Please try to imagine. A contractor approaches you with a twinkle in his eye and a plan as vague as if written in invisible ink. “Trust me,” they say. “We'll work on your house for three months. We'll spend 30% of the money on plumbing, 30% on wall and roof framing and construction, 10% on electrical work, and the rest on things like painting. ” When I ask if the house will last until the end, they shrug. “You know what? But isn't that trip exciting?”
This is a scenario so ridiculous that it makes the contractor laugh through the front door, which hasn't been installed yet. But this example is eerily similar to the pitch many startup founders make to potential investors. According to my research, more than half of founders don't have a proper “How to spend your money” slide. This is not great. Founders, you can do better.
When building a house, you will, of course, need a blueprint, a schedule, a clear image of what your future home will look like. Don't settle for a contractor whose only plan is to “make it work.” But in the startup space, founders often expect investors to buy into a dream woven with vague threads.
Investors, like homeowners, aren't looking to put money into foundations that lead nowhere. At the end of the construction period, they want to invest in a “home” that not only stands, but is ready for the next stage, whether to live in or sell.
A “finished home” for a startup is not built with bricks and mortar and a cool USB power socket, but with milestones and accomplishments.
Has this startup filed for a patent? How many customers will it attract? What kind of revenue does it boast? These are the “rooms” and “facilities” that investors are looking to find in a startup house. If these milestones align with what investors expect from a startup's next funding round, the startup has a fair chance of successfully raising funding.
The house analogy works in multiple ways. Mistakes happen, and estimates are often completely wrong. No one expects a contractor to predict the future with absolute certainty. Weather delays, supply issues, and other unforeseen events can always complicate your work. However, a good contractor will have a plan, schedule, and contingency plan in place.
When it comes to startups, looking over the plan and poking holes in it is what we call “doing due diligence.” Although startup founders cannot predict every market fluctuation or challenge, they can and should outline their goals, strategies, and plans to overcome potential obstacles. This plan is your blueprint for success and should at least be within your reach.
Look, I understand. Perhaps fearing failure or criticism, founders may avoid providing detailed plans. It's probably their first startup. Or maybe there's a huge, unknown hole in their future. That's fine and reasonable, but show that you know how to plan for that too.
The journey of building a startup, like building your dream home, is an adventure full of unexpected twists and turns. Anyone who's lived down to the studs has likely spent some time sitting in the middle of a run-down living room, crying their eyes out as yet another curveball comes their way. That's startup life. Roll with the punches.
But you need a plan, and you need to be able to present that plan as part of your pitch. No one is going to give you a pickup truck, a blank check, or directions to the nearest Lowe's. You need to be careful about how you use your funds.