There's a paradox that impacts most startups early in their journeys. You can't make your product without money, and you can't get money without a product.

Many founders waste a tremendous amount of time struggling unsuccessfully to fundraise to build their MVP.

I want to talk about three strategies for cutting through this Gordian knot.

This article is part of our series on fundraising. You can see the rest of them HERE.

I've seen companies take three different paths to get out of this predicament.

First, they give up on what they thought their product needed to be and make something much cheaper. Something that they can afford to build right now.

Second, they focus on validating the business.

Third, they look for other sources of funding. Raising money from angel investors or VC is not the only, or even best, path to be taking when you're in this situation.

Make it Cheaply

To make building your solution less expensive, strip it down to the core value creation loop. Eliminate everything except the functionality that delivers your core benefit. That's what investors want to know about.

We want to know, can you reach those customers? Are they interested in your value proposition? Do they experience that value? Will they continue to engage with it over time?

If you can show all of those things happening, even with a pretty crappy version of your solution, investors are much more likely to cut you that check so you can build the full version of your solution.

There are two main ways of building out a super inexpensive solution: Frankenstein it, or fake it.

Frankenstein It

Dr. Frankenstein built his monster by assembling parts from numerous other bodies into something that worked but wasn't particularly elegant. That's exactly what I'm suggesting you do. Use all of the widely available off-the-shelf third-party tools and cobble them together to create something that does something your users need. There are numerous tools for processing data, creating user input forms, creating user interfaces, no code application builders, and tools that let you connect them together, like Zapier, IFTTT, or Microsoft automation tools.

You can build surprisingly effective tools using off-the-shelf components and slapping them together with some duct tape and baling wire. It may not be beautiful. It might not have the user interface you wanted. It might have bolts sticking out of its neck. That's fine, as long as it delivers the core benefit to your users so people can experience it.

That validates that customers want it, benefit from it, and you can get them on the platform. With that validation, you can start raising money.

Fake It

The other approach is to fake it. This works for most startups but not for deep tech startups, where what goes on under the hood is what the business is about. But most companies are about something else, and the technology is secondary.

What matters is what the user gets from it, not what happens behind the scenes. Your users don't care if the system works because you've got a room full of incredibly well-trained hamsters. It's irrelevant. What they care about is getting the benefit you promised them.

So, how can you do that without building the back end? Well, maybe you can get away without doing it at all.

Consider a startup marketplace company that needs to connect buyers with sellers. The plan might be to use AI to do sophisticated searching and matching. But the AI is just a means to an end. In the short run, they could have the buyer fill out a Google form which gets sent to the founder. They then look through their list of vendors, find the right one, and then push that back to the user.

The customer would not know that a human did everything behind the scenes. It looks like it's an automated, though somewhat slow, process.

This can work in the short term because you don't have many customers. With a few hundred customers, you get at most 10 or 20 transactions daily. You have plenty of time to handle those manually.

And as an investor, I usually don't care. If the technology you're building is relatively generic, there's no technical risk behind creating it, then I have no interest in how you achieve this. What I care about is what your customers care about.

Compensate with Validation

If, for some reason, you can't build a super cheap version of your solution, your second option is to compensate with validation.

Investors want to see customers using your MVP because it validates your claim that customers want and will benefit from it.

If you can't build the solution, you must go about that validation differently. Usually, that involves interviews and surveys.

For a B2B company, you should conduct dozens of in-depth interviews with potential customers, at a minimum, and compile hundreds of survey responses.

For a B2C business, investors want to see thousands of survey results for statistical significance.

This is going to be a lot of work. The upside is that research is cheap. What you're spending is your time, but when you have time and not money, that can be a good tradeoff.

When interviewing customers, don't just ask if they would be interested in your solution. Dig deep to understand their problem. What's driving them to need a solution like this?

Also, look for impediments. What barriers exist to buying it? Have they been burned by similar products? Are they worried about security, efficacy, or inconvenience? Why might they resist buying?

Is this a priority for them? Even if they want it, and there are no barriers to buying it, would they? We all have 1000 things on our to-do list and endless products and solutions we'd love to acquire. Is yours the next one they purchase, or is this a nice to have? If it is just a nice to have, they won't buy until they resolve all the bigger issues, which might take forever.

Investors want to see evidence of customer interest beyond the surveys. We want to know that you've got people lined up to use it. In a B2B context, I want to see letters of intent. If you are selling a high-value solution, you should get about a dozen businesses to commit to buying your product as soon as it exists. We know that not all of them will do so, but it ensures you will have a handful of launch customers.

On the consumer side, I'd love to see thousands to tens of thousands of users on your list that understand the price and have signed up to get alerted as soon as you go live. Again, many of them won't convert, but it's still strong evidence.

If you can presell the solution, or run a Kickstarter, where people are paying for it before it exists, even better; that's fantastic validation. Also, that cash can help you start building even without other funding sources.

