four key value inflection points to reach and pass. Let’s take them in (sort of) reverse order.

Does it matter?

This may not really be “provable” to an investor. Your fundraise is a search for true believers, so I wouldn’t think much about this in terms of early value inflection points. You can get a sense of how hard or easy it will be to convince folks of this by talking about what you are going to do, before showing what you have done.

Can this team do it?

This depends on the strength of the team. The reason why hiring a technical co-founder or someone else in role X seems like a milestone is because investors might actually have questions about whether the team can be successful.

This is especially true for less experienced founders. The ability to hire someone surprisingly great very early is an indication both that there is someone else there to increase output (which is great) and that this founder is capable of great recruiting, which might be the No. 1 or No. 2 most important skill for a founding CEO. But again, it’s not specifically the hiring of people that is the value inflection, it’s answering the question of confidence in the team.

Is this something people want?

This is the most important question and where confusion happens. Getting a working prototype does not really answer this question. For a lot of products, everyone will believe that you can build a product that can do X or Y. That doesn’t actually enhance the value. If the product is really well executed, it helps bolster one’s belief that the team can execute. But it doesn’t show that it is something people want.

Sometimes, answering No. 1 (do people want it?) and to a lesser extent No. 2 (how hard will it be to sell?) can be done with an incomplete product. You can do it with a series of tests, simulations, or small-scale hacks. I just invested in a company recently that gathered amazing data from a test that replicated what the app would do using only email interactions. It was kind of Wizard of Oz-esque, but it showed that (a) consumers would really engage repeatedly with the service, (b) the service worked without too much effort on the back end, and (c) consumers were willing to spend a lot of money. The product what nowhere near built when this was done, but the value creation of this experiment was significant.

How hard will it be to sell or gain traction?

Similarly, proving sales friction can sometimes be done with very little actual product built. When Fred Shilmover started InsightSquared, he essentially sold an Excel model to his early customers that showed what their ultimate product would do. The fact that at least a few customers (and one channel partner) would sign on with such a rudimentary product was an interesting indication that the question above would be solvable for this business.

So, as a founder, when you are thinking about very early-stage milestones, focus less on the activities and more on answering the four questions above.

As Fred once told me, “The most common mistake I see startup founders make is building too much software too early.” You might find that you can actually invest a lot less time and engineering resources to get to some of these answers and to get a step or two higher on the value creation stairs. Or you may learn that there is just no way around investing more time and money to build out something more robust. The concept of an MVP requires the “V,” and in some cases, you can’t get to “V” without real resources. That’s when it’s important to raise more money sooner, even at the risk of more significant dilution from the start.