This post was originally published on Thoughts on Tech Startups and Venture Capital
We’ve written a lot here about fundraising and how it is a complicated, and at times, confusing process. To fundraise effectively you need to prepare and have a strategy, understand different types of investors, understand how much to raise and create an investor pipeline.
We also talked about a fundraising deck and how you put it together. In addition to the deck, it is helpful to prepare answers to typical questions that investors tend to ask.
Below we discuss the typical questions you will hear from investors and discuss how you might go about answering them.
1. Who are your customers, and what problem are you solving for them?
Investors are looking for a simple and clear answer of who you are selling to. They also are looking to understand how clearly you know the pain point, and how big of a problem it is for the customers.
This question also opens up a conversation about founder-market-fit, as well as helps investors think about the size of the opportunity.
2. What is unique about your solution? What is your unique insight?
Investors want to understand how you are proposing to solve the problem, but more importantly, they are looking if you have unique insight. Has anyone else thought about this before? How is it different from other solutions? Do you have a secret?
Seriously, investors want to know this because the more differentiated you are, the more defensible the business might become in the future.
3. How does your product actually work?
Investors naturally want to see the demo of your product, because a demo is worth 1,000 words. A lot of investors want to fund product-obsessed founders – founders who get lost in details of the product, who are super thoughtful and nerdy about features they built, and really understand customer needs.
Always show your product to investors and make the demo awesome.
4. What are your KPIs? How do you measure growth? How do you know you have product market fit?
What numbers do you use to drive the business? Lack of clarity or hesitation is a major red flag for investors. If you as a founder aren’t clear about your metrics or not measuring the right things, investors won’t believe that you can grow the business.
Investors want to make sure you understand and measure your conversion and sales funnels, activation, retention, magic moment, churn, CAC, LTV, etc. Investors want to know how you think about KPIs, look at your dashboard and understand how you think about growth.
They will likely dig in on how you think about attaining product market fit as well.
5. What is your traction to date?
The question of traction is really two-fold. First, investors are literally asking what is your traction. Second, and more important, how do you define traction?
Many founders mistake progress or effort for traction. On the other hand, investors think of traction as revenue and paying customers or significant growth in weekly and monthly active users.
6. What is the size of this opportunity/total addressable market?
How big is your market – a question that matters to a lot of investors. Why? Because VCs economics force them to only focus on very large markets. VCs look for big markets with lots of money so that when they own 20 percent of your business, they get a meaningful amount to return all or a portion of their fund when you exit. Otherwise, they don’t make money.
In addition, investors expect you to size accessible markets and do the calculation bottom up. Too many founders say they are in $1BN+ markets without realizing that, because of their business model, they can’t be addressed.
Spend time sizing up your actual addressable market using your pricing and growth projections.
7. What are your CAC and LTV?
This is another typical question that investors ask founders during each round of financing to establish how fluent they are in the business.
In the early days, founders are expected to know the terms and have an idea of what the numbers are, but it’s fine to say that you are early, and the numbers are likely to change in the future (typically CAC goes up and LTV goes down).
The cost of user acquisition conversation leads to the conversation about channels, marketing and advertising spend. If you are B2B company with direct sales, you will talk about cost of sales and how it will change at scale.
Life-time value of the customer is equally important. How long does it take to pay back the amount it cost to acquire this customer? How much money will you make on the average customer?
The LTV conversation touches on churn, revenue per customer and enables investors to understand how you think about your whole customer lifecycle.
8. What is your business model?
Naturally, investors want to understand how you make money. They want to know who your customers are and how are you planning to charge them. This question combines not just pricing, but strategy and tactics. If you make money indirectly, via advertising, they would then focus on how your acquire customers.
If you are a marketplace, the conversation turns to whether you are going after supply or demand and the incentives to be on the platform. What will be the expected average revenue per user? Will you have recurring revenue? All these questions get explored when investors ask about your business model.
9. How did you come up with your pricing?
This is probably a less common question in the early stage, but it is an important one. Investors are looking for you to demonstrate that you’ve done customer research and competitor research. They are also looking for you to acknowledge that you are early and the pricing is likely to change.
In addition, if you are currently free or have a free tier, investors will look to understand when are you planning to get rid of it and what the implications will be.
10. What are your unit economics?
Unit economics give essentially an inductive case for your business. For example, for Uber, a unit would be either one ride or one driver, depending on how you model it.
The key thing in unit economics analysis is to capture all associated costs and revenues and then see if you are actually making money. Some startups have poor unit economics initially and say they will optimize costs later.
Many investors, however, are now weary of this approach because as you scale, new challenges and new unforeseen costs may arise.
11. What is your go to market strategy?
The go to market strategy question is a really important one and is often misunderstood. Investors ask this typically when founders say that their product works for everyone. Investors are skeptical, as experience says that focusing on a vertical or a segment is typically better.
For example, if you are building developer tools, you could initially focus on freelancers and individual developers. Then once the product is solid, you can move upstream to mid and large enterprises. Tesla had the opposite strategy. It first made a high end car and has been moving downstream.
You can also focus on a specific vertical. For example, if you are a security software provider, you can first focus on insurance companies or law enforcement agencies. Having a focus narrows down the opportunity but allows you to really perfect the product and sales.
When talking about your go to market, investors are really looking to understand your strategy and why you think it will work.
12. What are your customer acquisition and distribution channels?
How are you planning to acquire customers? In the consumer world, you have paid and unpaid means. You can advertise or you can use content marketing, social channels and word of mouth. Investors want to understand how deeply you understand your channels.
The challenge is that most obvious channels often do not really work or aren’t cost effective. That is when you start your CAC via Google or Facebook ads is just too high. Investors are looking to understand if you figured out a growth hack / have an insight on how to acquire customers quickly and efficiently.
In the B2B world, investors want to know if you have an unfair advantage, like you’ve worked in the space before and have a rich rolodex. They are looking to understand if you are able to secure key partnerships that can help you distribute the product faster and win the market faster.
13. Why now?
This is a question that often goes unasked, but is certainly on the investors mind. Timing is everything, and really understanding why now is the time for your company to win is important. The VC industry is full of examples when something was too early or too late, and as a result, it didn’t work or didn’t get as big.
Before Facebook, there was Friendster, before Google there was Alta Vista. Even Uber wasn’t the first company to think of on demand rides, and AirBnB wasn’t the first company to let people host people in their apartments.
Before the current wave of VR and AI, there were at least 3 other waves. Why do we believe now is different? Why do we believe now it will actually happen? Some argue that we finally have enough cheap computing power and have evolved other key technologies necessary for VR and AI to go mainstream.
When investors are asking “Why Now?”, they are really asking about conditions of the market, context and state of society – dozens of factors that will make a difference between success or failure this time around.
14. Why you? What is YOUR Founder-Market-Fit?
We’ve written here before about the importance of Founder-Market-Fit and how most investors pay close attention to it. Investors don’t want to fund accidental founders. They want to fund people with deep domain expertise, massive vision and passion. Investors want to get to the bottom of why you started the business – do you have unique insight and unfair advantage?
