Why Passion and Preparedness Matter to Urban-Focused Investors
Detroit is considered by many to be the ultimate proving ground for social entrepreneurs, a place where they can test solutions to homelessness, lack of functioning public transit, and other major problems.
Capitalizing on that reputation, the Urban Entrepreneurship Symposium—held Friday at Detroit’s College for Creative Studies and co-hosted by Michigan State University, Wayne State University, and the University of Michigan—was designed to address the challenges faced by modern American cities through entrepreneurship, said conference organizer David Tarver, and help connect entrepreneurs with resources they need to get their ideas funded and out into the marketplace. (To see how the conference played out on Twitter, search the hashtag #UES2015.)
The conference featured lively panel discussions about a variety of topics, including what investors look for when they’re interested in a startup, which fundraising methods work best for social entrepreneurs, and where early-stage startups seeking to impact city dwellers should go for help.
“There is a lot of talent and intellect in the entrepreneurial ecosystem, but very little of it is being applied toward solving urban problems,” Tarver said in an interview before the symposium. “A lot of people are not even aware of the problems that exist. Or, young entrepreneurs have awareness but not the financing they need. We’re trying to bridge that gap.”
Tarver thinks venture capitalists are starting to pay more attention to social entrepreneurs, though his definition of social entrepreneurs is fairly broad.
“I consider Uber to be this kind of business because it solves a huge urban transportation problem,” he said. “Or what Rock Ventures is doing with Rocket Fiber [in Detroit]. There’s a whole range of opportunities, all under the umbrella of urban-focused businesses. Shinola is also one of these kinds of businesses, because they’re creating jobs for people in an urban environment—you can train people and have a story, and it becomes a marketing play that can be very successful. Detroit is an attractive brand in that respect.”
Julie Lein, CEO of the Bay Area-based Tumml, an incubator whose sole focus is on startups solving urban problems, participated in a panel about financing urban startups with Patti Glaza from Invest Detroit, Michigan eLab’s Doug Neal, and Ray Waters, president of the Detroit Development Fund.
Lein said it’s important for entrepreneurs to test early traction before pitching investors. However, she emphasized, early traction doesn’t mean a perfect product or prototype. Waiting for perfection can cause unnecessary delays, she said
“You can test traction even if your product isn’t fully built out,” Lein said. “You can interview customers. That’s the most important thing: Never underestimate the value of going out and talking to 100 potential customers. You can start refining your product or service before fully launching.”
Glaza and Neal agreed most investors want to see that startup founders have some skin in the game, so the first order of business when it comes to funding is to get financial contributions from “friends, family, fools, and founders,” Glaza said.
However, Neal cautioned, be mindful about the size of the contribution you ask family members for. Your mom will probably want to give you as much as she can part with, for example, but is cashing out her 401k to get your startup off the ground a prudent decision?
“It makes you work harder, because you don’t want to lose your parents’ money, but it’s important to understand these are really high-risk dollars and it shouldn’t be money they need for retirement,” Neal said. “It should probably be money they aren’t expecting to get back.”
In terms of what makes a startup attractive to VCs, Neal said it must address a problem with a big market or be an especially unique proposition; have a fully dedicated, technically competent team with a proven model; and, above all, it should present an opportunity for an exit down the road. Entrepreneurs should do their market research, be clear on their idea’s use case, and come to the pitch meeting with a compelling story, he added.
Glaza also pointed out that venture backing, especially for social entrepreneurs, is often not the best way to go. Microloans and grants from incubators or other entrepreneurial service providers are usually a better option for early-stage social entrepreneurs, she said.
“Rarely is a VC willing to hand out money during the first meeting—we usually send them to a place like TechTown and then we work with them,” she added. “On average, it takes six to nine months before they’re truly ready to raise money.”
Each of the panelists had a slightly different answer for what they look for in an investment-worthy startup, but passion and preparedness came up repeatedly.
“We want to see you out there hustling, talking to customers, and testing hypotheses,” Neal said. “We’re trying to fund you to move forward, but you need to figure most of it out yourself.”
On the topic of crowdfunding, panelists agreed that it can be tricky but a good option for the right startup. “When you have a physical product, it’s a good early market tester,” Lein said, noting that crowdfunding campaigns often validate marketing strategy but not necessarily the product or service itself. “You can measure consumer demand and drum up excitement. But entrepreneurs often underestimate the amount of work involved. To do it right, you have to put a ton of time and energy into it—you have to talk to media, come up with compelling perks, and give regular updates to backers. Crowdfunding campaigns are successful not because of happenstance, but because of a coordinated effort.”
And what about startups told by VCs to come back once they’ve gotten funding—how do they get that first investment that helps VCs feel comfortable enough to roll the dice? Lein said that’s when entrepreneurs should seek out an angel investor or an organization like Tumml or TechTown.
“It’s a chicken and egg problem, and it’s basically why Tumml exists,” she added. “It’s about trying to create momentum and not being afraid to make the ask.”
Lein told the story of HandUp, a website that allows homeless people in need of money for medical bills, housing, transportation, or other milestones to connect directly with potential crowdfunders.
“When HandUp came to us, they had nothing but an idea,” she said. “In three weeks, they had a part-time developer build a text-based prototype. It was very basic, but it was amazing to see that kind of progress—that kind of momentum and traction—so we accepted them into our program. Since then, HandUp has gone on to raise $1.5 million and expand to Detroit and Oregon.”