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How to Raise Venture Capital for your Startup (From Pre-Seed to Series A)

by Joe · 102 things on NewTwos

There are two reasons to seek out funding:
You have a partially validated idea that you think you can get to $50M+ of revenue in five years and you need money to get to product/market fit
You already have product/market fit with real customers and real revenue and need money to grow and expand
Startup early stage funding landscape:
Pre-seed round: Raise $100,000 - $750,000
Seed round: Raise $1M - $3M
Series A: Raise $5M - 10M
Series B: Raise $10M - $50M
Series C, D, and beyond.
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In a pre-seed round, you are focused on building MVPs, testing your insights, and searching for product market fit
Pre-Seed Round (6-12 months)
Team
What has your team achieved in the past?
Any important wins?
Do you have co-founders that complement your skills?
Product
Minimum viable product
Be able to share your three-year product vision to see if it engages a passionate customer response
Traction
Tell them about the search for product-market fit
Show them the evolution of your MVP
"Instrument" your customer acquisition process with analytics
Business Model
What are your assumptions about each part? What are some of the critical metrics that matter? Number of customers? Revenue per customer? Number of employees? Revenue? Gross margin? Expenses?
Market
Tell us why this is going to be a huge market
What have people missed? What's changed? What's now possible?
The company ought to have evidence that it has found product/market fit. You should be thinking about an end-to-end pipeline of how to get, keep, and grow customers.
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In a seed round, you have an early product and by the end you've found product market fit and understand the scale of what you are building and the levers you can pull to accelerate growth
The Seed Round (12 - 18 months)
Evidence you have found product-market fit. One sign is that you are no longer changing your website, sales powerpoint, product, app, every time you need to acquire a customer.
Now it's time to raise money to acquire paying customers
Team
You have a core team that can build the first product and get early sales
The cycle: Hypothesis > Experiment > Data > Insight > Validate/Invalidate/Modify Hypothesis
Product
At this stage you have a high-fidelity product that earlyvangelists can use and pay for
Enough that you can gauge customers' price sensitivity, depth of engagement, etc.
The three-year product roadmap gets earlyvangelists engaged
Traction
Investors want to focus on traction. You need to provide proof that your customers love and can't live without your product.
You've built detailed analytics tracking into your product, should be seeing organic and viral growth, and can provide daily/weekly/monthly active users and 30/90/120-day retention. Retention and low attribution are good signs of customer validation.
Your annual recurring revenue (ARR) and revenue milestones will depend on what business you’re in. For example, not all revenue is recurring and even in a subscription model for a consumer goods company, your recurring revenue will not be valued the same as if you’re selling enterprise software, where operating costs are so vastly different.
As an example, $1 of revenue for a direct to consumer company is worth ~$1 in valuation at scale (Zappos was sold for $1 billion when they had $1 billion in sales). On the other hand, in a SaaS business $1 in recurring annual revenue equals ~10x in valuation.
Business Model
Testing revenue models/pricing, resources, activities, and partners
Market
Why the data validates that this is going to be a huge market
The founders usually do the first sale, then they must prove their first salespeople can repeat that sale
Documents needed
Term Sheet
Stock Purchase Agreement
Amended and Restated Certificate of Incorporation
Investors’ Rights Agreement
Right of First Refusal and Co-Sale Agreement
Voting Agreement.
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For a Series A round, you want to prove you have built a repeatable and scalable sales/revenue model and understand all parts of the business model
The Series A Round
Your startup has a repeatable and scalable sales model and a provable case that there can be a multibillion-dollar valuation
Team
The core product team is working efficiently and the sales team for scale is in place (meeting 75%+ quota)
Product
Fully featured first version of the product needed to scale sales
Traction
Repeatable and scalable sales model with efficient growth
If you hire an account exec, you know that they will close $1M ARR per year
Or if you spend $100,000 in ads, you can get 100,000 new users
Startups raising a Series A typically have $500,000 - $4M ARR
This should not just be on growth month-to-month but also on efficient growth
Other metrics include,
Net retention of 80-150%
LTV/CAC > 3
2x CAC payback in less than 18 months
A realistic plan to grow revenue 3x-5x in 12 to 18 months
Business Model
Scalable, repeatable, profitable
Market
You need to convince investors that this is at least a $1B+ company
By the end of this process you should be able to show $5M in gross profit
If you want to achieve unicorn status or go public, you ultimately need to deliver $100M annual gross profit in years 6-8
Same paperwork as Seed Round
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Series B is about proving your net revenue model ("Can you be profitable?")
Series C and onwards funds growing your company to $100M in gross profit
If your pitch is not going to knock investors' socks off, if you cannot communicate big vision and a unique insight about the 10x advantages that customers and users will care deeply about, you will fail
Other resources
Five things potential investors will want to know about your startup:
Getting through to an Investor
When reaching out to VCs
What should revenue growth for a startup look like? Triple, double, double, double
12 Common Mistakes Entrepreneurs Make
Questions you should ask each investor you are targeting
SAFE (Simple Agreement for Future Equity) Notes
Speeding Up the Fundraising Process
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