Getting your facts straight is crucial to getting funded.
It is imperative for startups to understand that when VCs rescind their term sheets, they must adapt to it.
Venture capital is “growth money”, not “let’s get a chef to cook for us”.
Investors have seen hundreds (if not thousands) of startups failing to secure their next funding round simply because of squandering money which wasn’t theirs.
Venture capital – the facts
When startups wish to raise funds, they must understand what VCs or angels (or Family Offices) might be looking for.
In essence, startups must sell themselves (the idea) to others.
Depending on the state in which the startup is, getting your facts straights might come in handy:
- Dedicated team – founders working 85%-100% on the startup?
a. Is there a product yet?
b. Does the startup have clients (are they paying)?
- Does the startup have “skin in the game” (money in)?
- Is the product/service scalable (e.g. will it reach 900% in revenue within 24 months)?
- How is the burn-rate:
a. Would the startup be able to sustain 9 more months?
b. Should the ask be for $3MM or $5MM?
c. How much is the startup willing to give in equity?
d. Can it give debt instead?
- Does it have design partners?
- Are there any strategic clients (i.e. ones that may decide to acquire the startup in the next 3-5 years)?
The more “green ticks” added to this list, the more a startup may become lucrative to investors.
Asking for $3MM when the startup doesn’t even reach $1MM in ARR won’t get it the $3MM.
Scalability (sales and market share) is key for the growth of the startup, not how much money was pumped into it.
Sustainability – would the idea be relevant in 5 years
Not all VCs are looking for “cash-cows”, i.e. startups which could be acquired for a lot of money within the next 24-36 months.
Some of them invest in the team at hand and would like to see a sustainable business.
That is why despite receiving VC money, Facebook still is in the business and didn’t go for a merger/acquisition but an IPO.
If a founder(s) is in the business of solely going for an Exit in the next 5 years, the startup might not get funded.
The business should also make sense to investors.
If the numbers make no sense, it won’t make sense investing in – so dropping the act and doing the research are imperative.
Scalability – can it really hit those numbers
Startups talk about being “the next Tesla”.
“The next Google”.
The next “whatever”.
The reason VCs are not impressed by it and the Covid19 creating a “buyers-market”, is because startups make no sense anymore.
Not because startups are not the future, but because their market research is terrible.
They always pitch their startup, comparing themselves to the market leader.
No, investors would like to know how a startup compares to #10 on the Top 10, not the market leader.
They would like to know how the startup might reach the Top 10 in the vertical within the next 24-36 months, not how it takes on the champion.
The startup founders don’t know why the champion is at the top, but they do know why #10-#2 aren’t.
Getting your facts straight about the market would definitely get you a “maybe”.
Keeping thoughts to oneself
One thing startup founders don’t realize (or realize but don’t care about), is that many investors roam startup communities.
When founders speak ill of a certain investor or putting them all into the same category, they create antagonism.
Startups should remember that they need the investors’ money, not the other way around.
If a founder says that “VCs are stupid” or “they don’t understand business”, that growth capital may never be received.
Nobody likes a sore loser, so startups shouldn’t become any.
Getting your facts straight in your pitch deck
A lot of startups send out their pitch decks in cold outreach format.
The reason being that VCs speak to one another and share pitches of startups they are not interested in.
Yes, it’s called “venture partnership”, and many VCs work that way.
If an investor gets an email from one venture partner with the same pitch deck the other one had sent to him/her (and perhaps got the same pitch in the mail himself/herself), it creates further antagonism.
It means that a startup doesn’t understand the investment policy.
It also means the startup founders haven’t checked who is already working with that particular VC.
Brokerage – does it work?
Many startups are reluctant to use investment brokers/bankers because they fear “the middleman”.
Yes, some may not be relevant for the business, especially if all they do are intro emails to investors.
A startup must contract a broker which also provides further guidance, mentorship and business development in the package.
The more lucrative the startup arrives at the Round A/B/C talks, the more likely an investor would send out a term sheet.
So choose the one which best suits your needs as a startup.
The ones that offer dual due diligence, as in matching the investor to the startup (and vice-versa), are the ones that would secure a “maybe” and not a “no”.