Seven Practical Tips to Raise Money for Your Startup
Alchemist Accelerator was delighted to welcome Finmark's, Rami Essaid. A successful serial entrepreneur, Rami shared his hard-won experience on how investors think, and how to build a business model that supports your efforts to raise funds. These are my personal notes, and as ever, any errors are mine, not Rami’s!
What does Rachel bring to the marketplace?
Be aware that investors specialize, and find the investor who is looking for you
Rami pointed out that VCs typically invest in a specific risk level (that is, funding stage), industry sector, and/or geography. This can work to your advantage! When you find someone with deep domain expertise in the specific problem you are solving, you need fewer proof points. If you can find an investor who’s a former practitioner who has lived the problem you solve, congratulations! They’ve already developed conviction, which makes your job a lot easier.
The VC Power Law Curve means investors need to achieve $1B+ outcomes
No matter what, though, you’re going to need to convince a VC your returns are going to be big. Most VC returns come from a scant handful of winners. In 2014 it was estimated that 60% of capital returns came from 5-6% of invested capital - that is, only one in 20 investments paid off. That disparity gotten even worse since 2014, as the market moves from unicorns and decacorns to centicorns like Airbnb. If you can’t communicate to an investor how you’re going to be a billion dollar company, they won’t invest their time and energy. They want to chase the big winners. They have to.
What persuades investors? Growth above all else
While Rami acknowledged that the market has reset since last year, growth still matters a lot. If you’re a small business reinvesting your profit into growth, at best you might be investing 5-10% of revenue. If you take VC funding, that might be up to 10x revenue that you are investing in growth. With those resources available to you, you’re expected to grow at least 2x or 3x faster than a company that is not venture-backed. Expectations are increasing, as the time to grow a company to $100M in revenue is getting shorter and shorter.
This kind of hyper-growth matters to investors. To convince them that your company will achieve a meaningful outcome, your revenue should be a hockey stick curve. Ask yourself, “How do I make sure I have the kind of growth that matters to investors?”
Milestones signal that you have retired risk
At pre-seed and seed rounds, you are expected to be looking for product-market fit. With Series A, you should be establishing revenue-market fit. By Series B and above, investors will be looking at your unit economics and deciding whether to invest growth capital.
The easiest way to turn off an investor is to understate your risk. What they really care about is: Are you going to run out of money before you raise your next round? You get one shot, very occasionally a second shot, in each stage. You need to be able to communicate to investors how you will de-risk your business in order to get to that next milestone. The metrics themselves have broad ranges depending on a lot of variables, but the stages themselves are binary: you either have product-market fit, or you don’t. You must be able to demonstrate that you can outperform a non-venture-backed company.
The simpler your business model, the more persuasive it is
How do you make money? Before you even built your product you should have had a sense of what people are willing to pay for it. Make sure you ask potential customers: Do you have this problem? Validate that you’re solving a real problem. If they say yes, ask: How much would you be willing to pay to solve this problem? Have an understanding of how much this is worth to them. This understanding is going to influence so many parts of your business. It’s going to help the investor believe that you’ve thought this through.
For example, in Airbnb’s Series B pitch deck, the company said: We take a 10% commission on each transaction. If there are 10.6M trips, each on average 3 nights at $70/night, and we take $20 per customer, that’s $200M revenue. This answers so many questions investors have about the business. That’s the power of having unit economics broken out. Unit economics simplifies to: “This is what our target customer looks like, and this is how much money we’re going to make out of each target customer.”
Show that your market is meaningful
Average Revenue * Potential Customers = TAM. Show a bottom-up calculation of the size of your market. Include the assumptions you are making. When you’re talking about addressable market, do simple math. Make sure that number comes out to be $1B. If you don't have line of sight to a $1B market, you’re not a venture-fundable business.
Support your argument in your use of funds
Show investors that you’ll blow past the next milestone with the money they invest. Even if they discount your optimism, they may still have high conviction that you’ll get there.
Your "Use of funds" slide needs to reflect this narrative. Before you have product-market fit, you shouldn’t be spending much on sales & marketing. At that early stage, you should invest in R&D. Any sales & marketing before product-market fit is putting the cart before the horse. Once you’ve proven product-market fit, dollars should shift to sales & marketing. At all stages you should aim to have general & administrative be your smallest category.
Thanks again to Rami for a hugely impactful session. I know our Alchemist founders were grateful for your time and insights.
About Alchemist Accelerator
Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley — including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.