Dreams Worth More Than Limited Reality With Fundraising

Written by

This is a topic that continues to fascinate me, so here it goes again: startup dreams are worth more than limited reality when it comes to fundraising. Entrepreneurs pitching an unproven idea with no product or customers can often raise money at a higher valuation than if they have a working product with a few paying customers.

The potential of the unknown. What might the business become? How big can this thing really be in a few years? Without a product these are all fantastic questions. Being blissfully ignorant about the true potential makes for a dreamy discussion when it comes to valuation: there’s no data so the valuation can be as high as the entrepreneur can convince the investor.

Once a product has been built and a handful of customers are using it, there’s data. All kinds of data. How frequently is the product used? How much did it cost to acquire the customers? How much do the customers pay? How long does it look like they’ll use the product? With data, it’s easy to build a financial model and make estimates around growth, financing needs, etc. Then, valuations are more definable (even if some part of the financial models are imaginary).

Entrepreneurs would do well to remember that dreams are worth more than limited reality when it comes to fundraising and valuations.

What else? What are some other thoughts on the disconnect in valuations for a startup with an idea vs one with a product and a handful of customers?

Comments

5 responses to “Dreams Worth More Than Limited Reality With Fundraising”

October 10, 2014

Nima Hakimi

Makes sense, however doesn’t that contradict the whole idea of having a MVP along with at least 10 paying customers before you attempt to raise capital?

Reply
October 11, 2014

Ryan Green

Very interesting article and thanks for sharing. We are currently going through our customer development. We are curious to what investors look for when there is not an MVP?

Reply
October 12, 2014

Josh Austin

This post feels strange because usually DC gives very practical advice about how to get a start up off the ground. Valuations for a start-up are always going to involve some speculation and if the investors buy into the vision they may be more likely to use a higher valuation.

I’d be surprised if DC is saying entrepreneurs should stop working on MVPs and customer acquisitions, and just pitch dreams to investors instead.

Reply
October 12, 2014

David Cummings

I think MVPs and having customers is a must if you’re outside Silicon Valley _unless_ you have an entrepreneur that can sell the dream, at which point they’ll raise money at a higher valuation compared to other entrepreneurs that have to build an MVP and sign customers before raising money.

Here’s some interesting data from NYC:
http://www.thisisgoingtobebig.com/blog/2014/10/10/seed-round-pricing-actual-data-warning.html

Reply
October 18, 2014

Denise Detamore, Founder/Director

The biggest challenge I have found is funding. We’re have Big Dreams. Kids 4 Coding is filling a community need where are school are lacking in technology training for children. We have been featured in Tech Republic for our work in education and technology…now the hard part is taking this small business startup and growing it to the next level.

http://www.techrepublic.com/article/how-an-atlanta-education-startup-is-inspiring-early-learning-in-tech-and-coding/

Reply