15. Where did you grow up? Where did you go to school and work?
In addition to understanding if you know the space, investors want to understand if you are resilient and smart. The question about where you grew up is really a question about how hard you have had to fight through your life to get to where you are. If you grew up in a well to do family where you didn’t have to struggle, investors may not be as excited about funding you compared to, let’s say, an immigrant.
There are no hard and fast rules of course, but the environment you grow up in often defines your level of resilience. When things get difficult, and they always do, will you walk away? When you get knocked down, will you get back up?
When asked where you went to school, people look to see if you went to a top school, what you studied and what you learned. Sometimes this conversation leads to a common connection. Sometimes it is just a starting point for learning more about you. Investors are looking to assess your level of intellectual curiosity and honesty.
16. How did you meet your co-founders?
This is another interesting question that doesn’t have a clear cut right answer, but is telling to investors. If you say you met at a hackathon 3 months ago, what you are saying is that you don’t really know each other well. Investors may think that the connection between you and your co-founders isn’t solid. If you are saying that you’ve been friends since high school, investors know that you trust each other.
However, they also know that you haven’t worked together. Friends don’t always make the best business partners, and startups have ruined thousands of friendships.
Most likely, investors are looking to hear that you worked together before, ideally in another startup and ideally for a while. This would imply that you get along socially, but more importantly, you can make things together under a stressful environment.
17. Who are your competitors and how are you different?
We’ve written here before how to think about competition. Investors are looking to understand how knowledgeable you are about competitors and what is different about you. If you say you don’t have competition or if you bad mouth them, it is a red flag. Simply acknowledge competitors, and highlight what they are doing well. Explain how you are different and why.
18. What is your vision, your true north?
Some founders stumble on this question and this is a red flag for investors, particularly for VCs who want to back founders with big vision. What do you want your company to be in 10 years? This question reveals not only how you think about the business long term, but whether you plan for it to exist a decade or more. If your plan is to sell quick, you won’t have a broad long tem vision.
Similarly, a question about your true north is an important one. It reveals what you aren’t willing to compromise on. Great companies are always flexible on their path, but not flexible on the destination.
19. What milestones will you achieve with this financing?
We touched on this topic in our How Much Capital Should You Raise post. This topic is complex and founders often approach it with a naiveté. A typical answer might be expressed in terms of specific product milestones and scaling of the team. This is not what investors are looking for. They want to understand tangible business milestones you will reach with the capital you are given.
There are really two outcomes investors are looking for – either profitability, which is very rare in early stage startups, or the follow on financing. That is, investors are asking if you get funding and then execute and hit specific milestones, will you be fundable again? For example, if your plan says you raise $1MM, and then grow 20 percent MoM to achieve $40MRR in 12 months, to you this may sound great, but to investors it is clear that it will not be enough to raise a series A.
It makes sense to really think through your milestones and where you want to land and why.
20. How much will you be burning per month?
This is a pretty straightforward question that follows from your financial model. A few things to pay attention too: a) Your HR costs should roughly be 70K-100K per head. b) Investors will look for clarity around advertising spend — in the early days, before strong product market fit you should not me spending a lot of money to acquire customers and c) Investors will look for any outliers, anything that jumps out as out of ordinary or unusual.
21. What will be your MoM growth in customers and revenue?
Another straightforward question based on your financial model. As a startup, you need to make a growth assumption. The trick is that you don’t have a ton of historical data to back it up. Whatever data you do have, include it in the model and explain it, because it helps establish credibility.
Also, avoid cookie-cutter 20 percent MoM year round growth assumption, as it may come across as sloppy. Really think through seasonality and other factors that may influence your growth. Do your customers pay you right away or not? Does your cash in the door trail booked revenue? Reflect all the nuances in the model and your revenue forecast.
22. When will you be profitable?
Historically, many of the best startups have reinvested their revenues into the business and sacrificed profitability in favor of growth. Since the financing market has become tighter, profitability is fashionable again. Becoming profitable is important for many reasons, but the main one is that it allows you to become self sufficient and control your destiny.
When you are profitable, you are no longer in need of external capital in order to survive. Investors are looking to understand how you think about profitability, and tie this to the conversation about your burn and the need for follow on financing.
23. Why is your business defensible?
VCs want to know what happens to your business over time. Assuming you can get a lift off, investors want to know what happens year 5, year 10, etc. Why? Because this is a typical horizon over which more successful startups go public or get acquired for a significant return. Long-term defensibility is difficult to predict. That’s why many investors look for natural monopolies, winner take all markets and businesses with network effects.
This is a complex and important topic that is less likely to be top of mind for the founders, but is certainly something investors are paying a lot of attention to.
24. What is your intellectual property?
If you are startup that is creating a new technology, investors want to know about your IP. Are there things here that can be patented? What is the true innovation in your business? While software patents haven’t been effective in recent years, depending on the type of your business and depending on what kind of investors you are talking to, IP can be an important topic.
25. What is your tech stack?
This question will be particularly relevant for startups that are working in AI, VR, dev tools and other areas that require deep tech. Some investors, particularly technical ones, will want to nerd out with you on your stack.
26. What are the key risks in your business?
This is one of the hardest questions investors will ask you – why might you fail? This question is a probe for a) how do you think about risks in your business b) do you acknowledge risks and c) most importantly, are you self-aware and intellectually honest. Great founders bring up and face risks head on. They don’t try to shove them under the rug and ignore them.
Risks vastly range from building incorrect products, to the market not being there and to key distribution deals falling apart. Whatever it is, be prepared to talk about risks and show that you’ve been deeply thinking about them.
27. Who is the natural acquirer for your business?
Investors aren’t likely to ask you this question, but they will certainly think about it. Investors are putting money into your business to make more money, and historically, since the IPO market is tight, most successful companies are acquired.
Although you have no plan to sell your company, it is good to think about who might bite in the future and why.
28. How much capital did you raise so far and on what terms?
This is a simple question – just tell investors exactly how much you raised, whether you did it on the note or via equity. Don’t stumble or hesitate, because that would be a red flag.
29. Who are your existing investors?
This is another straightforward question.
30. How much capital are you raising and what are the terms?
You should have clarity on how much you are raising based on the financial model. Depending on where you are in the fundraising process, you may not have the terms set yet. If you don’t have the terms set, then just say so – investors will completely understand.
And now please tell us what we missed. Share the questions that investors asked you during your fundraising conversations.
Fundraising is an Enterprise Sales Process. Which means it’s going to take time to get fundraising done and you’ll need a lot of prospects at the top of your sales funnel.
As you prepare for your fundraising effort, you need to get the basic tools of the trade completed before you start the process. The Executive Summary, Presentation and Financial Model are your marketing collateral to sell your product. You’ll build a funnel of prospects, requiring both research and introductions.
The goal is to create competitive term sheets, from multiple investors, for your growth capital.
In this post, we will dive into traction and the executive summary. In part two, we will cover pitch decks and financial models.
