A humble little guide to raising funds

Photo by Shamim Nakhaei on Unsplash

It has been years I have been reading “best tips” articles about succeeding in your VC fundraising without finding exhaustive and concrete resources. After one year of experience in Venture Capital on both sides of the table, i.e. as a fundraising advisor and as an analyst in a VC firm, I would like to give back to entrepreneurs the lessons I have learned in this enthralling industry. This is not at all meant to be the holy grail of fundraising, but simply a pragmatic analysis with tangible examples and a summary of key success factors I have been able to identify in my dawning professional career, which I hope, will help some of you who are considering to raise funds. It is not exhaustive because (1) I do not have the pretension, the knowledge and the experience to write such a thing (2) I want to keep it readable and digestible (<10 min read).

Note: All views are my own and do not reflect those of the ventures I have worked in.

Please find below the 10 criteria (hierarchally ranked to my mind) that VCs will carefully look at and challenge you on, starting from the first call / meeting.

(1) Team

(1) Market opportunity

(3) Pain point / Value proposition

(4) Defensibility / Barriers to entry

(5) Context / Timing

(6) Go-to-market strategy

(7) Business Model

(8) Metrics

(9) Exit opportunities

(10) Cap Table

I will begin with the first 3 as they usually win unanimous support.

(1) Team

VCs are looking for a team ideally meeting the following features:

(a) Strong background: top academic background and relevant work experiences either in top tech / consultancy / investment banking firms or in the industry you are tackling (but not crucial requirements at all), past experiences (successful or not) in building companies

(b) Meaningful complementarity: expertise (e.g. sales, marketing, development) and backgrounds (e.g. business, finance, engineer)

(c) Velocity of execution: close deals / sell fast without compromising on quality

(d) Customer-obsessed: focus on iterating, gathering feedbacks, numbing churn, increasing retention, engagement and AOV / ACV

(e) Outstanding strategic vision: go-to-market, product / tech roadmap, internationalisation

(f) Human qualities: resilience, attentiveness, humility, pragmatism, ambition, and obsession / passion

(1) Market opportunity

Team is #1 factor, but I believe that validating the market size is almost as important as having a stellar team. “Small market” is one the most common reason why VCs will give you a negative answer. You might have the best team in the world, they will struggle in a market which is too small.

Typical conservative minimum market size to be considered interesting would be >€500M nationally and several billions in Europe / the US (the hard thing about it is to reconcile top-down and bottom-up approaches). That being said, a smaller market size is not necessarily always a red flag. For instance, it is reasonable to assume a start-up is willing and able to capture a 5% market share (let’s take a €500M market, which makes a SAM of €25M). Now, let’s say the TAM is €250M, but given that the team looks very strong, they rationally expect to capture 10% of the market, which is tantamount to €25M as well. Besides, depending on the CAGR in your market, your current TAM could seem small today but might skyrocket in 5-10 years. It is important to bear in mind that reasoning because it matches the VCs’ exit timeline.

Those figures are completely discretionary but remember that you will not build a unicorn if you are operating in a niche market.

(3) Pain point / Value proposition

Your product / service must solve a real pain point, offering an overall better experience to your clients (e.g. cheaper, timesaving, better quality, frictionless UX). In order to be top of mind, it must be a must have (vs. nice to have) product / service. For instance, a talent management system is a must have in big corporate companies, but IoT devices (connected watches, fridges, etc.) are nice to have products for customers.

The next 7 could be interchangeable depending on viewpoints.

(4) Defensibility / Barriers to entry

VCs like when the product / service is differentiating and people truly love it, so that it does not boil down to an execution play (particularly true for B2C products / services where average baskets are lower than B2B, so that you need to reach a critical mass of customers, and your strongest asset is often your brand image). For instance, defensibility can come from (a) your tech (deep learning, OCR, NLP, etc.) (b) the quality of your supply and massive network effects (e.g. AirBnb) (c) legal barriers in your industry (e.g. CE-marked / FDA-cleared in digital therapeutics). The answer to the question “could someone else with equivalent (or bigger) financial means launch the same business as mine tomorrow?” should be no. If yes, it means that you are running a business mainly reliant on your velocity of execution as explained above (e.g. conciergerie or data vizualisation start-ups).

