Here's how you increase the chances of your start-up success.

Thread

Instead of a traditional approach where you are expected to do market research to determine demand for your product,

spend that time and money into developing a proof of concept with the aim of developing a minimum viable product (MVP),

then start testing it.

The proof of concept should be funded by you,

which will cost anywhere between $5-20k depending on the product you are trying to develop.

This self-funding is mandatory. Because it shows investors your commitment and devotion to your product.

When you reach the MVP stage, you will need to raise funds from investors.

See my thread on *how to attract mentors* for this part.

Lets make some realistic assumptions on how this startup will play out:

The MVP could cost anywhere between 100k-500k.

We'll take the max at 500k.

The MVP calibration and testing phase will probably last around 3 years. If you're lucky, it could bring in some after-tax operational cashflow.

Lets pretend your MVP could bring in 20k per year.

After the 3 years, you will need a next stage funding of $2 million to fully commercialise the product at full service.

The operating revenue will remain uncertain at full service, because it will depend whether the MVP will achieve traction or not.

The uncertain operating revenue is assumed to be $200k in the first year of launching at full service.

You'll also assume that this revenue will grow at 10% in perpetuity per year.

Because of the uncertainties around the revenue of your product, you apply a standard deviation.

The standard deviation is the uncertainty that represents the attainment of the desired cashflows.

Because of the high start-up failure rate,

lets assume you set a standard deviation of 200%.

Lets assume investors require 30% return & the current risk free interest rate is 5%.

If you do a Net Present Value calculation on your MVP phase of the start-up,

it will be around -500k.

So in other words, the value of your start up, is less than worthless.

Now we can try to turn this value positive by applying some options.

An option would be to layout the flexibility an investor would have by investing in your start up.

The flexibility is that the investor will only need to pay 500k for the MVP,

assess whether it gains traction,

then have the option to expand by investing further.

OR they can abandon if the MVP does not gain traction.

The value of that OPTION is very lucrative to most investors. There are cash reserves in silicon valley that are allocated just for "high risk startups".

If you do an option analysis, the value of that flexibility gives your MVP a net present value of -20k.

Much closer to 0.

All startups will have negative present values.

But the point of this thread was to demonstrate that you should break up your startup into smaller development process stages.

Sell each phase separately.

Then give investors the option to expand.

There are evaluations you can actually use to determine the value of the;

"option to expand"
"option to delay"
"option to abandon"

A very organised startup would have a several development stages with timelines and an option analysis for investors.

I successfully used the "option to expand" on my startup, which improved the present value of my MVP from -120k to +5k.

I paid a financial analyst and my accountant to sign off and validate my analysis in the proposal appropriately.

What you're effectively trying to do with the strategy in this thread,

is to address the uncertainties around your startup in a quantifiable, realistic manner to investors.

When they see you've accounted for the risks, they will be inclined to invest.