The Funding Flywheel
By: Paul O'Brien
Tags: Fundraising, Funding, Venture Capital, Startup Lessons, Angel Investors

Businesses and startup founders learn early of a critical methodology in sales referred to as a funnel. Developing products and services, marketing is the process therein by which organizations get to know potential customers and then profile people so as to better understand the needs and motivations.

The goal, of course, being the conversion of people as buying consumers or business partners.

This funnel has consumed a corner of my mind since Mr. Johnson’s high school business basics class.

Around the turn of the last century, advertising executive Elias St. Elmo Lewis developed the idea of the funnel; first noting in The Western Druggist, in 1899, that the function of advertising was “to catch the eye of the reader, to inform him, to make a customer of him.” Little more than a decade later, his thesis developed, noting that advertising is meant “to attract attention, awaken the interest, persuade / convince.”

In time, studies of his work broke down this funnel into four stages: awareness, interest, desire, and action.

These stages map the journey through which a customer goes when making a purchase. The model calls to mind a funnel because a great many potential customers are found at the top of the funnel in among this large set of people who are of what you’re doing and may have an in it some day. Only a fraction of everyone aware of something reach the point of that interest driving a decision and even still, those decisions need to be converted to an action for the business, a purchase.

Throughout most of history, this funnel made complete sense and helped businesses and marketers profile people and plan campaigns to meet the expectations of each piece of the funnel. The organization would work together to reach more people, improve the process of moving people from one stage to another, and to uncover new channels through which to reach others or introduce new products with funnels of their own.

The funnel is still one of the easiest ways to learn and appreciate marketing today, for example, Disney runs trailers before movies in theater and teasers on Amazon Prime, creating awareness of the next Avengers film. But consider, that’s in fact NOT the awareness stage of the funnel… the movie industry planted awareness in much more subtle ways: the clip leading to the next film after the credits rolled at the end of the previous, leaked news on reddit, and our beloved actors dropping hints to Jimmy Fallon. is generated by our teasers and trailers. As the film date approaches, commercials are aired, word of mouth encouraged, and more talk show hosts chat up our actors’ interest is steered toward a to see the film; now we know when and where it will play. Sure, it’s easy to think that decision was already made, but neglecting this part of the funnel is how some films seem to disappear into obscurity; people’s attention spans are brief and our focus needs to be reminded to act on our interests. And act we do, with news of the box office opening take, pictures from the red carpet on Instagram, and talk of the movie on radio and podcasts, we find ourselves at the bottom of the funnel taking .

In 2014, David Edelman and Francesco Banfi, with McKinsey & Company, proclaimed The funnel is dead.

Today, I want you to consider that the startup pitch is dead.

The Funding Flywheel

Edelman and Banfi called the end of the funnel as it’s been increasingly realized that the touchpoints of a brand with an individual are so great and varied (in large part thanks to the internet), that it’s no longer meaningful enough to treat the customer journey as simplistically as a funnel.

“The channel-surfing customer of today is often expanding the set of choices and decisions after consideration. Customers now are also often actively engaged with the brand — and their friends and peers — after they’ve bought the product or service using social media and the Web.” - Edelman and Banfi

The touchpoints of a startup with an investor are so great and varied (in large part thanks to the internet), that it’s no longer meaningful enough to treat the investor so simplistically as someone you’re pitching.

“Without the ability to understand their customers, companies will find it difficult to be where their customers are,” added Edelman and Banfi. “Part of the reason that companies are having trouble understanding their customers is that customer behavior itself is complex.”

That’s when it dawned on me that marketing’s evolution from funnel to flywheel was as appropriate, if not more so, to founders’ relationship with investors.

A flywheel is a rotating device that is used to build, store, and discharge energy. This cycle is not unlike what founders do as they cycle through the various stages of a startup.

The purpose of a flywheel is to provide continuous energy when the energy source is discontinuous. Indeed, your energy and that of your team and work, is going to wrestle through ups and downs; rather than perceiving your work as wins and losses, all of your effort is building and storing momentum that should be used to move you forward.

Delivering energy at rates beyond the ability of standard energy source, a flywheel collects energy so as to release it at greater rates; not unlike the acceleration a startup receives in a venture program or, when that funding is secured, and a team moves forward at a greater pace of innovation.

How your Funding Flywheel Works

If you’re familiar with the concepts of centripetal force, our flywheel directs energy at the center around which it’s moving and/or as momentum is applied to our center, a greater velocity is experienced as we move further from that middle.

Raising capital, we might [over]simplify our approach to investors and rethink “funnel” along this flywheel.

Our funding flywheel spins.