(5) Context / Timing

There has to be a story behind your value proposition. You decided to launch your business because (a) there are positive trends (e.g. new regulations in your market) (b) the market is huge and largely untapped (e.g. cross-border factoring) (c) the market is growing quickly (e.g. e-sport). What I want to say here is that I would recommend not trying to build a competitor of Netflix, Airbnb or more recently N26 / Revolut and not trying to break into red ocean markets without strong defensibility because you have probably already missed the right timing. “Too much competition” is also one the most common reason why VCs will give you a negative answer.

Fun fact: I have been particularly striken by the tremendous number of entrepreneurs building financial saving apps for millenials.

(6) Go-to-market strategy

You must prove that you have found / will find the right product market fit: what are you selling, who are you selling to and how are you selling (do not overlook the last one as distribution is fundamental). If you are running a B2C business or a B2B business with relatively low ACV (<€30K), you must make it clear how you intend to increase your ACV / AOV over time (up-selling / cross-selling).

If your market is mainly in the US (e.g. PRM, HR Tech, etc.), you should be able to demonstrate your understanding of business stakes and willingness to relocate one of the founders full-time there in the short term.

(7) Business model

You probably know that VCs love SaaS models because (a) gross margins are high (b) it is mainly subscription-based, so that revenues are more predictable. Whatever your business model (subscription, one-off, fees, etc.), you must put all your efforts proving that it is scalable. For instance, you could run a B2B software company without being that much scalable, because of high set-up costs involving heavy customisation and onboarding (tantamount to tailor-made services and more Customer Success guys). Likewise, travel businesses and marketplaces have low margins, so that they must prove they can grow fast without tremendous human needs behind.

(8) Metrics

Your KPI obviously depend on your business but I could not sum it up as best as this a16z article. Check it out, this is extremely well explained and straight to the point.

As most VC-backed businesses are B2B, I am focusing on B2B metrics here. The following elements have obviously to be put into perspective as every business differ, but I guess it gives a rough idea:

(a) LTV / CAC > 3: common standard in the industry

(b) Sales cycle < 6 months: ability to ramp up

(c) CAC Payback < 12 months: to avoid net working capital issues

(d) Churn rate < 5%: all the more important if you have high ACV

(e) MRR / ARR: more than figures, it is about M-o-M / Y-o-Y growth

(f) Growth projections: it’s totally crystal ball here but do not be too conservative (be pragmatic but ambitious)

If you are in Seed phase, of course you do not have enough metrics, but do not overstate your forecasts, i.e. (a) you do not have data track record, so be humble about your lifetime value estimation (b) think wisely about your CAC as you Sales guys might not sell as fast as you.

Find your north star metric and do not focus on vanity metrics, i.e. metrics that boost your ego but do not really matter for your business (e.g. the number of followers on your social networks or the number of downloads for an app).

(9) Exit opportunities

You already know it for sure but keep in mind that VCs’ goal is to exit, so it could be reassuring if there have already been M&A deals in your industry (preferably for relevant transaction amounts, i.e. >€50M in Europe / >€100M in the US). If not, make it clear who could buy your business out in the endgame (it shows you are aligned with VCs’ goal) as the European IPO scene has not been very active lately.

(10) Cap table

This is #10 but could have easily been in the top 3 as an unbalanced cap table can definitely be deal-breaker. VCs usually like when the founding team has at least c. 60% of the business pre-round as they want them to remain incentivised enough post-round (non-executives holding too much equity is also an issue as they are not putting their efforts growing the business but own many shares). That is why companies coming out from start-up studios may struggle more than traditional start-ups and close off avenues.

A #11 criteria would be the detailed use of funds (tech, sales, marketing).

To round it off, yes, it is a lot of things to work on and yes raising funds is a tough journey. It is not because you are overwhelmed with fundraising news on a daily basis that it truly reflects what is happening out there. Bear in mind that VC funds see literally thousands of decks a year and invests in only c. 5-10 start-ups, so that I think it’s worth stacking all odds in your favor and being aware of what they are analyzing when looking at your start-up. And if VCs say “no” to you, it does not necessarily mean that your start-up is bad, but probably that your business is not VC-compatible (scalability issues, long time-to-market, capital intensive hardware products, etc.).

Please feel free to comment and give me feedbacks if you disagree or think pivotal thoughts are missing above (again, it is difficult to cover everything), it will definitely help me a lot to improve as I am a newbie in the industry :)