You also need to validate your costs. What does it cost to bring in your customers? You might need to spend a couple hundred dollars on ads in the places where you think you plan to advertise. Do you get a strong response to the language you're using? Do people resonate with your value proposition? Will they click through to your landing page? Do they click the buy button?

Finally, I want to see you validate the cost of goods sold. If you're making a physical product, have you got quotes on everything? How much does it cost to get all the parts and have it assembled, packaged, and delivered to your customers?

If you've got a software-based model, how many people does it take to build it? How many people do you need to maintain it, create the new features and capabilities, keep up with operating system changes, and provide tech support to your users? You can use numbers from other companies, industry standards, or, better yet, do some small experiments yourself.

For fundraising, analyze your costs at scale. Get quotes for what it costs to build 10,000 of your thing rather than ten. Of course, you also need a quote for ten because that's where you'll start, but we know as investors that you're probably not cash flow positive or economically viable when first starting. But we need to see that this makes economic sense once you hit some reasonable scale.

Find Alternative Sources of Capital

Friends and Family

Raising money from angels or VCs when you don't have a product is exceptionally difficult. So why do so many founders keep banging their heads against that brick wall when there are many other sources of funding available, most of which, Pre-MVP, are easier to get and are usually nondilutive?

First, you can raise funds with equity investments from people other than angels and VCs. Angels and VCs invest for profit. We are professional investors looking for a return. But, you may have friends and family willing to invest who care less about returns on capital. They're going to support you because they like you.

Friends and family typically write smaller checks. They may give you $5k to $10k rather than the $25k to $100,000k you might get from Angels. Combined, you might raise $50k, which is often enough to complete the MVP version of your product.

Debt

Another option is debt. You can use credit cards; many companies have started with those, but it's not your best option. The interest rates are high, and the limits are low.

There are many programs focused on providing loans to startups. It's common to get a $50,000 loan at reasonable terms through one of these agencies for building your MVP.

Many governments provide this kind of financing. In the U.S., it's usually done at the state or city level. Some searching will probably turn up several options in your area.

Grants

Many startups qualify for grant funding. Usually, they come from government entities, but not always. You're in luck if you are in green tech, med tech, or space. There are a lot of programs focused on helping companies in those areas. But the government is enormous. There are many more kinds of grants than you could imagine.

And the great thing about grants is they're nondilutive. You're not giving away any part of your company, and you don't need to pay them back. However, there are some strings attached. The granting organization expects certain kinds of deliverables from you.

Often organizations give you a grant to create something they want to use. You see this frequently in the DoD, where they are looking for dual-use technologies.

A common denominator with most of these grants is they're for research and development. They're not paying you for operational activities, marketing, customer support, or things like that. However, building that product is usually your biggest expense at this early stage. Getting a grant can jump the hurdle to getting your MVP out the door.

Often, the grant-giving organization is a potential customer, so you already have a relationship with someone who might be a paying customer.

A great resource for finding grant opportunities is TurboSBIR (not an affiliate link, but this will give you a discount).

Partnerships

Similar to grants, partnerships are businesses that want to see your solution exist and are willing to pay you to make it.

I worked with a company that was building out a marketplace platform. A large vendor in the space wanted to use it. They paid $600,000 for the startup's software development costs. The agreement included future discounts and prioritizing certain features but also effectively guaranteed a customer as soon as things got up and running.

If you have large, well-funded potential customers, it may be worth approaching them to see if they want your solution enough to help pay for its development.

These are almost always nondilutive investments. Most companies are not in the business of investing in startups. Stock is messy and doesn't fit with their accounting and business models. They want to focus on their business, and if you can make it more effective, they're often willing to pay you to do that.

Bootstrap

Finally, you may be able to bootstrap your business if there's something that you can sell quickly.

If you've been doing consulting or could consult on what you're building, you may be able to generate revenue by doing that right now. At the same time, you are building relationships with people who may be customers for your product once it is ready and learning exactly what kind of things they need.

If you want to bootstrap, start generating revenue with whatever you can, sweat equity, minimum viable product, something bolted together, or anything else. Generate some cash, and plow that back into the business to allow you to build a little bit more and bring in additional resources.

Once you have a viable revenue stream from these activities, you're in the command seat to decide if and when to raise money for equity. You might choose not to. You might have a great business that's growing well, and you don't need funding after all.

Alternatively, now you have demonstrated product/market fit, you might decide that a pile of cash would allow you to accelerate to the moon. Once you've bootstrapped to that point, you have a compelling case to make to investors and can command a much higher valuation.

However, bootstrapping is slow. Bootstrapping probably won't work if you are in a market where the winner will take all.

So…

These three strategies: build it super cheap, validate without the product, or find other sources of funding to make that MVP, can allow you to escape the paradox and move forward toward the business that you want to build.

Until next time, ciao!

If this article was useful, you might want to check out this one next. It covers how taking VC investments can destroy your startup.