We at Instamojo recently raised our Series A from an amazing bunch of investors. In the process, I have interacted with a bunch of super smart folks across the globe. Truth be told that I’ve gained more than what they would have thought. So I’m taking few cues from those interactions and sharing it here. Hope this can come in handy for few people.
Caveat: This is a completely personal experience. Yours might would differ on every point. But my best guess is below points might help you build your personal framework for your startup while raising venture capital.
What VC’s typically look for:
1. How big is the market? — Have a waterfall calculation of how big is the Market opportunity and if possible showcase how big the market can become in 3-5 year’s time.
Note: A typical VC’s calculation is that they expect that you’ll get max 10% of the entire market at best. And then their backward calculation starts. This is the very reason why VC’s don’t invest in smaller opportunities (aka lifestyle businesses) as the odds of success are far lesser than ideas with bigger market opportunities.
For example, if you say that total market opportunity is $1Bn. They would assume that with all market inefficiencies, you would gain only 10% market i.e. your revenue would be $100M. Considering that you would have few competitors too, best you would get is around 5X revenue multiple valuation i.e. $500M max. If it’s not multiple times over their AUM, then its probably not worth it (P.S. I’m generalizing, but use the framework). Hence, market opportunity is one of the biggest contributor to your funding story.
2. Growth curve — Investors love growth Curve and they only invest for growth; and rightly so. In other words, initiative conversations with investors when the curve is moving towards north. Also, articulate why it’s growing and how this capital raise would help you accentuate growth.
Note: Show growth curve for 4 most important business metrics and it’s subsequent 12-month trailing growth curve in terms of X. For example, I’d shown that Instamojo grew 18X for Y (redacted) in the last 12-months due to network effects of imojo payment link distribution.
3. Team is important – Articulate why you & your team can make it big. If you are able to prove that past & existing skill-sets of the team can help, then you’ve a winning combination. Although, it’s not a pre-requisite.
4. Competitive landscape – Being little careful here would help. Choose a worthy competitor for the market that you’re shooting for. If you don’t have any, position global competitor as your benchmark. It’s very important since most often than not you would be like them in more than few aspects. Also, that might have an impact on your future valuation too!
5. Special ingredient – Be vocal about that special ingredient that sets you apart in the long haul — something like proprietary technology, network effects etc.
Few ancillary points while fundraising:
- Never leave an investor in quandary with any aspect of your business model. I’ve seen in such cases, major analysis paralysis happens over data.
- Always have two sets of presentation – one for F2F interaction and for email.
- F2F presentation can be more elaborate and verbose.
- Email presentation should be exactly opposite of F2F presentation.
- Try to give a sense to your investors that where you will reach in terms of milestone with the capital that you’re raising. This helps your future investor(s) to get a sense when you can/should raise your next round. Accordingly, they would line-up their ducks.
- As founders, you should always fight for rights which has material impact on 2 things:
- Ownership of the company
- Financial outcome
- From the above point, you should always take care of 2 things:
- Liquidation preference – always go for “non-participation preferred” (read more)
- Anti-dilution – always go for broad-based weighted average (read more).
I’m sure I’m forgetting many other important points. But, I’m hopeful that this helps!
May the force be with you…