Timing is everything. Don't go out fundraising before you've read this.
Updated: Mar 17, 2020
Hey there! I hope you and your family are well. Like many of us, who are lucky to have the opportunity to work from home, my girlfriend and I have been (mostly) self quarantining in our home for the last days and we will continue to do so for some time. I hope most, if not all, of your startup staff has managed to do so, too, and that the impact on your companies will be positive. Oh, and yes, we are open for business!
Today, I want to share a framework for your fundraising timeline. I won't talk about KPIs, but about the key proof points that VCs, and we at our firm specifically, would like to see at each stage, especially at an early stage.
First, it is essential to understand that you, and you alone, define your fundraising timeline.
As a startup founder, you are managing a private company until you sell it or do an IPO. While public companies see their stock priced by investors daily (and as we are just witnessing, this can be brutal), a startup decides when it prices, NOT the investors. Thus, ask the question, 'what are we worth?' when you think the time is right.
Make sure that cash management aligns with your fundraising strategy to avoid losing this pricing power. Cash is king, especially now, as we are in a new economic environment, and we don't know yet how long it will last. The belief is that the time between rounds will lengthen in the next 12 months (from 2007 to 2009, we saw the time between rounds increase by over 30 percent to over two years). Here some useful guidelines on cash mgt from our friends at Pear in Palo Alto.
Finally, it is, more than ever, crucial to focus on building a strong business and defining a robust fundraising strategy.
Here are the key proof points that investors are looking for at each stage, from Seed to Series C.
Team (do(es) the founder(s) have the necessary ambition, storytelling, and execution skills?)
Product (can/does this product have a material impact on the customers' lives?)
Market (will enough people use this product?)
Monetisation (will/does anyone pay to use this product? While a couple of months back, this could have been a Series B requirement only, but see here how this has changed recently)
Scale (can you grow to lots of users and lots of revenue?)
Profitability (do you have a clear path to profitability?)
With each proof point, a risk layer is removed, and the value of your startup increases. So wait to price on exactly the right type of good news the investors are looking for...
Personally, I get excited about the following:
A big or new but fast-growing market first, then a team with unique insights into a trend or market, and finally some very early product traction and a clear value proposition. I do invest pre-product, especially for areas we have a particular interest in such as voice/audio, healthcare, silver tech, sustainability or online toxicity. Most often, though, the best entrepreneurs will have built something, even if only a very basic product, before raising any money or while doing so.
At the very early stages, I do not care much about revenues or the number of users but more about product usage and organic growth. Monetisation should be a natural consequence. Usually, it is a good sign if some users are using a product often, and telling some friends to do so too. The entrepreneurs should also have an idea which distribution channels will work well for a start. The same logic applies to B2B companies. Good B2B teams can onboard one or two known brands, often if found through some serious hustling. These will allow me to get a good reference check.
This aligns with the results of a recent report from Docsend on what VCs are looking for in pre-seed companies.
'The analysis shows that investors expect pre-seed companies to not only have a clear product that's in or close to being in the market, but they also expect a clear plan to monetize the business. Additionally, investors spend nearly 50 percent more time on the product slides in successful pitch decks and over 18 percent longer on the business model in unsuccessful pitch decks. This tells us that confusing or hard-to-understand monetization strategies can be detrimental.'
92 percent of companies with successful pitch decks had either an alpha, beta, or shipping product. Potential investors also expect founders to be clear about why now is the right time to invest. Having a product out there might help investors answer this question. So don't wait, but show off your first performance metrics asap in your deck. Not surprisingly, according to the Docsend analysis, the narrative and the order of the story makes a big difference in successful vs. unsuccessful decks. Here a useful deck template.
This is only a framework I use. The personality and storytelling skills of entrepreneurs I meet are equally important.
So, if you think that you are onto something, please do reach out. I am looking for entrepreneurs with unique insights. This implies that I expect you to know stuff that I don't :).
Do not hesitate to reach out by contacting me on this blog. An insightful cold email is often more powerful than a meh introduction. We’ve funded companies off of cold emails and will continue to do so in the future.