How Your MVP Helps you Raise Funds for Your Startup

15 February 2013 by Gaurav Gaglani 3 comments

Eric Ries defined Minimum Viable Product (MVP) as “The minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.”

When you want your MVP to raise funds for your product, the definition needs to incorporate a few validations for the investors as well. In order to do so, let’s get started thinking from investor’s perspective.

mvp_gaurav-resized-600

Show me the Money

The investor looks for only one thing – The Return on Investment(ROI). ROI is one of the most frequently used words by investors. The parameters and terms that they use to judge the potential of your idea are:

  1. Selling ability
  2. Margins & Exit strategy
  3. The Team
  4. The Execution plan
  5. Entrepreneur

Characteristics of an Investor-friendly MVP

  • Already have customer that pay or are ready to pay in near future
  • Substantial number of customers provide regular feedback
  • Formation of a tribe of customers, a fan following
  • Active and returning customer base
  • Customer centric business model
  • Steadily growing user base
  • New feature development in future based is based on customer feedback

Process of defining an Investor-friendly MVP

As a startup, your biggest constraint is your financial runway where you go on without getting paid. It is also your most powerful decision-making tool. You must take the time to define the MVP right so that you avoid creating waste and use your runway most efficiently.

Every MVP is different and must be carefully defined. Below are some guidelines that will help you craft your investor friendly minimum viable product.

Customer Engagement

Certain ideas, such as Facebook, Mint, and Dropbox grab investors’ interest based on the number of active users. Others require having to pay customers with a product like HubSpot. Based on your product idea, you need to understand which one is right for you. The easiest way to choose the target customer engagement is to identify if your product requires huge data to be successful or if it can be a standalone tool. In the former, you will need customer registrations and in the latter, you will need to have paying customers.

Another parameter to identify the right customer engagement is to categorize your product into B2B and B2C. Most B2C products require a large number of registrations, and B2B proves itself on the grounds of paying customers.

Reason to Come Back

Your customers may register initially due to a some attraction factor sexy up for example and may never come back. Ensure your MVP has enough reasons for the customers to come back and find value in your product. Showing your vision for the product extremely clearly is one of the ways to do it.

Market your WHY

If you tell why you exist more than saying what you do or how you do it, chances are that you will resonate with the right customers in a much better way. Apple and Zappos have done a great job at it. Simon Sinek puts it beautifully and we recommend you to look at the video of his TED Talk.

Business Model

A startup is defined as an attempt to discover a sustainable business model. Most startups have various possible business models but the entrepreneur is almost always unclear about the right one. This is a smell. It means the entrepreneur is not yet clear on the vision of the product.

The entrepreneur is only supposed to spot the most dominant model based on the customer usage. Leave it up to the early adopters to drive it for you. If the entrepreneur is unable to do so, it means that the product does not yet have the right early adopters and the focus needs to be on creating the right set. Probably time to think about a pivot.

Organic User-base growth

If you manage to get a large user base quickly, it does not mean anything. Once you stop pushing the product at this point, and if the user base is still growing steadily than you have created an investor friendly MVP. Use this as a parameter to evaluate your readiness for going to the investor.

You are saying NO to every Feature Request

If every feature has to try hard to prove its verdict to get into product development, you are minimizing wasteful work. This is something very much needed to ensure you are going to spend each dollar wisely and the investors love your conscious in doing so.

Use the above as the guideline to get started. We’re a Ruby on Rails Consulting shop and work with our clients to help them define their MVP. Please feel free to reach out to us to discuss your idea or to define your investor friendly MVP.

Gaurav Gaglani

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3 thoughts on “How Your MVP Helps you Raise Funds for Your Startup”

  1. Oh! I so loved the way you explained the matter of funding esp the witty sub heads. Nice article with relevant info… and wonderful graphic with perfect illustration!!

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