How Startup Funding Really Works. The Truth.

Plus 3 prompts for our AI and get featured in the next newsletter!

Author

Aron Meystedt
June 29, 2023

Today:

💵 The steps to fundraising. How it really happens.

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📃 What you need to have in your pitch deck to land investors.

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🤖 3 AI prompts to get the best advice from our (updated!) AI tool.

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 🔦 I want to highlight you in the next newsletter. See below.


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💸 This is what VCs really want
 

I want to quickly discuss something that keeps coming up.

For many reasons (which we’ll cover another time), people often try to skip ahead and raise money when they simply are not ready.

It’s important to understand this:

  • Investors don’t fund ‘ideas’.

  • Investors want startups that have traction and customers, so they can accelerate the growth of the business.

  • They don’t want to put their money at risk while an entrepreneur is proving something out.

  • They expect the entrepreneur to have located a problem that they intimately understand. They want to solve a major problem, not a minor annoyance.

  • They want a solution that solves this exact problem… not some tangential issue related to the big problem.

  • They want a clearly defined customer, who is well understood by the entrepreneur.

  • They expect the entrepreneur to have proven that their solution resonates with the target customer.

  • They want early traction: sales, expressions of interest, a waiting list etc. to show that this is a problem that people will pay for.

  • They want to know you have found a repeatable process to bring in more customers… and all you need is cash to turn this startup into a rocket ship.

  • It’s a numbers game for the VC. They are going to invest in 100 companies, and they know maybe ONE or TWO of them will return huge results. So, to make their fund profitable, you need to show the ability to make a 100X or 200X return, at a minimum.

  • Therefore, if they invest with you at a $5 Million valuation — there needs to be a path to a $500 Million or more exit. They aren’t interested in hitting singles… they are looking for home runs.

Pair this with the understanding that more than 90% of startups are going to fail, quickly… you’ll understand they are looking for a needle in a haystack. You need to be able to completely upend a major market in a way that hasn’t been done before.

❝

Therefore, I would argue that your time is MUCH BETTER spent working on your startup. Don’t waste time reaching out to VCs. You’ll only show a lack of understanding of how the how system really works.

Use your time to learn about your customer and their problems. Trust me, if you’re just getting started, it’s a massive waste of time to pursue funding right now.

📊 What your pitch deck should have in it


If you are further along in the startup journey, as described in the bullet points above, this is what your pitch deck should cover. As an angel investor, this is what I look for:

  • The entrepreneur has a unique insight into an industry and a problem within it.

  • Their solution addresses this exact problem — and this problem is something massive… so massive that people are actively seeking a way to solve it.

  • They have traction… this isn’t just a concept. They have active paying customers. This removes the risk that this startup will quickly fail, because convincing people to part with their money and providing value is the entire game.

  • The founders are the right people to solve this.

  • They have a repeatable business model that will grow like crazy if they have a cash infusion.

  • Personally, I like to think of who might acquire this company down the road, and why.

  • I need to understand why this new business hasn’t been done yet, and/or why is this solution 10 times better than what exists today.

  • Bonus: I need to like the people and actually want to spend time with them.

  • Bonus 2: I’d like the startup to be in an industry where I can help and give advice, as necessary. Maybe I can help connect some dots.

📉 What’s my personal investing track record?

My snapshot at any given time:

33% profitable exits
33% die quickly
33% are on life support and probably will fail.

And this is a good outcome. It’s tough out there!

Ok, some fun stuff now.


🤖 Talk to our new AI just like you would a trusted friend or advisor. Check this out!


You can now prompt our AI with a varying degree of questions.

Idea: I want to create an AI software that bills clients in the legal industry.

🙁 Let’s say you lack deep knowledge of the industry you are looking to disrupt. Feel free to ask our AI about that.

Prompt 1:
I want to start an AI business in the legal industry. I want the AI to bill clients. Should I have expertise in the legal industry? I don’t have a background in this market. What do you think of my idea and lack of expertise?

🤖 ValidatorAI:


Important Things To Consider

Starting an AI billing system for the legal industry can be a great business idea. However, having a good understanding of the industry and having necessary contacts can significantly increase your chances of success. Here are a few points to consider:

Advantages of Industry Knowledge and Contacts:

1. Understanding Customer Needs: Having knowledge of the legal industry will help you understand the specific billing requirements, pain points, and challenges that law firms face. This understanding will enable you to develop a solution that effectively meets their needs.

