Raising startup capital before full product-market fit

Mar 12, 2024

Early-stage startups face the challenge of adjusting an innovative solution to the market and achieving a real product-market fit. Raising capital in the midst of this process is a substantial challenge for many startups.

We discussed these challenges on The Meet.Capital Startup podcast, with Guillermo Flor from GoHub Ventures.
Guillermo was an M&A lawyer and a startup founder before starting his VC career. One topic he is particularly interested in is product-market fit, which is also the name of his successful newsletter. Here are some of his suggestions for startup founders early on their journey:

1. Focus on Client Acquisition and Retention, Not Just Sales

While sales might seem like the ultimate goal, they're not the best indicator of whether you're on the right track to PMF. Instead, pay more attention to how many new clients are coming on board and whether they stick around. If people are not only trying out your product but also continuing to use it, you're likely moving in the right direction. This shows that your product isn't just attractive at first glance but also valuable and useful in the long run.

2. Listen to Your Clients, But Watch Their Actions Closely

Talking to your clients is essential, but it isn’t enough. Especially when you're innovating and bringing something new to the market. Your clients might not even know exactly what they need until they see it.

So, while you should listen to and communicate with clients, focus more on observing how they interact with your product. Experiment to see what solutions they gravitate towards and what they're willing to do to solve their problems. Their behavior will give you invaluable clues about what your PMF might look like.

The evidence you want is your clients’ will to make an effort to get your solution to their problem. At best, that means sales, but even subscription, attendance, or other real-life metrics are a start.

3. Stay Lean and Flexible in Your Spending

If you're still in the phase of tweaking and learning about your product, it's wise to keep your budget tight. Avoid the temptation to raise a ton of money and expand rapidly. This can be risky if you haven't found that strong market pull yet. Raising just enough capital to allow for this iterative learning process can help you stay agile and make changes as needed without the pressure of burning through a large investment too quickly.

4. Sell the vision and journey if you haven’t yet nailed the solution.

If your startup hasn't fully achieved PMF, there's no point in overselling your current solution as the perfect answer. Investors will be more interested in the problem you're addressing and your vision for solving it. Invite them to join your journey towards refining your solution. This approach not only sets realistic expectations but also attracts the right kind of investors - those who want to be with you for the long term and believe in your vision. It also opens the door for investors to contribute their insights and experience to help you reach PMF.

5. Clearly Outline Your Path to PMF for Investors

When you do approach investors, arm yourself with a solid plan detailing how you intend to achieve PMF. Share any signs you've picked up from the market that indicate a demand for your solution. Whether it's early user feedback, pilot project results, or engagement metrics, these pieces of evidence can bolster your case and demonstrate your commitment to finding and serving a real market need.

6. Iterating to get PMF is also a journey towards more clarity.

Clarity makes everything easier. The more clarity you have on your problem and who you are solving it for, the faster you will get to the exact solution. Clarity is also what helps you convince investors. Make it easy for them to understand what you do. It will also help them share your vision with their partners, co-investors, and LPs.