Traction First – Before Fundraising
Before we begin – I need to point out two not so obvious points for founders:
1 – Your need for capital does not mean you can raise capital. I’ve been there, you have constraints, lack of cash, lack of engineering resources, and you need the money to pay for design.
All of that is a reality that stands between you and the fulfillment of your product vision. Get used to it, even after you raise the capital, you will continue to have constraints.
You need to find a way to get customer validation and traction before you raise money. That’s what the investors will require you to do before writing a check.
2 – Completing these presentation tools doesn’t mean you’re ready to go raise money. All too often founders complete a pitch deck and confuse doing that work with the “Real Work” of customer validation, traction and revenue.
Your product offering and company need to be at a point in the maturity of the company that you have proven your concept with data. For example:
If the idea of the product or service is known to the market – e.g. you’re creating a competitive product, this can be a direct competitor or a derivative competitor in different markets, then you have a known comparable or “comp”.
Let’s say you are copying a former employer and building a competitive product. The investor risk, in this case, is mostly on your team’s execution of your plan. You have to answer the question: “can you build a competitive product and market and sell it better than your former employers?” There are known unit economics, pricing, conversion ratios, etc. The competitor, in this case, your former employer, has an enterprise value or a comparable.
However, if you are launching a brand new product into an unknown market, e.g. AirBnB before it launched, the risk is greater than just execution. It is also now a question if anyone actually wants the product you are proposing and which market wants that product for what price. In this case, the unit economics are speculative and there isn’t a comparable. With that, the reward for the investor is also potentially higher.
That’s why customer development and traction is so important.
Remember, investors have opinions and checkbooks. If you have only an opinion, your opinion combined with customer data will get you to the checkbook. If you have a new product, unknown market, and unknown channel, you need to at least have 50 customer development interviews that show why people will want to purchase your product.
Business plans are dead – at least in the tech market.
The reason is that a 40-80 page document is irrelevant given the dynamics of actually interacting with potential customers. Remember what Mike Tyson said – “everyone has a plan until they get punched in the face.”
That’s not an excuse for not planning – just a reminder that a plan doesn’t reflect the reality of the world and that you are better off doing the customer interviews and getting traction than sitting in your basement writing a plan.
Having the documents ready doesn’t mean the company is ready.
Startup Executive Summary
The Executive Summary is the two page summary of the business. It addresses the Pitch Deck content (problem, solutions, etc.) in a narrative arc that tells a story. The purpose of the Executive Summary is to “get you in the door” for the meeting with the Angel, Angel Group or VC.
No one is going to write you a check from any of these documents alone. Think of this as a process, you’ll still need to do the meetings, build a relationship and pass the due diligence process. But without doing these docs, you’ll look like a noob and won’t raise any cash.
Do the deck first, then draft the summary from the pitch deck. Remember, it’s only there to help you get the meeting and will be sent over in email as part of the meeting request – resist the urge to detail out all of your plans. It should match your website.
You won’t need to send the deck in advance. It serves as the discussion guide for the conversation you will have in the meeting.
All of these documents should sync, from your website, summary, and financial model. When they are out of sync you will get questions. Do the work, pay attention to the details.
This was originally published here.
This was originally published in Factory Berlin’s Magazine.
So you have an idea and now you need some financial support to get the ball rolling. At this point, seed capital can be helpful. Although the seed round is usually smaller and can come from many funding options (friends, family, incubators, angels, VCs), it’s important to be strategic, because it builds the foundation for later rounds of funding.
Since there’s no formula for how to do this and navigating this process can be overwhelming for budding entrepreneurs, we spoke to two seasoned VCs about some key things a fledgling entrepreneur needs to know when raising seed financing from a venture capital firm.
Consider Timing and the Amount
A common question among new founders is: When is a good time to raise a seed round? When a startup thinks they’re “onto something”, the time could be ripe to examine options for seed financing, said Florian Heinemann, founding partner of Project A Ventures, an early-stage investor and VC focusing on e-commerce, marketplaces and SaaS.
“When they see the first signs of their idea potentially develop relevance, then it makes sense to think about whether this development could be accelerated by some additional funding to sharpen the business model, and pre-finance the development of an initial configuration,” he added.
As for the amount, seed capital can range from €100,000 to €1 million. “I always find it difficult to tell anyone there’s an absolute amount that is correct”, explained Gabriel Matuschka, partner at Fly Ventures, a VC firm making seed and pre-Series A investments in the areas of machine learning, marketplaces and SaaS across Europe. “It’s a case-by-case and company-by-company thing. It really depends on the type of company and what you can do.”
Typically though, the goal should be to raise enough to hit the next defined milestone with a bit of a buffer.
“The seed round should be a step towards raising a Series A, so founders have to ask themselves what elements of their business they want to have proven by raising the Series A,” said Heinemann.
“Often, this involves demonstrating first commercial traction, some understanding of profitability on a per customer level, and first scaling of the organization. Ideally the money should give them a runway of 15-18 months.”
Be Clear and Concise About Your Story
“At the seed stage, it’s not so much about metrics as it is about clarity and purpose. Investors want to know, ‘Who are these people and what are they doing?’” said Matsuschka, who has worked on both sides of the table – as an entrepreneur and investor.
Being able to describe your idea and talk about your team in a compelling manner is more important than showing metrics at this stage.
Founders should know how to talk about their team, their product, the market, their story, their customers, the pace of product development, etc. in a very easy-to-understand and concise way.
Educate Yourself on the Process
For entrepreneurs, the sheer amount of information at our fingertips can be both a blessing and a curse. When looking for resources on raising seed capital, Matuschka suggested looking at Seedsummit to get a grasp of core terms in venture, as well as getting an idea of the kinds of term sheets people use for UK or German deals.
“If someone asks for 30 percent of the company, that’s probably wrong, if someone asks for more, that’s very wrong. If someone asks for 2.5 percent and gives you a million, the likelihood of them being a crook or not knowing what they’re doing is very high. There are certain ranges that are okay in terms of valuation, but the cool thing is that most of these things are already in the public domain today,” he added.
Heinemann advised that entrepreneurs should educate themselves on the concept of vesting, cliff and liquidation preferences. When in doubt, consult experts.
Don’t Forget About Speed
It’s not uncommon that startups go through a number of rounds of funding in their lifetime, so try to be as efficient as you can when going through this phase.
“Speed is a critical element at the seed stage. A typical company in this stage is so small that this round occupies or distracts oftentimes many or all of the founders,” explained Matuschka. “Trying to get done with it sooner than later is an important element.”
Find the Right Entrepreneur-Investor Fit
Regardless of how many investors participate in the seed round, it’s crucial to think about the reputation of your investors and whether they’re a good fit for your vision.
“There are great investors that are probably just not great investors for you,” said Matushka. “Getting a sense of who the right person is for you because they understand your space and they’ve done something there is key.” Additionally, Heinemann said that it’s important to be aware of the likelihood of participating investors to do or support follow-up rounds.
The following is based on a sort of “internal guide” that I frequently share with portfolio companies I am involved with. It is a collection of various sources of information and best practices that should help the founders to prepare for their Series A fundraising.
