"More precisely, what risk is going to be removed from the deal?"

You've got to be joking. One of the highest risks in every startup is the team falling apart. A team that was able to build a prototype is likely to be more consolidated than a group of people with an idea. You are weeding out the teams that disbanded while trying to build something simple, and I've seen plenty of those.

I don't have the hard statistical data to prove it, but I would bet on that hypothesis.

The point of the article seem to be: don't need a prototype if you have a fantastic, seasoned team - because we invest in the team and not the product. Great, but that doesn't apply to most people. Thus, the prototype and some signs of traction are generally required for the average team to get investment.

Seems like another in the line of "for some definition of startup (which we don't elucidate) this factoid (which depends on our definition) is true."

Comments like this : "But today, it is the very rare Internet software deal that has meaningful technology risk — other than scalability,"

Seem to sweep the whole patent/copyright risk under the table for example.

I get the whole 'invest in the team not the idea' mantra, but that depends on the team having a track record.

Third paragraph:

"Assume... ...your team has product, development, and design chops."

I am going to assume that this means your team has a track record, one definition of "chops"

Yes, but if there is a way to determine 'chops' without an exemplar or two that would be useful to know.

You don't need a prototype. Absolutely not. But is there an advantage to raising money before you have a prototype?

I'd say no, although it may vary case by case. Instead of focussing and building your product, now you have to build your product AND make sure your investors are pleased.

Also think about the valuation. Imagine going to investors saying "we built our product, we even have some customers who've given us some positive feedback and constructive criticism. We found that X meets our customers needs but we need to work on Y and Z."

I'd imagine the valuation would be higher and less speculative. I'd also imagine this situation to be more advantageous, simply by giving you more confidence when raising money.

You're totally right but you probably want to if you can. For a few reasons:

- The later you raise money the more data and knowledge you have to validate what you're doing.

- There's less risk involved. You know you can work well with your team. I personally want to pay back my investors 10x or more so raising money with an idea and either failing or selling to Facebook for $2M isn't appealing. You can be far more flexible.

- You can get better investors interested. The best investors look for people that don't need their money and have something to show. Traction, revenue or validation.

- You can raise money at a better valuation. Admittedly some companies need the money to build your company but the longer you hold out, the longer you're worth. If not you're probably doing something wrong. This means you also have more leverage and control of your company through bad times.

If you aren't succeeding and need to raise money at a low valuation the chances are things won't get better quickly and as you won't have control of your company. Your (Bad) investors will likely kick you out. These stories come up all the time.

Color had a founder with past wins but if he'd followed his equation, he would've been agile enough to scrap everything or try something completely different.

There's nothing wrong with raising an incubator/YC style boost when you start. As in raising 10 - 50k right at the start to help you survive if you need to. Whether it be from friends and family or an investor you know that you trust. Raising $2m with just an idea seems like a bad idea.

"But today, it is the very rare Internet software deal that has meaningful technology risk"

This statement embodies what I think is wrong with the SV climate today. You seem to have money actively shunning technological risk which usually is directly coupled to technological progress. While Id certainly agree that their is some money to be made on the current infrastructure Im pretty pessimistic that the next actual big thing (atleast in the internet space) will come out of the current VC ecosystem. Ok Ill get out of my armchair now.

Interesting post. I guess I "agree" with the headline that you can raise without a prototype. Should you? Unclear.

I can only speak to this from my own experiences with fundraising (2x) - I've seen entrepreneurs raise bigger rounds with zero code and I've seen entrepreneurs struggle to raise with product in the market, customers, traction, the whole nine.

At the end of the day, all definitive conclusions are suspect. If you're a single founder first time out of the gate (I was), you increase your chances a great deal with a working product in the market IMO. If you're like my former bosses (angel investors in FB, 1 big exit to AMZN back in the day, several smaller exits as investors to GOOG), yes, you can raise without a prototype.

Or a PowerPoint, for that matter.

Or an idea, for that matter.

Maybe even if you lose your voice in the pitch meeting and just kind of sit around for an hour and then ask for a check.

The point is, every situation is different. On balance, I'd rather go into any pitch meeting with a prototype.

I feel like this excludes all those teams that have a lot of experience but not specifically in startups. There are many moving parts to business and a prototype is just one of them.

I'd say modelling the entire business at low fidelity and getting started on all the activities: Marketing, Technology, Sales, Metrics, etc is a good way to show that you're a sound investment.

Also to prove you do have those basic technical skills, and to prove that the team is productive

No surprise this is coming from a VC.

I think you should build a prototype and engage with potential customers, to (1) increase your valuation and (2) decrease the likelihood that you need a seed round in the first place.

you don't need anything to raise a seed round (or do anything for that matter), but it sure helps your chances.

Other stuff you don't need, but helps: - signed orders - distribution channels - Wireframes - ...