Fundraising for a startup and what requires attention
After over a year of living in San Francisco and fundraising for my startup, I have highlighted the 10 main criteria which are considered by investors when fundraising for a startup. All of them have different levels of importance and can be valued from 5 to 20 points. Any owner of a marketplace can check his/her project, assess it by each criterion and sum up the result of the startup in total.
Perfect conformity with all the criteria achieves the maximum grade which is a total of 100 points. Let’s take a look at each of the criteria.
1. Big addressable market
The investor presumes that a market for a marketplace already exists and that the company's founder understands that market. The main indicator of its existence is a number of users, and that is exactly what is taken into account by the CEO. If your market is less than 10-20 M users, the investor is not interested in you.
For the Aware project, the total market appraisal in users is 25 M. This is the amount of people who were practising yoga in the USA in 2015. You should understand what size your market is now and what size it will be in around 5 years when you will be planning an exit, transition or IPO.
2. Hotness
- Hot Niche
The investors of the Valley are focused on “hot” startups. It can be, for example, on-demand economy or sharing economy startups. On the contrary, an e-commerce project is not interesting for the Valley’s investors. This market is already well known with predictable figures and a huge amount of competitors.
San Francisco and the Valley are the territories of the future where from a lot of trends are emerging. The majority of those trends die without even reaching a significant audience. They fail the test of the real world.
- Recent Exit or Big deal
When an unofficial leak of Uber’s income and growth index was revealed, all the investors who had missed the round started investing in startups that create on-demand marketplaces.
In my opinion, to have a solid idea of what is about to trend in California without being there is unreal. What TechCrunch writes is already known in the Valley two months ahead of time.
3. Star Team
- Ideal Team
Being inspired by the idea of a project in the Valley is very good but it’s not enough. In San Francisco it is essential to have people in your team with business skills from Stanford University, technical skills from Massachusetts Institute of Technology and all these people are highly preferred to have PhDs. The more of these types of people on your team, the better. Being consulted by such specialists is already a big plus as well as having team members who used to run their own business. In the USA there is a big trend of diversity, so if you are going to the Valley without a MIT specialist but you have a woman-founder you’ll gain points for that too.
- Full commitment
In the Valley, investors expect startupers’ full involvement: availability must be 20/7 — part-time work is never an option. Otherwise, the criterion appraisal goes 2-3 points out of 20 down.
- Own money invested
As a rule, American startups have their own capital before launching a project. This can be money saved from the previous project, a loan from the bank, or a well known FFF. In Ukraine it is rather hard to already have an initial capital, so many founders begin their startup whilst keeping their job.
If you are running a project in the Valley you are expected to invest your own money. You spend it either on development, design or marketing. Ten thousand dollars is the initial amount the investors are pleased to hear. If you have not invested your money, then how on Earth could you ask other people to invest money in your project?
4. Financial Projections
- CAC (Customer Acquisition Cost ) and LTV (Lifetime Value)
These metrics present KPI appraisal of the company in the future. This includes both the understanding of the customer acquisition cost into the project and calculating the revenue the user will bring to the marketplace. In Silicon Valley, the acquisition cost of one b2b client is about $2-5K, and an average American b2c mobile user will cost $30-40. These figures are approximate, and they depend on the industry and the competitiveness of this industry.
For example, in our company when I was performing my first test, a registered user in the “meditation in America” niche in California cost about $20. Today several companies with big budgets dedicated at customer acquisition have entered this market and the figures have naturally gone up.
- Funding strategy
An expectation of your awareness of how much money and what you will need it for in the next couple of years. More long-term forecast is not the case as the company is changing the strategy, market and conditions. However, it is crucial to know when the money will run out and when you will need more.
- Break-even point
The moment when the companies income meets its expenses and afterwards becomes profitable. Investors want you to get to this point as soon as possible. The process can be accelerated by decreasing the company expenses and the founder’s expenses in particular.
5. Traction
- Growth of user base
The project growth index, which is ready to be presented to the investors by the CEO. For the Valley, the standard index of growth for the user base is not less than 5-7% per week.
- Extraordinary virality
This term refers to a project that was started a month ago and is already showing an exceptional growth index. Say you have 10-20-30-40-50K users, and they have all arrived during the last month — it means your growth rate is dramatically rising. This is called the “hockey stick” and investors love this scenario.
- Technological breakthrough (speed, AI, robots)
If you develop hardware, Internet of Things (IoT), Artificial Intelligence (AI), the latest video streaming technology, but you have no idea how to promote your project you should consider selling these innovations to a larger company. You can run a campaign on the Kickstarter website and see what results you have. If the campaign is successful that means that a customer needs the product and that you have a good PR team.
6. Cash flow
If you only subscribe users without providing any benefits and selling them anything, you will not have an income and your grade will be zero. Firstly the money will be provided for the startups that achieve a certain amount of sales.
- 1K-10K of transactions
When talking about b2c startups you should have 1 to 10 thousand transactions. This minimum is a must in the early stage. It includes your loyal client base of 100K of users per month, and each buyer pays you $10K per month.