It is most applicable to companies and their (first time) founders in Europe that have previously raised some (small) seed money from Angels or Micro VC funds such as ourselves, Point Nine Capital. That said, it contains various general notes that could help you in any fundraising situation.
Please note that it describes the ideal scenario which hardly any company reaches, so you might deviate from it in one or more points. As usual, the exception proves the rule.
The post is structured in three parts:
- Preliminary remarks regarding prerequisites (to raising a Series A)
- Input and inspiration for fundraising material
- Description of how the (ideal) fundraising process could look like
1. Make sure you are on track to generate 80 – 100K EUR/USD per month in net revenue by the time you go out on the market to start raising your A round. Certainly, do not start fundraising before hitting 1M EUR/USD in annual (net) revenue run rate.
In case you are not (yet) monetizing your product, lack of revenues might be compensated by exponential growth of active users which, usually, can only be achieved by some sort of virality (likely the case when Zenly snatched up over 22m USD from Benchmark Capital or, when Brainly raised its 9M USD Series A). Note that all following points are geared towards revenue generating companies.
2. Ideally, you are on track to grow 3x YoY (on a year-to-date and/or month-over-month basis, for instance, March 2017 is approximately 3x March 2016) on the most relevant KPIs like GMV, net revenue and/or bookings (also see this simple “compound growth calculator” template). Don’t forget, this translates into an average growth of approximately +10% month-over-month for 12 consecutive months!
3. As a rule of thumb, the faster and the more consistent (read: predictable) you grow, the higher the “multiple” on your monthly (net) revenues and/or yearly revenue run rate (as well as GMV for any marketplace business) and thus the higher your potential (pre-money) valuation for your Series A.
4. The basis for #1 to #3 above should be, of course, healthy unit economics (CACs vs. CLTV or CAC vs. net revenue per booking). Investors won’t honor unsustainable, expensive revenue growth.
5. Make sure to nail the explanation of market size. Define the total addressable market as well as the opportunity and find as much backup information (official, up to date research papers etc.) about it and do your own well-founded bottom up calculation to be able to support your reasoning (in your pitch deck; more on that below).
6. Have a financial plan ready on a monthly basis for the next 18–24 months that defines how much money you need for what. It should also include monthly actuals (which are even more important to investors than the outlook).
You can use your existing KPI dashboard and also use it to forecast the next 24 months (forecasting cost, your burn rate, is especially important). There are various templates for KPI dashboards for different business models. There’s a comprehensive KPI dashboard for SaaS and for marketplace businesses from yours truly or this marketplace KPI dashboard template from our friends over at VersionOne (great job Angela Tran Kingyens!) as well as this version from Willy of French Daphni.
1. Use this comprehensive list of European Investors from Techstars to compile a shortlist of approximately 50 suitable investors.
Rank the investors based on “quality” and perceived “fit” to your case as follows (and yes, you should get familiar with what the different investors are up to):
A = Dream Partner*
B = Nice but not the best fit
C = Could serve as a back up and/or to fill up a round (e.g. when they do smaller tickets, cannot be a lead etc.)
* Dream Partner does not necessarily mean the investor who pays the highest price; the optimal outcome is to maximize and balance several variables at a time: 1) the price an investor is willing to pay, 2) the qualityand brand of said investor (what can she or he bring to the table other than the $$$?) and 3) the time it takes to get firm commitments and close the round.
3. “Priority”, as mentioned in the shortlist template (#2), means in which chronological order you approach the investors. You want to make sure that the amount of outstanding feedback is never higher than 10–20 because:
a) anything above that is hard to handle;
b) you won’t be able to provide a good experience to your prospective investors;
c) you do not want to blindly fire a “shotgun shot” into the dark and leave the impression that you approached ANY possible investors out there – remember that fundraising is like dating, potential investors want to feel “special”;
d) you shouldn’t approach your “dream partners” at first because you want to gather feedback from “B candidates” before approaching potential “A candidates”. That way, you can still work on your pitch to refine the presentation and storyline if necessary (…and I’m very well aware of the fact that this advice is not going to make me very popular among later stage VCs). 😉
1. For the pitch deck preparation: Nail the story and content of the slides first, then take care of design afterwards.
In case your own design-skills are limited (like mine), ask a professional designer to polish the slides: Either someone internal (your own in-house designer) or use a service like SketchDeck, The Presentation Designer or Unicornpitch.
Important: Never (!) outsource the preparation of the pitch itself, this is purely meant for design purposes only.
2. Our dearest Michael Wolfe, Portfolio Advisor at Point Nine and co-founder of our portfolio company Gladly, dedicated an entire medium post on “What should be in my fundraising slides? The art of the startup pitch”.
3. Scott Sage recently published a handy guide to preparing a fundraising deck in “Fundraising? Why you shouldn’t just copy Sequoia’s Pitch Deck Template”.
4. The founder of Crew wrote a detailed guide on storytelling and shared the company’s pitch deck in his article titled “How we built our investor presentation and raised $2 million”.
5. A while ago, Nico shared a simple but efficient pitch deck template.
6. Of course, Jean also has one.
8. Here is a useful collection of various early stage pitch decks from successful tech companies such as AirBnB, Intercom or WeWork.
10. This might be an obvious one, but try to engage with fellow entrepreneurs that went through the same process and operate a similar business model. If you run a B2B SaaS startup, try to get a glimpse at the deck of another B2B SaaS company that has successfully raised their Series A already.
It’s obviously easier if you have access through a common investor that you share. Members of the Point Nine Family frequently share their decks in order to push each other forward and learn from one another.
If you can tick off all of the above points, this is the process:
1. Prepare a draft of your fundraising deck with no more than 20 slides; the fewer slides, the better! Unnecessary to mention that it is highly advised to use a cloud-solution like Google Slides, Prezi, Bunkr, HaikuDeck or Canva to facilitate collaboration, annotations and sharing.
2. Together with your existing investors, board members, advisors and mentors, do as many sessions as necessary to refine the deck and equity story. Do a “dry run” of the pitch in front of them and let them play the devil’s advocate. Take their feedback seriously.
3. Prepare a draft shortlist of (max. 50) potential Series A investors that you would like to approach. Again, consider using a solution like Google Spreadsheets for easier collaboration as several different people will continuously contribute to it.
4. Together with all relevant stakeholders (investors, advisors, key employees etc.) do a session to define who is approaching which potential new investor from the shortlist. Try to reference your preferred partners through common connections from their existing portfolio companies, etc.
5. Formulate a short, introductory “teaser” text to be copied & pasted into an email to forward your deck to the shortlisted, prospective investors. Remember the concept of “double opt in” for introduction requests.
Consider using a service like docsend, pitchXO or attach.io for sharing the deck. It allows you to keep the pitch deck always updated, even if already shared, keeps you in control over who can see it, does not clutter the recipient’s inbox, and you get valuable viewer-analytics on every slide, which can help you to improve the deck “on the fly”.
6. Avoid common pitfalls when approaching investors described in this – not too serious – presentation about “The VC Game”.