Awareness is still the right word to use in our Funding Flywheel and I’m sure you already contemplate how to connect with investors; how to create in them awareness (and interest) in what you’re doing.

is still the right word to use in our Funding Flywheel and I’m sure you already contemplate how to connect with investors; how to create in them awareness (and interest) in what you’re doing. Opportunity is what sparks interest in investors and it’s opportunity that you must manifest in your venture. Whether that’s uncovering a Problem and Solution or validating a Product Market Fit, investors seek a use of capital that will create greater value in what you’re doing (and deliver a return) — an opportunity.

is what sparks interest in investors and it’s opportunity that you must manifest in your venture. Whether that’s uncovering a Problem and Solution or validating a Product Market Fit, investors seek a use of capital that will create greater value in what you’re doing (and deliver a return) — an opportunity. Diligence refers to the familiar process of Due Diligence in funding; that investor’s decision is a result of doing diligence on you, your team, and your work. Their goal in the process is to get to know you and the startup, reduce risk, and familiarize themselves with how their capital will be put to work, beyond what the pitch deck informs.

refers to the familiar process of Due Diligence in funding; that investor’s decision is a result of doing diligence on you, your team, and your work. Their goal in the process is to get to know you and the startup, reduce risk, and familiarize themselves with how their capital will be put to work, beyond what the pitch deck informs. Invest as that is after all the action we’re seeking in this case. Act.

Marketing’s funnel is dead and so too should die your perception that this is a narrow process with an end in mind. Having secured capital does not mean you’re done, does it?

Modern marketers grew beyond the funnel as bright minds realized that so too does the customer journey continue. Some added Retention and Referral to the funnel (see Dave McClure’s Pirate Metrics; here’s a take from Melanie Balke), noting how our work continues as we support customers, serve partners, and can work with both to grow their interest in our business as well as how they spread the word about the products or services offered.

It’s paramount to appreciate foremost as a founder that your relationship with investors never ends (unless you choose to make it so or otherwise neglect them). Having received the action in our flywheel, an investment, we keep the wheel spinning right back around to awareness as we create awareness of the funding itself, what it means, and as we publicize and promote our plans as a startup from here. That in turn creates greater awareness with investors and opens up new opportunities at greater valuation.

Our funding flywheel spins.

And what spins, at the extreme edge of the velocity we’re accelerating, is not just securing the funding but the role that these stakeholders play throughout the stages of your startup.

Before being funded at all, our audience is investors. We’re creating velocity with, momentum with, the investors in whom we hope to create awareness and opportunity. As our wheel spins, some investors, before being our investors, become supporters. These are investors who take the time to have coffee, give a little feedback here and there, introduce you to others, and join your LinkedIn page or Facebook group. Such supporters are relationships that you’re developing with people meaningful to your venture, people who can and will get more involved, with advice. Some supporters become advisors and with even greater momentum, advisors become your investors; investors who keep spinning the wheel as supporters themselves, at least, some more so as formal advisors (Board Members perhaps), and with enough velocity, such investors will participate again in future rounds of funding.

Fundraising with your Funding Flywheel in Mind

Flywheels are acted upon by three fundamental considerations:

How fast you spin it How much friction there is Of what and how it’s created (how big it is and how much it weighs)

The ventures most successful fundraising have a plan for all three.

As with any flywheel, its speed is increased by applying force where most effective and efficient. This is where shifting your point of view from a funnel really shines because as a funnel, your mind is probably fixated on “meeting investors,” “contacting investors,” or “pitching investors,” you’re at the top of the funnel, haphazardly trying to toss more into your process with that elevator pitch > 10 slide pitch deck > financials > term sheet being your funnel to close. That isn’t how it works.

Our process of diligence in the wheel? Uncover and reduce friction.

If your startup hasn’t created much or sufficient opportunity, apply force there and get your wheel in motion: Create an opportunity, consider the diligence an investor would do on your startup, invest YOURSELF in some growth or attention, and investors will take note. If your startup has an opportunity, say you have a patent you can license, but you’ve not invested your time and effort into turning that patent into a commercialized venture, apply more force first there and get your wheel spinning.

As we spin, we’re going to encounter friction. Friction slows our flywheel; while you may still some day secure funding, you’re adding months to the time it will take because of mis-alignments or pressures preventing your momentum. That licensed patent isn’t just an opportunity with potential, it’s a friction that needs to be released with the right agreements and terms; if that patent holder has restrictions in place: friction. Does marketing agree with and align with what your product roadmap is planning to release? Are you connecting with investors where they’re found or where you find convenient for your sake?

Finally and very seriously appreciate the weight and size of your flywheel because this is a set of ideas that often makes founders question their sanity. More customers is a heavier flywheel

Let me repeat that: More customers is a heavier flywheel.

That oft cited advice that it’s all about the customer or that the customer is always right? In innovation, within startups, it’s rarely entirely true.

A heavier wheel requires more energy and momentum to spin. Customers come with expectations, demands, and bias; customers can mislead and customers can distract.

But before you go doubting customers, and thinking that I’m implying that you want a light and easy to spin wheel, appreciate too that a heavier wheel produces a greater energy as spun. Density of your flywheel creates a momentum that’s more difficult to arrest but likewise a wheel that takes more effort to spin. Support your wheel with an exceptional team, a competitive advantage, and operational excellence, and you have a wheel created with density that will perpetuate with more velocity as you get it up to speed.

With this flywheel in mind, NOW we can approach the process of fundraising with many of the tips and techniques with which you’re familiar or learning. Now, those blog posts, pitch decks, advisors, and incubators become meaningful in spinning your wheel so that you’re not just spinning your wheels.