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The Real-World Test Your Startup Needs to Raise Money


JAMES SCHRAGER: When raising money, think about how best to demonstrate that your idea will have traction among potential users. To do this, search for the quickest, cheapest, real-world test with the lowest chance of registering a false positive.

Doing a brisk business enlisting customers explains why some deals attract money with such apparent ease. Take Facebook, for example. Sure, it’s easy looking back and telling yourself that everyone knew this was a winner from the jump. But erase the fact you know how well it went. What evidence can you find early on for the future success of Facebook, rather than, say, Myspace?

The speed at which Facebook was adopted by new groups was key. The initial launch at East Coast schools was so fast and easy that it almost needed no promotion. Then off to selected West Coast schools and the process was repeated. Do you remember Facebook ads? Probably not, it didn’t need many. By the time the founders went for capital, the real-world test was a resounding success.

This doesn’t mean the job of building Facebook was over, as the question of making money from all those page views was still a concern. But the real-world test had been met, and the rest, as they say, is history.

Michael Dell founded a business as a college student. His retail enterprise required large amounts of capital, yet he bootstrapped himself using generous terms from component suppliers while collecting payment for his computers at the time of order. This balanced his cash flows and when searching for venture-capital money, his real-world test had already been passed.

Medical-device companies tend to have high rates of success from animal models when crossing over into humans. But pharmaceutical interactions between animals and humans are far more complex and difficult to foresee. So a medical-device company can use successful animal models as a better real-world test than pharmaceuticals, where often all looks good until the final preapproval clinical trials.

We recently worked with a talented software engineer with a clever idea for a computer language to lower development time by using an interpreter to translate native commands into code. He wrote and spoke passionately about his project, had a detailed plan of how to put 200 software engineers to work, and already recruited a team of 20 motivated software designers all over the world working on parts of his program. Armed with this, he traveled up and down the venture-capital corridors of Silicon Valley, securing top-flight connections and pitching far and wide.

He never raised a dime. Everyone needed to see his software work, and signs that the world would soon be beating a path to his door.

In the early years of McDonald’s, the company convinced potential restaurant franchisees of their future success by trumpeting results from existing locations. The necessity for a real-world test remains no less important today than it did half a century ago.


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