7. Once introduced to a prospective investor, you proceed with a first call or meeting to walk her or him through the deck.
8. First Round recently shared their extensive experience from raising $18bn in follow-on funding for their portfolio companies. It’s a long read, but more than worth it and it contains valuable advice on how to run a fundraising process end-to-end.
9. Last but not least, do not forget to factor in sufficient time to close your financing round. Make sure to not stand with your back against the wall by the time you expect first offers. Start the process early enough (at least five to six months) before running out of money.
Following the above steps shall put you in an ideal position and maximize the outcome of your Series A fundraising process, while minimizing the fundraising effort itself.
After all, the main purpose of launching your startup is not to continuously raise VC money and entertain prospective investors, but to eventually build a large, self-sustainable, profitable business that generates money.
Venture Capital is just a means to an end and should never be the main reason for creating a company.
One of the worst things that can happen to a CEO of an early-stage company is to be in the state of perpetual fundraising.
Here is how you can tell that it may be happening to you:
- You have been fundraising for a while
- You are fundraising and running the business at the same time
- You don’t have strong interest from investors
- Investors aren’t engaged / don’t ask a ton of questions
- Investors keep telling you it’s early / to keep them posted
The list can go on, but you get the point.
You are wasting your time because you aren’t prepared and the timing is likely off.
Please go and read my popular post about 9 seed funding gotchas and I will be right here when you come back.
Disorganized, prolonged fundraising is exhausting and harmful for your company and your personal brand.
So what can you do?
Here are some things for you to consider to help the situation.
Do the Gut Check
Be honest—are you really READY to fundraise?
Have you prepared enough, or are you going out too early? When you go to bed at night and think about it, like really think about it, are you really ready?
The best way to fundraise is not to go out early, but to first prepare and answer a whole bunch of key questions about the business and the opportunity.
Think about questions like: why are you the right team, why are you going after this opportunity, why now, how do you know this is needed, what are the early indications of product-market fit, what is the business model, what are the unit economics, how are you going to acquire the customers, what is the pricing, what will this business be like in three years from now, who are the right investors, why would they invest, how do you get in front of them, what will be important to them—etc, etc, etc.
The nerdier you get about fundraising, and the more prepared and disciplined you are, the higher the chance you will be able to get it done faster.
Build Investor Pipeline
Assuming you passed the gut check, and you really feel like you are ready, next assess whether you are able to get in front of enough qualified investors.
Like sales, fundraising is a numbers game. If you don’t have a strong enough pipeline, you can’t get to the finish line.
Every single NO should cause you to add 3-5 more prospects to the top of the funnel.
If you are early on in the process, particularly a first-time founder without a strong network, you will find that fundraising is taking a long time because you aren’t even getting that many meetings.
Your fundraising process is stretched over weeks and months, but you aren’t seeing a lot of investors. As a result, you obsess over every single opportunity, like a few conversations you are having instead of focusing on having a lot more conversations.
What you need to do is to pause and focus on filling up your pipeline with 20-30 new investors. Just keep filling the pipeline, but do not take the meetings. After you have the pipeline filled up, THEN go and pitch everyone. This strategy will help you get a real signal and have a chance at creating momentum in your round.
Understand Investor Feedback
Assuming you have enough in your pipeline and you are meeting a bunch of investors in a short period of time, you really need to understand their feedback. What is the reason that people are saying NO? Do you not have enough traction? Is the space not interesting? Is the opportunity too small? Is it something else?
Whatever it is, your job as a founder is to avoid happy ears, parse the feedback you are given and really take it to heart.
If you are early and don’t have enough traction, then you need to understand the milestones people expect and go build the business until you hit them.
Investors may tell you that they don’t believe in the market size, or in unit economics or in your customer acquisition strategy—whatever feedback they give you, whatever the signal is, go back and address it. Understand the pushback, do research, get data, execute and come back with a fix.
Also, know that there are more subtle things that people won’t necessarily tell you about. For example, investors may not believe in the founding team and don’t see strong founder-market fit. Investors may not like the space. They may have issues with well-funded competition. If the issue is more subtle, try to really figure out what it is.
The bottom line is whatever the feedback is, no matter how tough it is, go back and address it.
Pre-seed Fundraising Strategy
Now let’s look at specific strategies for types of financing.
Your pre-seed round is truly an idea stage. You don’t have a product and you may not have your team fully assembled. You are super, super, super early. Read this other post I wrote first.
If you are a first-time founder, focus first on your friends and family, people who really know you and already think you are great. Get at least a little bit of their capital, and maybe even your personal capital so that you aren’t at zero. Being at zero is the worst state.
Don’t spend any time with VCs at this stage; you are WAY TOO EARLY.
You can raise capital from angels, but the key things are to a) get a little first from friends and family, b) target the investors correctly, and c) figure out milestones.
To build a correct list of potential investors, talk to other founders and ask them who the pre-seed stage firms and individuals were that funded them. Research, research and research some more to build the right list, otherwise you will be massively wasting your time.
Only specific funds and individual angels invest so early, so your job is to find investors whose strategy it is to fund the companies at your stage.
Next, think through all the tough questions you will be asked. Do the gut check—do you know the market, the customers, competitors, etc.? The more fluent you are in the problem and the business, the higher the chance you will get the check.
Lastly, clearly define milestones you are going to hit with the pre-seed round.
A typical milestone at this stage would be shipping the product. A better one would be shipping the product and getting a few early customers. No investor wants to give you a check to support your burn.
Investors want to fund you to the NEXT MILESTONE.
In the case of pre-seed, the key question an investor needs to answer is what milestones will enable you to raise a seed round. That’s really the meat of getting the pre-seed check—articulating milestones and metrics that will get you to the next round.
Seed Fundraising Strategy
Everything that we said for the pre-seed applies to the seed round as well.
Keep in mind that the bar is now higher in the seed round. You can’t be pre-product; you need to know your customers and you will likely be expected to have early traction. The game overall is upped significantly compared to pre-seed.
In addition, since the amount of capital you are raising is larger, you need to spend more time on identifying more relevant investors and getting introductions to them.
In terms of targeting investors, start with angels and micro VCs and try to get a few hundred thousand committed. Don’t spend a ton of time early on talking to venture firms, as they take longer and most of them would still think you are early.
By getting several hundred thousand committed on the round, you will be able to create momentum and will have better chance of getting larger checks.
Start with small checks—get to 1/4 or 1/3 of the round then shift focus to larger checks.
Also, how much capital are you asking for? 1.5MM – 2MM may be too high. Review your financial model. Can you make things happen with 1MM? If so, revise your model to be more capital efficient.
It is always better to start lower and then, based on the demand, over-subscribe vs. starting high and never getting there.
Series A Fundraising Strategy
It’s really tough to raise Series A if you don’t have strong metrics. Some founders raise on a story, but they are either repeat founders or working in the hyped-up spaces. Most founders will need really strong metrics.
There are exceptions, but if you are already generating revenue, you will be judged by your a) MRR/ARR and b) MoM Growth. However, strong metrics alone won’t get you a check. Not in this market, anyway.
