Ask HN: Is it a good idea to seek funding pre-launch?

https://news.ycombinator.com/item?id=5706604

by optimus • 13 years ago

3 8 13 years ago

news.ycombinator.com

I've built, and validated the need for, my app but I don't have the funds to grow it; there's a sales component to it and I need to hire some sales reps to scale. The app also requires a sizable upfront expense per major city (population > 100k) that is recouped about 10 days later.

The startup is a b2b play that has a b2c component that I'm working on too.

Are investors likely to invest assuming they like the idea, the initial execution (the building of the app), and the size of the market, with no traction (not yet launched).

Should I start looking for funding now?

patio11• 13 years ago

A partial answer to your question: there is an inverse Goldilocks zone for seeking funding. An idea/market/team can potentially be fundable pre-launch no-traction, and be potentially fundable post-launch post-traction, but absent extraordinary circumstances post-launch pre-traction is the kiss of death.

The app also requires a sizable upfront expense per major city (population > 100k) that is recouped about 10 days later.

For what it is worth: Many investors will assign fairly low confidence to this prediction prior to you having successfully demonstrated it 1+ times.

optimus3• 13 years ago

The problem I'm worried about is precisely what you're warning against: I'm confident that I can successfully launch in one city (with my own funds) but I'm afraid that this will be considered post-launch and pre-traction when I solicit investors.

rguzman• 13 years ago

if you can recoup your funds 10 days after launching in one such city, why are you worried about the investors?

launch in 1 city -> recoup -> launch in another city -> recoup -> ... do that enough times and you either have traction and/or you don't really need investors.

i suspect that your prediction of the recoup-ability is what's off.

sharemywin• 13 years ago

My understanding is unless you have a couple succesful businesses under your belt it's hard to get investor interest pre-traction. The other thing investors are going to look at is barriers to entry. if your up and running proving your business model works and making good profits how hard is it for someone to come along charge less and take your business from you.

csense• 13 years ago

My thought is that it doesn't hurt to start the conversation, especially given that you already have a business plan and a product.

But whether you take investment depends on the valuation you can get and the amount of equity you'll be asked to give up.

You need to determine three things:

(1) How much is your company worth?

Basically, the assets you have in the present, plus present value of expected future profit.

(2) How much you're willing to give up?

Figure out whether you want to maintain a majority of the business, and how much margin you want to leave for future equity grants (later funding or stock-based compensation incentives)

(3) What's your exit strategy?

If you're planning on staying with this business for a long time, then you can probably get better returns, and have a freer hand with strategy, if you avoid taking lots of investment. Staying in a niche and generating $100k a year in profit to live a reasonable lifestyle and support a family with minimal work (once you're past the startup stage) can be considered success if you're 100% owner, but an investor might not be happy unless you get acquired for $1M - $10M, and might try to pressure or even force you to pursue that outcome.

OTOH, if you're looking to eventually hand the reins over to someone else and cash out a nice golden parachute down the road, I'd start the ball rolling with investors early on.

Ask HN: Is it a good idea to seek funding pre-launch?

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