Entrepreneurs with early-stage startups often think that the first step to building a successful business is raising capital. Some startups initially reach out to their inner network and raise a "friends and family" round. Many approach institutional investors either for their first round or after they use up the funds from their friends and family round. If you are planning to move beyond your inner network and pitch to institutional investors, you will want to keep in mind that there are usually a number of prerequisites that your company needs to meet before starting this process.

From my experiences raising capital as a founder and hearing startup pitches as an Entrepreneur in Residence, I have seen that when you have met the prerequisites, you can put forth a stronger case as to why your company is a viable investment so the chance of raising a round goes up significantly. This is especially true for first-time founders who do not yet have a track record of success. To see if you meet the prerequisites, ask yourself these questions:

1. Are you all in?

The founder, or founders, of the company must be working on the business full-time. I have lost count of how many times I have heard aspiring entrepreneurs tell me that they will start working on their business ideas full-time as soon as they receive funding. It is understandable for founders to be apprehensive about relinquishing a full-time salary and job stability, particularly if they have a family to support. But dealing with a low (or no) salary and uncertainty comes with the territory in the early days of a startup. If you have not "taken the plunge," you are conveying that you lack confidence in your company's prospects, are not comfortable with unpredictable situations, and are not fully committed to your company. None of this bodes well when pitching an investor. If you are not taking a gamble, you cannot expect an investor to be willing to take a gamble either.

2.  Do you have proof of concept?

The required state of the product varies depending on your company's business and revenue model. Ideally, a minimum viable product (MVP) has been developed before any institutional investor pitches begin. In some cases, such as when a company is developing highly-specialized enterprise software, there is some leeway with the product's maturity and a beta version is sufficient. Either way, the product has to be well beyond the concept phase for a first-time founder. (Serial entrepreneurs with past successes have more flexibility).

I have seen numerous companies seeking funding that only have product sketches, wireframes, or a user interface with no technology behind it, and these companies often have a very tough road ahead of them. Many investors will pass on a startup that is still in the first stages of developing its product because there is a significant amount of additional risk that comes with a company being pre-product. Investors usually want to see an actual demonstration of the product during the pitch session. Having a finished product, or at least a finished beta product, not only illustrates what your product does and why it is valuable, but it also establishes that you are resourceful and can be productive on a limited budget, are serious about your endeavor, and have already made progress in getting your business of the ground.

3. Is anyone buying?

No matter how early your company is, it is essential to show market validation and customer interest. That is part of why it is so important to have a product that is mature enough for customers to evaluate it. Naturally, the more traction the product has, the better. And revenue is the best indicator of traction. Even if your first customers are receiving heavily discounted prices, if they have taken out a credit card or written a check it shows that you have a product that is filling a market need. Moreover, your customers' testimonials can be very effective in influencing an investor's decision.   

If you are pre-revenue, there is still potential to attract early-stage investors. For business-to-business (B2B) companies, the next best alternative to paying customers is potential customers who are showing substantial interest by signing a letter of intent, participating in your beta trials and providing detailed feedback, and being willing to speak to investors about why they want to buy your product. For business-to-consumer (B2C) companies, you can demonstrate traction if you have a considerable number of non-paying users who could potentially convert to paying customers. You have an even stronger case if you have continuous user engagement, a low rate of user attrition, and a very low user acquisition cost.

Fulfilling all the pre-requisites is no small feat. But you are in a much better position to not only raise capital but also have a successful business when you have done so.  

About the Author

Roselle Safran is the Entrepreneur in Residence at Antecedent Ventures, an early-stage venture capital firm. She is also the President of Rosint Labs, a consultancy that provides operational and strategic direction to cybersecurity teams, leaders, and startups. Previously she was the CEO and Co-founder of Uplevel Security and led the startup to become a venture-backed company with Fortune 1000 customers and numerous industry accolades. Prior Roselle managed cybersecurity operations at the Executive Office of the President during the Obama Administration and directed the 24