The dance to raise Series A involves identifying the right firms and identifying the right partners, then getting to know them and letting them get to know you. It will also involve a lot of guts and luck.
Clearly assess how much appetite there is in the market. You should have a gut feel.
If the demand is not there, cut the burn (you should do it anyway), and go back to building the business.
Focus on getting to profitability.
Get feedback from the investors on what your metrics need to look like and keep them posted every eight weeks or so. Assuming you are growing well and hitting profitability, the investors will likely be open to another conversation.
In conclusion, fundraising is stressful, complex and needs to be done thoughtfully or else it is extra painful and takes way too long.
A lot of founders get fundraising wrong.
Do not fundraise randomly and perpetually. By doing so, you are literally harming your company and your personal brand.
As the CEO/founder, have the strength to listen to feedback, understand that you are not ready, pause, regroup, improve and go back to the market.
And lastly, get help! Read up, connect with other founders and get 2-3 key advisors on board. You don’t have to do this by yourself.
Originally posted on Alex’s blog.
This post was originally published on Thoughts on Tech Startups and Venture Capital
We’ve written about the slowdown back in August of 2015. Lack of IPOs and liquidity in the later stage has a reverse domino effect on the whole investment ecosystem. The bitter election and uncertainty around the US and world economics and the future aren’t helping either.
As a result, we are seeing a significant slowdown and reluctance in seed investing. There are fewer angel investors, and those who do invest take much longer and invest much less. Similarly, Micro VCs are more cautious and take a lot longer to make decisions. What used to be two or three meetings to a check, now is five or six meetings to a MAYBE.
This market is not likely to improve quickly.
Here are some practical things founders can do to be successful in this new environment.
1. Raise Less Capital
Start by thinking about how you can do more with less.
If you previously planned to raise $1MM, can you revise your plan to accomplish the same with $700K? Most of the time, founders ask for arbitrary round numbers like $1MM or $2MM instead of the actual amount of capital needed to achieve specific milestones.
Think about what can you cut. Work to re-budget. Hire less people. Spend a little bit less on marketing. Get rid of your office space. Try to get hosting credits from Amazon or Digital Ocean.
Be creative and stingy. Spend time really polishing your financial model, and forecast, so that you can confidently tell investors why you are only raising $700K and why you know you can achieve the necessary milestones with less capital.
2. Lower Your Valuation
Very few things upset founders more than a low cap or pre-money valuation. Whenever most founders look at a term sheet, the only important term they see is valuation.
In reality, many other terms matter, and post-money valuation actually matters a lot more than pre-money valuation, because thats the true indicator of how much dilution the founders are going to have.
It is important for founders to realize that in a slow market, investors want a deal.
When there is plenty of capital to go around, founders ask for high valuations. When there is little capital to go around, investors push for low valuations. Investors want a deal.
Instead of being stuck on the numbers, lower the valuation and get your round done.
You thought you were going to raise capital on $5MM cap but investors want $3MM cap? Fine, agree to the deal. Yes, this is a lot more dilution, but you’d rather raise quickly on a lower valuation that not raise at all.
More importantly, if you crush it, there will be an opportunity for you to make up the dilution in the future financings. A year from now, when you may need to raise capital again, your numbers will be stronger and there is a chance that the market will be better as well. At that time you will be in a position to ask for better terms and you can compensate for the dilution you have to agree to now.
Simply put, you can get diluted 25 percent now and 15 percent later, or 15 percent now and 25 percent later and it is the same amount of dilution.
Sure, ideally, founders want less dilution now and later, but this is not real world, that’s not how markets work, and that’s not what investors want. Recognize the reality, give the investors a deal, and close your round faster. Also, raise less capital and your dilution will be smaller.
3. Meet More QUALIFIED Investors
We tell Techstars founders all the time – when in doubt, add more to the top of the funnel. This is true for both sales and for raising capital.
In the slow market, the shape of your fundraising funnel changes in two ways.
First, it gets taller. It will take you more meetings and more time with every single investor. What used to take two to three meetings to a check, may now take five to six. Be prepared and ask what are the steps, how long the process will take and what to expect.
Secondly, a lot more people will say NO in every stage, so it is important to triple the top of your investor funnel.
Fundraising, like sales, is a numbers game. You need to meet a lot of investors to get funding. Most say NO, because seed stage companies are super risky. Just be ready to get a lot of NOs, and keep finding new investors to talk to.
While it is important to talk to a lot of investors, this doesn’t mean you need to talk to every investor out there. Quite the opposite. You can only get funding from a qualified investor – someone who is interested in your space, someone who has capital to invest, someone who hasn’t backed your competitor. Research the investors to make sure they are qualified. Do not waste your time by trying to talk to every single investor out there.
4. Become Profitable
In the world enamored with venture capital, we rarely talk about profitability.
Yet, profitability for a startup is the most liberating thing that can happen. When you become profitable, you no longer depend on raising external capital.
Can you become profitable by closing a few more contracts, cutting expenses, and slowing down your growth? If you can, then this is the time to seriously consider doing it. If you become profitable you will be able to control your destiny.
A company that’s profitable is also more attractive to investors. It is less risky and it’s clear that the management team will spend the money responsibly.
Even if you aren’t profitable now, make profitability your next milestone. Instead of telling investors you will need to raise more money in 12 months, build a plan that gets you to profitability.
5. Get MORE Customers
In general, early stage investors are reluctant to invest because the companies don’t have enough traction. Real traction is revenue and paying customers. Get obsessed with sales and getting customers, not just fundraising.
Every single paying customer gets you closer to profitability, and to ultimate independence.
The more customers you get, the more convinced you are about the business and the faster investor dollars will come. Become your own toughest critic, leave no stone unturned and ask all the questions investors will ask.
Nothing excites investors more than actual paying customers and a hockey stick growth in customers and revenue. Get to revenue, grow the revenue and your chances of fundraising will go up.
6. Be MORE Inspirational
In a slower environment the bar for everything is higher. Not only do investors expect a better deal and more customers, they will also expect an inspirational vision and a bigger story.
Investors are naturally attracted to founders who have strong founder-market fit, see the future and have the ability to make it happen.
There reason that investors are attracted to artful story telling is because they know that great CEOs and founders have to inspire customers, employees, new investors and the whole world.
Founders who have a clear vision are also very resilient – they know where they are going, why they are doing it and what they are doing, and that gives them strength.
Inspirational founders with massive vision are the founders who won’t give up.
Take your vision and weave it into an inspirational story and investors will be more likely to invest.
7. Be Ready to Bootstrap
Lastly, be ready to not raise capital.
Strong founders need to be ready for every situation, and there is a real possibility that you won’t be able to raise any capital or will raise a lot less than you set out to do.
Do you feel like investors aren’t biting, and you’ve been fundraising for months? When your fundraising is not going well, it is time to pause and re-think your strategy. It is probably time to switch to plan B and to bootstrap.
The important thing is to have clear plan.
