The number one challenge for start-ups looking for funding to scale their big idea into a viable going concern is the lack of a track record. That’s according to Claudia Zeisberger, Senior Affiliate Professor of Entrepreneurship and Family Enterprise at INSEAD.

In this INSEAD Explains Entrepreneurship video, Zeisberger explains that entrepreneurs need to show early traction by demonstrating that their product solves a real-world problem, and has an audience willing to pay. They also need to be able to articulate the go-to-market strategy, as investors won’t have the same deep understanding as the founder who has lived the problem.

Zeisberger, the co-author of "Mastering Private Equity", also cautions entrepreneurs not to overinflate the value of their start-up, pointing out a very different reality today as compared to the record-breaking valuations of 2021-2022. Investors have also shifted their priorities, no longer looking for ideas to change the world but instead, focusing on a clear path to profitability. Hence, being able to show clear evidence of demand is vital. In addition, investors prefer start-ups with an existing teams over those made up of just a single founder.

But despite this tougher reality for start-ups, it’s important that they still do their due diligence and be cautious when assessing potential investors. Zeisberger recommends delaying external fundraising for as long as possible to prevent the dilution of your equity. After all, the first round of capital raised by a founder is likely to be the most expensive in terms of equity.

It’s also important to know what type of investment your start-up needs at different stages of the venture. While angel investors can help with early round funding, venture capitalists (VCs) tend to have deeper pockets. If chosen wisely, VCs can offer valuable expertise, from network access and operational expertise to guidance that can help scale the business.

Picking the right VC is crucial because early-stage investors are likely to be on a start-up's board for seven to ten years. Too often, entrepreneurs make the mistake of not doing their due diligence in selecting their VCs and partners. It’s vital for entrepreneurs to remember the relationship with a VC is a long-term one, not just a one-time transaction.