2. Building Credibility: Having contacts within the legal industry can help you build initial credibility and gain trust among potential clients. It may also assist you in getting referrals and testimonials, which are invaluable for a new business.

3. Developing Relevant Features: Being familiar with the industry will ensure that your AI billing system includes necessary features that are specific to legal operations, ensuring its market fit and potential success.

Possible Problems with Lack of Expertise:

1. Inadequate Solution Development: Lacking expertise and knowledge in the legal industry may lead to developing an AI system without fully addressing the industry's specific requirements and challenges. This could result in a less effective solution, leading to limited customer interest and adoption.

2. Difficulty in Market Penetration: Without industry expertise, you may face challenges in effectively marketing and promoting your AI billing system. Legal professionals may prefer solutions developed by people who understand their workflows and can provide relevant insights.

3. Limited Networking Opportunities: Without existing contacts in the legal industry, it might be challenging to find customers and showcase your product. Building a network from scratch can take time and resources, potentially slowing down your business growth.

In summary, while it is possible to embark on this business idea without a deep understanding of the legal industry, having industry knowledge and contacts can significantly increase your chances of success. It would be beneficial to either partner with someone who has legal expertise or actively seek to gain industry insights and build connections as you move forward with your venture.

Feedback

Constructive feedback:

Starting an AI billing system for the legal industry sounds like an interesting and potentially lucrative business idea. However, it is important to have a good understanding of the industry and contacts within it to truly succeed.

Here are a few considerations and recommendations:

1. Industry knowledge: Since you are targeting the legal industry, having a solid understanding of how billing systems currently work, the specific challenges faced by law firms, and the legal regulations surrounding billing would greatly benefit your business. It would be wise to research and familiarize yourself with these aspects before starting your venture.

2. Legal contacts: Building relationships and connections within the legal industry would be crucial for the success of your AI billing system. Having contacts who can provide insights, act as advisors, and potentially become early customers would be advantageous. Consider attending legal conferences, networking events, or reaching out to law firms to learn more about their needs and how your solution could address them.

3. Lack of expertise: While it is true that you currently lack expertise in the legal industry, this shouldn't discourage you from pursuing your idea. However, it's important to acknowledge this gap and work towards filling it. Consider partnering with legal professionals or hiring consultants who have the necessary expertise to guide you in developing an effective AI billing system tailored to the legal industry's unique needs.

4. Market research: Conduct thorough market research to gain a better understanding of your potential customers' pain points, the existing competition, and opportunities for differentiation. This will help you refine your product offering and ensure that it addresses the specific requirements of the legal industry.

5. Continuous learning: As you venture into an unfamiliar industry, commit to ongoing learning and staying up-to-date with legal regulations, industry trends, and advancements in AI technology. Demonstrating a dedication to self-improvement and expertise development will instill confidence in potential customers and partners.

Remember, starting a business requires a combination of domain knowledge, persistence, a willingness to learn, and adaptability. By addressing these considerations, you can increase your chances of success in the legal industry with your AI billing system. Good luck!

Pretty cool.



🧑‍🤝‍🧑 Let’s change it a bit. Let’s assume you have a friend that can help fill the gaps in your knowledge. You are technical, he is not. How to proceed?


Prompt 2:
I want to start an AI billing system for the legal industry. A friend of mine is a lawyer and knows this is needed. How do I involve him in my startup? I have little understanding of the law field but I can technically build any app.

🤖 ValidatorAI:


Important Things To Consider

Involving your lawyer friend in your startup can be a valuable step for gaining insights into the legal industry and ensuring that your AI billing system meets the specific needs of legal professionals. Here's how you can involve him in your venture:

1. Initiate a conversation: Begin by discussing your business idea with your lawyer friend. Explain your technical skills and the potential benefits of an AI billing system in the legal industry. Gauge his interest and get feedback on the idea.

2. Collaborative brainstorming: Invite your friend to participate in brainstorming sessions, where you can jointly explore the specific pain points in legal billing and how AI technology can address them. His legal expertise will be valuable in shaping the features and functionality of your app.

3. Validation and research: Request your friend's insights and assistance in validating your business idea within the legal industry. He can help you understand the market, identify potential competitors, and validate whether there is truly a need for such a solution.