What can you do with no or little capital? How long can your team go without being paid? Can you tap your friends and family to help a little bit? Can you make progress on the product? Can you sell more customers? Can you execute on the business without the capital?
Come up with a very clear plan. For example – we won’t try to raise again for the next six months. During this time, we will grow revenues by X percent MoM and add A,B,C product features. We will all work from home and will have to dip into savings. We think that based on the feedback from the investors, if we achieve the above goals we are likely going to be able to raise capital in six months.
Having a very specific and concrete plan and having very specific and open conversations with your co-founders is really important. Come up with a plan, discuss it, get feedback and then go back and execute on it.
How badly do YOU want YOUR business to exist? If you have to make it happen, then no slow market and no lack of investor checks will deter you. You will find a way to make it happen.
Last Friday, January 6, at CES, we hosted a conversation with a panel of venture capital investors to understand how they approach Series A investing. Participants in the conversation included:
- Hamet Watt, Board Partner, Upfront Ventures
- Jenny Fielding, Managing Director, Techstars
- Jon Goldman, Venture Partner, Greycroft Venture Partners
- Nicole Quinn, Partner, Lightspeed Venture Partners
- Ryan McIntyre, Managing Director, Foundry Group
If you want to dive deep into the conversation, you can view it in its entirety on our Periscope feed. There are tons of great nuggets of wisdom and unique perspectives offered by each of our panelists. For those with less time on their hands (after all, we’re building companies here!), here is a summary of some of the topics we discussed:
Each VC Approaches Investments Differently
Each of the investors talked about their investment theses for how they approach investments at key stages such as first money in, seed, series A and later stage investments. They each had a bit of a different approach in terms of target ownership amount, range of investment size, desire to hold a board seat or not, industry/sector focus, and geographies in which they consider investing.
Do Your Homework Before Approaching Investors
Given how differently each fund and even each individual investor within a fund approaches each of the above items, it is critical that founders do their homework on each investor they may wish to approach before attempting to do so.
Entrepreneurs can do this homework in any number of ways from finding articles or interviews from investors (including things like watching this panel!), following them on social media and paying attention to what they post, pattern matching against past investments, and getting feedback from other entrepreneurs who may have worked with them in the past.
That Said, Exceptions Happen!
But given all of this, it is critically important to remember that in venture capital, each individual investor may have a set of general guidelines they use when making investments but almost every investor can cite instances where they’ve deviated from their guidelines in the past.
That said, the closer your company is to matching their sweet spot for an investment, the more likely it is that they’ll want to engage with you.
VCs Invest Time “Getting Smart” on New Markets
Investors spend considerable time themselves getting up to speed on emerging technologies, and often they are learning about these technologies roughly within the same general window or curve as entrepreneurs who are building businesses around them.
VCs do all sorts of things to dive deep on new technologies including reading articles, attending conferences, and (probably most importantly) trying to meet as many founders and companies as possible who are working on technologies that they want to know more about.
As a founder, keep this in mind, especially if you are working in an emerging area! There is nothing disingenuous about a VC meeting you as part of their learning curve, but one thing you can ask when meeting a VC is to understand how likely they are to make an investment in or around your technology focus or business focus in the near future regardless of whether or not it is in your company directly.
Referrals Drive Deal Flow
There are lots of services on the web now to help investors get smart about a space including Mattermark, Pitchbook, CB Insights, and more. Investors are more likely to use these in a diligence phase or to understand competition around an investment they are contemplating rather than using these for sourcing of new investments.
Investors source the vast majority of their new investments via referrals from other founders, other investors, and trusted members of their personal networks.
Pro tip: when trying to engage a specific investor, the stronger the referral you can get, the better chance you have of securing a real conversation with that investor.
And super pro tip: this is one reason why it’s always useful as founders to spend some time helping and being #givefirst with other founders… you never know when good karma can be helpful to you down the line… like when that entrepreneur you helped two years ago goes on to close a funding round with a top VC and is glad to help you with an intro in the future.
VCs engage in what is called deal syndication, where once they know they want to invest in a deal they will often work to bring other investors in the deal that they think can be helpful to the company in the future and down the line as well.
Their approach to syndication can change on a deal by deal basis…on some deals an investor may want to take the bulk of the round in order to achieve a target ownership percentage of the round…in other deals they strategically may want to bring in a co-investor who they know can lead a later stage round in the future if necessary (typically a VC doesn’t intentionally seek to lead multiple rounds of investment in a company in a row as they want outside investors into the company in order to make sure that the company is fetching a market price with each new round). Various factors can change their approach on this such as whether the company is pre-revenue, pre-product, or in a less mature market.
Product Market Fit
VCs often talk about whether a company has achieved product market fit but this is a fairly subjective thing. Some investors may have key metrics they want to see a business achieving in terms of revenue or growth before deciding to invest…and again the maturity/immaturity of a market or technology may impact this as well. In general, this goes back to the above point that every investor likely has a set of theses they use to guide them but in the end the decision to invest or not is highly subjective.
Finally, one last point to consider is that venture capital investment is only one of many means you can use to grow your business. You can of course bootstrap by living within the means of the revenue you directly generate. If you are working on a new technology, there are often grants at your disposal such as NSF SBIR grant.
And there are debt instruments and other tools at your disposal (though a typical bank loan is usually not readily available to early stage startups due to lack of revenue and extreme unpredictability about the business itself). In general, figuring out how to finance your business is, like most things to do with startups, extremely hard and is much or more art than science.
Hopefully these tips and insights help make the journey just a little more accessible! And again, if you have time, check out the full conversation for more details and tips. Thanks again to Hamet, Jenny, Jon, Nicole, and Ryan for taking the time to share their thoughts!
LiveStories recently announced our seed round. Initially, our goal was to raise $2 million. We ended up raising $3 million. Our success occurred against the backdrop of venture capital investments generally slowing down. Going into fundraising, we received many warnings about the difficult fundraising environment. We were told to expect a long, drawn out process.
In this blog post I will share some of the learnings from the process that helped us succeed. It is important to note that we were raising for seed stage. Many have said that the cooling of the venture market hasn’t affected the seed stage as much. Mattermark, an investor-focused data firm, offers a detailed analysis of the change in the funding landscape.
Here are our six tips for success:
Focus on Revenue
Revenue helped us big time in this not-so-friendly investment climate. Our narrative was around our unique business model. We demonstrated a growing customer base, growing revenue and the ability to close government customers in less than half the time of our competitors.
We shared testimonials in support of our product to help add color to our story and demonstrate customer satisfaction. They say, when the tide is low you see who swims naked – we wanted to make it clear to investors that we were building a real business.
Know your Story
Be prepared to summarize your company in a way that highlights the investment case. For LiveStories, these pillars are:
- The government is the largest sector and thus represents a huge opportunity.
- The market is underserved; we offer a product that customers love.
- Our unique business model gives us quick sales cycles with governments, and we are generating revenue.
Answer the Important Questions
Preparing for the fundraising, everyone told us our pitch should answer such questions as: (1) What problem does your startup solve? (2) What is unique about your approach? (3) What traction do you have so far? (4) What will you do with the money? You should develop clear, concise answers for each of these questions.
