Finding funding is stressful but it is job #1, 2 and 3 for all early stage founder CEO’s. Fund raising is a multi-stage journey beginning with initial seed capital to raising subsequent rounds with existing and new investors. At times fund raising can feel like a crushing responsibility that dampens the exhilaration of starting your own company. While sometimes insider funding can reduce the pain of needing to recruit new investors for subsequent financing rounds, bear in mind that syndication with new investors in each round is an essential part of the process of building value. Anik Bose (BGV General Partner) shares his perspective on successfully navigating the fund raising process.
Fund Raising – A look back at 2018
The SVB state of the market report published recently highlighted a few key themes:
- Deal counts at the early stage fell for another year from their 2015 highs. Capital remained robust, however; the median Seed deal size reached $2M for the first time.
- Records were shattered at the later stages, with nearly 200 venture deals of $100M+ in the US. Median pre-money valuations for Series D+ crossed $300M.
- US Venture firms secured more than $50bn in committed capital, the highest total since the dot com era.
- Corporates participated in one-in-six US VC deals, with new CVC groups forming in old guard industries facing disruption.
BGV Perspective
Despite the above favorable macro trends, most early stage startups find it difficult and time consuming to raise capital (even more so if they are first time founders). Raising capital requires a lot more than having just an idea and a pitch deck. Our experience in funding early stage startups and helping them navigate subsequent refinancing cycles lead us to believe that a few crucial factors can help to significantly increase the probability of success.
- Rising above the noise – Most VC firms see between 20-30 startups a week. For a startup seeking their first round of financing, their pitch needs to convey a compelling, crisp and highly differentiated positioning in a clear target market coupled with a strong founding team to standout. It’s not about the technology as much as it is about how your startup can “uniquely” solve a big problem that others cannot in a sizeable customer segment. Entrepreneurs often showcase huge markets but are unable to justify these claims with a clear articulation of their target SAM (served addressable market). When filters such as willingness to buy, customer type, innovation proclivity, presence of a burning platform, buyer persona/budget, and value pricing ability are applied, the SAM often shrinks to narrow niche markets. Remember: VCs are seeking to fund businesses that can scale to $100M in top line.
- Poor targeting of VC firms – Do your homework to prequalify VC firms who have a track record of investing at the appropriate stage in your space or have an investment thesis that is potentially aligned with the market/technology you are seeking to disrupt. This will avoid having to spend lengthy cycles educating VC’s on the industry context of your startup or meeting with firms that have a low likelihood of investing in your startup.
- Re-financing – Insufficient progress against graduation milestones is the #1 reason most startups fail to raise subsequent rounds of financing from new investors. If you are seeking to raise Series A or B in 18-24 months then you need to demonstrate clear product market fit (ie scale deployments at 10-20 customers) and a repeatable sales and marketing model. A repeatable sales and marketing model implies a demonstrable ability to scale sales (whether it is direct, inside sales or partner oriented). If the company does not have a credible demand generation (MQL’s and SQL’s) and sales conversion model with its sales team and channel partners, then this tends to be a “faith-based” selling model. One where founder CEO’s mistakenly believe they have a repeatable sales motion whereas in reality most of the accounts that have been won were sold by the CEO or founder, and most of these customers had a personal and or pre-existing relationships. This is the prototypical false positive and the unit economics are so weak that the model is not repeatable. Finally, the metrics bar for SaaS companies has gone up significantly (ie ARR growth rates, Upsells and expansions, Churn and Sales & Marketing Efficiency metrics). Relying purely on a single dimension bookings or revenue metric rarely satisfies what later stage investors are looking for as demonstrable proof. Relying on your existing investors to bail the company out when you fail to achieve graduation milestones by a large margin is not a viable strategy either.
Conclusions
What an entrepreneur can do differently to become more effective in raising capital:
- Investor Pitch – Review the investor pitches from companies that have been successful raising capital. Learn from their best practices around how best to articulate the messaging around your differentiated positioning and clearly defined target market SAM. Network with fellow founders.
- Prequalifying VC firms – Review VC firm web sites for data on past investments in your sector. See if there are blogs by Partners that reveal their areas of focus and/or investment thesis. Select firms that have a pre-disposition to invest at your stage and space.
- Articulating graduation milestones – Set 3-4 objectives and outcomes for your next round of financing. Ensure that these objectives are around achieving product market and/or demonstrating a repeatable sales and marketing motion. Engage your board and the full team around this exercise to create alignment as well as shared and individual accountability. Set clear metrics that you can use to gauge your progress on a monthly and/or quarterly basis – see book by John Doerr Measuring What Matters. Ensure that you incorporate contingency planning into company objectives to ensure you can change direction if needed.
- Building relationships for next stage – Begin identifying and building the relationships with qualified later stage VC firms at least 12 months before you have to raise the next round of capital. Often times founder CEOs make the mistake of ceasing all fundraising completely after the first financing round. Failing to engage with potential future investors, they expect new investors to jump in at the last minute and write a huge check. Building relationships early will give you time to learn more about the VC firm, for them to learn more about your startup, and to build a stronger investor syndicate.
Finding funding is stressful but it is job #1, 2 and 3 for all early stage founder CEO’s. Fund raising is a multi-stage journey beginning with initial seed capital to raising subsequent rounds with existing and new investors. At times fund raising can feel like a crushing responsibility that dampens the exhilaration of starting your own company. While sometimes insider funding can reduce the pain of needing to recruit new investors for subsequent financing rounds, bear in mind that syndication with new investors in each round is an essential part of the process of building value. Anik Bose (BGV General Partner) shares his perspective on successfully navigating the fund raising process.
Fund Raising – A look back at 2018
The SVB state of the market report published recently highlighted a few key themes:
- Deal counts at the early stage fell for another year from their 2015 highs. Capital remained robust, however; the median Seed deal size reached $2M for the first time.