- $100K pre-sail
It is more suitable for hardware projects. Petcube, as an example, was in AC (Almaz Capital) on a rather late stage, and the project had already had sales for millions of dollars in retail throughout America. You should display good sales figures during your Kickstarter at least.
7. Momentum
This means that at this very moment your project is highly relevant and attractive for investors. Among the factors that influence momentum is the availability of other investors, marketplace promotion using mass media and the timeline (a precise time of the release).
It is not recommended to lie to investors about other ones: the venture market is small, and financiers know each other.
As for the timeline — you come to investors and say: this is the traction that we have and the team. Currently, we are due to have a release next month. You can use this approach because after the official release your traction will increase, you’ll earn more money and the grade of your company will be higher. This means that the conditions for investors to buy into your idea will not be as beneficial to you as it is right now.
8. Perfect legal base
In the Valley, you are expected to understand what a corporation is and how to start it, and most importantly you are obliged to have prepared a base for attracting investments. For that, you need to have a term sheet and a founders agreement.
A highly qualified legal company is also a must because you can misunderstand some nuances — and lose everything. The financial plan should account for an expensive attorney. The minimal sum that is to be paid for an hourly consulting service of an independent attorney in the USA is $400. Prices in legal companies start from $600 per hour but more often than not the price is closer to $1000-1200 per hour.
9. Be ProCEO
- Great pitch with the story
This point is about your soft skills and charisma. There are a number of stories when founders give an excellent pitch deck, but the investor shows no interest. But as soon as a founder starts communicating with the investor the latter is ready to begin the funding process right away. Your interpersonal skills play a crucial role in attracting investments.
This is what you need to train if you are a founder who plans to speak to a live audience on stage. Use your cat, your grandmother, other investors — use any opportunity to pitch your project. The more times you present your speech, the more you understand the format needed for reaching your intended audience.
- Functional demo
You should offer to “touch” what you do. If you work in a closed beta-version, you have no product or anything to show — imagine how you can demonstrate the feeling of using your product. Give a feeling of your pro-user with the upgrade account. Work on creating a demo (great book “Pitch Anything” by Oren Klaff). You should know how to present your principal value, be a carrier of your culture, a demo carrier.
Talking about meditation, lately I have started doing small meditation sessions everywhere so that people could understand what it is, what these feelings are.
10. Be in California
To rise in the Valley, you should be in the Valley.
- HQ in SF
Development that is somewhere outside will work only for the first funding round. Development is expected to be in-house, in America. This defines quality of communication between a founder and a team, quality control, legality, etc. If you are a startup, whose team is always at hand, it raises your chances of success.
- “50 miles rule”
An unspoken rule which all funds stick to say: “If your headquarters are located more than 50 miles from our headquarters, you are not interesting for us to talk to”. Communication within the team as well as communication between the investor and the founder is very important.
- Personal network
Build your network where you want to be. During the first round, you establish business relationships that you can use in the next round. The network of your investors is kind of your network too. If you focus that on one territory it will be easier for you to attract money and a big client if you work b2b.
80 points out of 100 — a good chance to attract investments
100 points is the maximum that can be obtained once all the criteria are met. However, in reality, it’s almost impossible to achieve such a high grade. Grades higher than 50 are considered to be very good.
If your project has 80 points or higher, it has a very high earning potential in the Valley. If you have less than 50, update your team, traction, and accordingly, a final forecast, and only then think about moving to the Valley.
How to move to the USA with your own startup
If you have an idea of a startup or even a finalised project and you are sure that it will attract investments in the USA, the next stage is to get ready for the trip. To move to America with your own marketplace, consider these two options:
- Raise traction in Ukraine and submit an application in the business accelerator. During the 3-4 months in the accelerator, it is possible to get base training, obtain new knowledge about project promotion and contact investors.
- Suitcase — railroad station — the USA. Arrive to America and start from scratch. Bear in mind that adapting to a new country will take some time. There is the first transformation — 3 months, second one — half a year, and third — 10-11 months. You would have to move at your own expense.
There are several more unpredictable variants that depend on luck, not on personal calculations:
- The first variant — attract money on events
There are such stories. The founders arrived at a conference, pitched their startup, won a grant, found an investor. But their projects were likely to have 80-100 points; they were ready from the very beginning.
Most of the cases, it’s waste of time and money. It’s better to attend events and conferences as a speaker or if you have an appointment with your investors and partners.
- The second variant — search for “cold” investors via the network
In general, such angels are either looking for beneficial terms or “buying” a startup for a team.
A marketplace owner who wants to attract investments in America is highly not recommended to contact non-profile investors. The project should involve people who are interested in the niche and sphere you work at, and who have personal business interest directly in your company. Talking about Silicon Valley, there are a great number of investors, and finding those that you need is only a matter of time, efforts, and assiduity.
Preview photo: garagestock / Depositphotos.com
Header photo: Vacclav / Depositphotos.com
