Venture capitalists play an important role in providing capital to startups, but they often opt out when it comes to funding ideas and prototypes. Why is that?

💀 First, high risk and low assurance – ideas and prototypes are untested. VCs have to be able to see evidence that there is real demand in the market. Without user feedback, there is no way to know if the product has legs. VCs look for businesses that have proven that they can actually turn the idea into a viable product.

👿 Second, lack of traction. If you haven’t produced a working product and have zero – let alone a few – early users, you cannot tie down critical numbers such as user engagement, feedback from customers and growth over time. You can make up some of these stats with an idea or a prototype, but not nearly enough. When you do generate revenue – even a single dollar – you have a shot at proving the viability of your business model. Without revenue, proving viability is a tough sell.

👹 Then, there are risks and returns. VCs are looking for extremely high returns, which is understandable given the amount of capital invested. Ideas and prototypes are too early and risky. VCs want scalable businesses that can capture significant market share. Ideas and prototypes often can’t give the measurable proof of the latter.

👽 And so, market validation. It includes customer interest in buying your product and their willingness to pay a price. This is evidence that shows the product will really solve a problem or meet a need. Before market validation – with an idea, a business plan, a prototype – there’s no proof. In this way, it’s risky because you can’t know if the product you’re creating has what it takes to be unique and competitive. 

👾 Finally, team competence. This is related to a good founding team but goes beyond it to the ability to execute – that is, to build the product, acquire users, and earn revenue. VCs can evaluate ideas and prototypes, but they will never be able to match a company’s actual ability to follow through on its plans until these plans are put into action. The skill required to go from concept to execution – to make strategic decisions, effectively operate, and navigate one’s way through a market – is best demonstrated in practice, not in theory.