Ask for Feedback. Iterate. Repeat.
This process has two aspects to consider. First, you should be committed to spending a few cycles on your deck and pitch. Ask for feedback and update your pitch accordingly.
In my case, I went through 183 versions of my fundraising deck before it was complete. You might think that’s a lot, but this kind of diligence is what can set your presentation apart in the sea of pitches that investors get on a weekly basis.
The second aspect of this process is to surround yourself with business-minded people outside of your immediate team. Chris DeVore from Founders Co-op (@CrashDev) and Gary Benitt from Social Leverage (@GaryBenitt) were early investors in LiveStories and have always been generous with their time when I have asked for feedback.
Make Fundraising the CEO’s Sole Focus
When you are in fundraising mode, the CEO should be prepared to put the day-to-day aspects of their job on the backburner. This means delegating tasks to the lateral leadership.
Delegation allows the CEO to focus on preparing the pitch deck, contacting investors, setting up meetings, doing follow ups, and other vital fundraising tasks.
I remember when we started to put our pitch deck together; Eric Dillon, our CTO, said, “I got the product. You should focus on fundraising.” Fundraising is a full-time job, and his leadership allowed me to fully concentrate on doing it well.
Prepare to Be Lucky
Going into this process, we were warned multiple times to brace for a long fundraising process. We were lucky to meet our lead investor, True Ventures, very early on in the process and were immediately impressed by their vision and track record.
They also moved incredibly quickly. Less than three weeks passed between our first meeting and our signed term sheet. Our preparation meant we didn’t have to play the game of shopping our deal around to drive up the price, we knew True would be a great fit and that allowed us to act decisively on their offer and close the round so quickly.
As they say, luck comes to those who are prepared.
When it comes to meeting the challenges of fundraising, Thomas Jefferson captured it best: “I find that the harder I work, the luckier I get.”
Be more prepared than you think you need to be, rehearse more than you want, and delegate responsibilities so you can focus your efforts. Many elements of fundraising are out of your control, but if you follow these tips, you’ll amplify your chances of success when opportunities do arise.
A lot of startups are confused about the expectations investors have at different stages of the fundraising process, and therefore make mistakes aligning their fundraising efforts and business progress. When working with Techstars companies, I like to use this basic graph to show how capital needs and execution should align.
Obviously, you want to be on the “Good” or “Great” paths. Both of which should relatively easily attract the right stage of investment at the right time — as long as the market is big and compelling and the team remains strong and effective. You’ll also likely have leverage and be able to get good investors and terms for each financing round.
Being below the slope of the “Good” curve is a dangerous place to be. Not only are you behind but you’re likely to lose leverage with your existing investors and new investors will be hard to attract.
How to Think about the X (Stage) and Y (Progress) Axes
The X axis represents the standard fundraising stages. The more interesting axis is the Y axis which represents the progress you are making as a company throughout your fundraising journey. The milestones I’ve included are where most investors expect you to be to raise that round of financing. If you are early on your journey and haven’t raised money yet, the milestones I list are a good goal to shoot for.
If you have raised money, you should talk with your investors about what they would like to see on your Y axis to make subsequent fundraising rounds easy — knowing that the milestones for your company may be different depending on your market, team or another variable.
How to Make Sure you are on the “Good” or “Great” Path
Be measured and disciplined in your pursuit of capital. Make sure you accomplish the milestones needed for the next raise before you need the capital. Your goal is to get ahead and be on the “Great” curve.
Raise less money and slower than you may want. Raising capital is a powerful catalyst and milestone for a company and can seem like a silver bullet but when you get ahead of yourself you begin to set unrealistic expectations of accomplishment and ultimately end up behind.
Spend your capital wisely. Keep your burn low and execute.
Know where you are. Be sober about the data your startup is churning off and make sure you understand where you are in the startup process and don’t get ahead of yourself.
Check in with your stakeholders. Be open and candid with your existing investors about where you think you are on the chart and understand their expectations of the slope of your curve and where you are today.
How to Get Off the “Bad” Path
Knuckle down and execute. You’re going to need to do more with less and go fast. Your goal is to catch back up and pull up the slope of your curve.
Become incredibly capital efficient. Your goal is to not need new capital until you change your trajectory. This may mean changing the size of your team, dropping salaries, and slowing down non-customer related growth.
Explore if you are in bad soil. Maybe you are approaching the wrong customer, maybe your product isn’t solving their problem, maybe you don’t understand their problem, maybe your positioning and message isn’t resonating. Start testing variables to see if you can find better soil.
Extend your runway. If it becomes desperate yet you still deeply believe you are onto something, you can try to raise more capital from existing investors or try to attract new investors to extend your runway and give you time to bend your curve. This will be hard, distracting and costly.
I hope this model is helpful in thinking about aligning investor expectations and your startup’s progress. To put it into practice, create the graph for your company. Start by figuring out your Y axis (your best guess at least), determine where you are, look at your slope and then keep checking in as you move forward.
This post was originally published on Medium.
Back in Q1, you couldn’t swing a dead cat without hitting someone advising startups that the world, as they knew it, was coming to an end. Venture dollars flowing to startups had decreased from $16B in Q3 ’15 to $12B in Q4 and VCs were telling anyone who would listen that nuclear winter was in sight and funding would be drying up. The media just ate it up. Take a look at just a tiny sample of headlines from early Q1.
Imagine my surprise when I opened PWC’s VC Q2 Money Tree report on Friday (ok, I’ll admit that I wasn’t surprised at all). Take a look at the chart from their report below. Not exactly the apocalypse everyone was predicting, right? To be fair, while dollars have increased again, the number of deals fell by about 5% (suggesting that larger dollars were going into some later stage companies).
I wrote a post about all this in February and my advice to founders remains the same as it always is. Raise more than you think you need. Price your rounds to avoid the pain of stacked notes. Watch your expenses. But whatever you do, don’t pay attention to what anybody’s saying about the macro because they’re all full of shit.
Will the funding environment get worse for startups? Yes, of course it will. Eventually. Bill Gurley’s been telling us we’re in a bubble for years now. He will undoubtedly eventually be right. But there’s also logic supporting the notion that an entire generation of globally important companies will be born and go public by the time he is.
We’ve now had ten quarters in a row of over $10B of venture capital flowing into the system. Venture Capital firms raised more money in 2014 than ever before in history and then they raised even more in 2015!
All of those firms have a mandate to put that capital to work which means VC dollars will continue to flow liberally to startups at least for the next three to four years.
My two cents? I think we’re in the greatest tech innovative cycle in history and capital will continue to be available to fuel it.
Technology is solving more problems for more people in more ways around the globe than ever before.
I see it when I travel to our 22 Techstars accelerator programs and the hundreds of events we put on for entrepreneurs around the world in over 130 countries. Barring a global economic collapse (which certainly does seem like better than a zero percent chance given the events of 2016 and the potential fallout from our Presidential election this November), I think we’ll continue to see a healthy environment for startups for years to come.
This post was originally published on Mark’s blog.