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Texts with Founders: Customers understand before investors do
And some investors will never understand.
Welcome to Texts with Founders — tested tactics for early stage startups. This is a free newsletter designed to give an inside look at how I work with other founders.
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In the past, I've described two types of fundraising strategies:
Sell the Dream
Sell the Traction
Selling the dream means you do not have a product in the market. Selling the traction means you have promising early signals from customers paying for your product.
Most founders are better off getting a product into customers' hands instead of going straight into a fundraise. The reason: customers understand before the investors do.
In a prior essay, I talk about how many brilliant investors didn't "get" Airbnb when the company raised its seed. Here's Fred Wilson:
We couldn't wrap our heads around air mattresses on the living room floors as the next hotel room and did not chase the deal.
The fact few understood Airbnb is not a knock on VCs—they are infrequently the customer a founder is building for. It's unlikely they've personally experienced the problem you solve for your customers. That's why it can be hard for them to reach conviction pre-traction.
Focusing on customers ultimately helps you with future fundraising. You'll be able to show investors that you're addressing a tangible customer problem and that there's a significant willingness to pay for the solution. Two examples come to mind.
Customers can become investors
The first example is a company I worked with where customers loved the product so much that they asked to angel invest. Customers wanting to invest can provide validation that you're building something of importance:
They could have tried fundraising instead, but they were just out of university, and it would have been hard to convince investors. It was only when their customers started asking if they could invest that they considered running a fundraise process. They had such strong customer momentum that it also created momentum in their fundraise, resulting in multiple term sheets from lead investors.
(from Founders and Momentum)
Customers can be some of the most helpful investors:
They understand your customer (because it's them) and can give meaningful feedback
Referrals: they know other potential customers and hires
Alignment: if you solve their problem, their business improves
Customers help with objection-handling
The second example of founders focusing on customers before fundraising touches on how it can help with objection–handling.
One founder I work with knew that one of the biggest challenges he would face raising his first round would be convincing investors he could sell into a notoriously hard-to-convert customer segment.
Instead of discussing how he might overcome these challenges in the future, he got to work making actual sales. Eight weeks after launch, he had signed $100k in ARR and built a pipeline of eager potential customers—a remarkable acheivement that ran counter to what was believed possible. Some investors still felt uncomfortable with the market. But not all. He ended up with multiple term sheets.
It can be good to be misunderstood
Raising based on a dream felt more doable for a larger pool of founders in a zero-interest rate environment. Nowadays, it feels restricted to founders with impressive early-stage track records.
Regardless of your background, I encourage you to consider getting something out into the world that customers are willing to pay for before fundraising. There are startups where this advice doesn't make sense (longevity drugs, asteroid mining, etc.). In those cases, it's usually evident there is a market if the technical challenge is solved.
I’ll close out by noting that many investors will continue to not understand what you’re doing even as you acheive greater levels of success. If the “winners” were obvious to every investor then startups would not have such tremendous upside potential as investments.
Sam Lessin recently published an essay on Twitter with a related idea about how many seed stage companies that have a lot of investor interest end up not being amazing investments:
my bet is that any seed deal that has ›3 or 4 bids on it is a bad deal. One or two other bids, sure - that can work...and 'special access' because of who you are / the entrepreneur wanting to work with you, yes please…. but the negative signal of a deal that too many people / firms want to do / making the market 'efficient and bidding up the price.... Is an ENORMOUS red flag - it means that the founder fit the pitch too much to seed capital market demand vs. what actually makes sense to build (investors have no idea what to build really)
Focus on your customers. If they understand you it means you’re on the right path—even if most investors don’t get it.
Texts with Founders is entirely free.
If you feel these resources might benefit someone you know please text or email them about it—would love for this to be of service to even more founders.
The Benefits and Downsides of Responsiveness - Where it can help and where it can backfire.
Raise the round behind you - Avoid a drawn-out process and optimize for the best investors.
Conditional Commitments - Why they aren't commitments and what to do about them.
Avoiding Gossip - Nimbly navigate an awkward scenario.
Handling Inbound From Investors - Avoid distractions and keep potential investors warm.
No identifying information is shared in texts.