4. Legal guidance and compliance: As someone knowledgeable in the legal field, your friend can provide guidance on legal compliance, ensuring that your AI billing system adheres to relevant laws, data privacy regulations, and billing standards specific to the legal profession.

5. User testing and feedback: Invite your lawyer friend to test your app and provide feedback. This will help you refine your product, adding or modifying features to better meet the needs and workflows of legal professionals.

Now, let's consider some possible problems with your business idea: 

1. Resistance to change: The legal industry is often slow to adopt new technologies. Convincing law firms or individual lawyers to switch from traditional billing systems to an AI-based one may prove challenging. You need to address concerns and demonstrate clear benefits and efficiency gains.

2. Data privacy and security: Legal professionals deal with sensitive client information, so data privacy and security will be a top priority. Ensure your system is secure, compliant with regulations, and incorporate strong encryption and authentication protocols.

3. Accuracy and reliability concerns: Precision and accuracy are vital in billing systems, especially in the legal industry. To gain trust, your AI system should be highly accurate, able to capture billable items correctly, and minimize errors or discrepancies.

4. Integrating with existing systems: Many law firms have already invested in software and systems to manage their operations. Compatibility and integration with existing tools may pose challenges. Consider how your AI billing system can seamlessly integrate with common legal practice management platforms.

5. Pricing and affordability: Determine a pricing model that is suitable for law firms of different sizes and ensure your solution offers sufficient value to justify the cost. Consider different pricing tiers or options to accommodate various budgets.

6. Limited domain knowledge: Since you have limited understanding of the legal industry, you might face difficulties in fully capturing the nuances and unique requirements of legal billing. Collaborating with legal experts will help bridge this gap.

Remember that involving your lawyer friend does not guarantee success, but it greatly improves your chances of building a relevant and effective AI billing system for the legal industry.

Feedback

That sounds like a promising business idea. Involving your lawyer friend in your startup can be beneficial in terms of industry insights, legal expertise, and networking opportunities within the law field. Here are some steps to consider:

1. Communicate: Reach out to your friend and discuss your business idea in detail. Explain how your AI billing system can address the pain points in the legal industry and benefit law firms. Clearly outline your vision, goals, and how you believe your technical skills can contribute.

2. Seek their expertise: Encourage your friend to share their expertise and insights about the legal industry, particularly the billing process. They can provide valuable information about existing systems, legal requirements, and potential challenges. This will help you refine your product and ensure it aligns with industry standards.

3. Collaboration opportunities: Explore ways to collaborate with your friend, such as becoming a co-founder or involving them as an advisor. Consider their level of interest, availability, and willingness to actively contribute to your startup. Their involvement can bring credibility and industry-specific knowledge to your venture.

4. Market research: While you may have little understanding of the legal industry, conducting thorough market research is crucial. Identify competitors, target customers, and potential obstacles you may face. To gain a better understanding of the billing process, consult legal professionals, attend industry events, or join relevant online communities.

5. Validate your idea: Before investing significant resources in developing an AI billing system, validate your concept. Create a minimum viable product (MVP) to test its usability and desirability among potential customers. Encourage your lawyer friend to provide feedback and involve them in the testing process.

6. Legal considerations: As your startup operates within the legal industry, it's important to ensure compliance with all legal and regulatory requirements. Your lawyer friend can guide you through the legal aspects, such as data privacy, security, and any legal obstacles specific to the billing process.

7. Networking: Leverage your lawyer friend's professional network to connect with other legal professionals who may benefit from your AI billing system. Attend legal conferences or seminars together to showcase your product and gain industry exposure.

Remember, collaboration with your friend should be based on mutual understanding and clear communication. Their involvement can greatly contribute to the success of your startup.

Cool!


➡️ ➡️ ➡️ For the 3rd interesting prompt, I want YOU to discover cool ways to prompt our AI to get solid feedback.


Go to ValidatorAI.com - come up with new ways to ask the AI for feedback on your startup idea. Then, reply to this email with interesting things you discover.
What prompts are you using to get the best feedback?
I’ll feature a few of your prompts in the next newsletter, as it will help all of us!

 


Take care out there.

❗️❗️ If you made is this far: Email me with what you’re working on.
How has our AI helped you think through your own challenges?
Maybe I’ll share your startup with the community (with your permission).


Aron



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