- Records were shattered at the later stages, with nearly 200 venture deals of $100M+ in the US. Median pre-money valuations for Series D+ crossed $300M.
- US Venture firms secured more than $50bn in committed capital, the highest total since the dot com era.
- Corporates participated in one-in-six US VC deals, with new CVC groups forming in old guard industries facing disruption.
BGV Perspective
Despite the above favorable macro trends, most early stage startups find it difficult and time consuming to raise capital (even more so if they are first time founders). Raising capital requires a lot more than having just an idea and a pitch deck. Our experience in funding early stage startups and helping them navigate subsequent refinancing cycles lead us to believe that a few crucial factors can help to significantly increase the probability of success.
- Rising above the noise – Most VC firms see between 20-30 startups a week. For a startup seeking their first round of financing, their pitch needs to convey a compelling, crisp and highly differentiated positioning in a clear target market coupled with a strong founding team to standout. It’s not about the technology as much as it is about how your startup can “uniquely” solve a big problem that others cannot in a sizeable customer segment. Entrepreneurs often showcase huge markets but are unable to justify these claims with a clear articulation of their target SAM (served addressable market). When filters such as willingness to buy, customer type, innovation proclivity, presence of a burning platform, buyer persona/budget, and value pricing ability are applied, the SAM often shrinks to narrow niche markets. Remember: VCs are seeking to fund businesses that can scale to $100M in top line.
- Poor targeting of VC firms – Do your homework to prequalify VC firms who have a track record of investing at the appropriate stage in your space or have an investment thesis that is potentially aligned with the market/technology you are seeking to disrupt. This will avoid having to spend lengthy cycles educating VC’s on the industry context of your startup or meeting with firms that have a low likelihood of investing in your startup.
- Re-financing – Insufficient progress against graduation milestones is the #1 reason most startups fail to raise subsequent rounds of financing from new investors. If you are seeking to raise Series A or B in 18-24 months then you need to demonstrate clear product market fit (ie scale deployments at 10-20 customers) and a repeatable sales and marketing model. A repeatable sales and marketing model implies a demonstrable ability to scale sales (whether it is direct, inside sales or partner oriented). If the company does not have a credible demand generation (MQL’s and SQL’s) and sales conversion model with its sales team and channel partners, then this tends to be a “faith-based” selling model. One where founder CEO’s mistakenly believe they have a repeatable sales motion whereas in reality most of the accounts that have been won were sold by the CEO or founder, and most of these customers had a personal and or pre-existing relationships. This is the prototypical false positive and the unit economics are so weak that the model is not repeatable. Finally, the metrics bar for SaaS companies has gone up significantly (ie ARR growth rates, Upsells and expansions, Churn and Sales & Marketing Efficiency metrics). Relying purely on a single dimension bookings or revenue metric rarely satisfies what later stage investors are looking for as demonstrable proof. Relying on your existing investors to bail the company out when you fail to achieve graduation milestones by a large margin is not a viable strategy either.
Conclusions
What an entrepreneur can do differently to become more effective in raising capital:
- Investor Pitch – Review the investor pitches from companies that have been successful raising capital. Learn from their best practices around how best to articulate the messaging around your differentiated positioning and clearly defined target market SAM. Network with fellow founders.
- Prequalifying VC firms – Review VC firm web sites for data on past investments in your sector. See if there are blogs by Partners that reveal their areas of focus and/or investment thesis. Select firms that have a pre-disposition to invest at your stage and space.
- Articulating graduation milestones – Set 3-4 objectives and outcomes for your next round of financing. Ensure that these objectives are around achieving product market and/or demonstrating a repeatable sales and marketing motion. Engage your board and the full team around this exercise to create alignment as well as shared and individual accountability. Set clear metrics that you can use to gauge your progress on a monthly and/or quarterly basis – see book by John Doerr Measuring What Matters. Ensure that you incorporate contingency planning into company objectives to ensure you can change direction if needed.
- Building relationships for next stage – Begin identifying and building the relationships with qualified later stage VC firms at least 12 months before you have to raise the next round of capital. Often times founder CEOs make the mistake of ceasing all fundraising completely after the first financing round. Failing to engage with potential future investors, they expect new investors to jump in at the last minute and write a huge check. Building relationships early will give you time to learn more about the VC firm, for them to learn more about your startup, and to build a stronger investor syndicate.
- Investor Pitch – Review the investor pitches from companies that have been successful raising capital. Learn from their best practices around how best to articulate the messaging around your differentiated positioning and clearly defined target market SAM. Network with fellow founders.
- Prequalifying VC firms – Review VC firm web sites for data on past investments in your sector. See if there are blogs by Partners that reveal their areas of focus and/or investment thesis. Select firms that have a pre-disposition to invest at your stage and space.
- Articulating graduation milestones – Set 3-4 objectives and outcomes for your next round of financing. Ensure that these objectives are around achieving product market and/or demonstrating a repeatable sales and marketing motion. Engage your board and the full team around this exercise to create alignment as well as shared and individual accountability. Set clear metrics that you can use to gauge your progress on a monthly and/or quarterly basis – see book by John Doerr Measuring What Matters. Ensure that you incorporate contingency planning into company objectives to ensure you can change direction if needed.
- Building relationships for next stage – Begin identifying and building the relationships with qualified later stage VC firms at least 12 months before you have to raise the next round of capital. Often times founder CEOs make the mistake of ceasing all fundraising completely after the first financing round. Failing to engage with potential future investors, they expect new investors to jump in at the last minute and write a huge check. Building relationships early will give you time to learn more about the VC firm, for them to learn more about your startup, and to build a stronger investor syndicate.
