The global economic crisis has changed the lives of startups. The current crisis is unique. Its beneficiaries turned out to be digital companies, which have expanded the online activities of consumers. The booming industry is streaming, online education, delivery, and other contactless solutions. For example, the Chinese educational platform Yuanfudao raised more than $1 billion during the crisis. It should have happened at a time when millions of schoolchildren were on distance learning.
As the founders of the startup Costless, we decided it was time to share our experience in getting venture capital investments.
In this article, we will tell you about all the life hacks when communicating with venture capitalists.
What is venture capital?
Venture capital is money to start a business from scratch. The venture capital firm invests in the company in the early stages and provides capital for its development.
Startups want to get venture investment. Because the venture is one of the few options for raising funds. Alternatives are crowdfunding and ICO. Crowdfunding uses for hardware products, ICO - for financing startups based on the blockchain. These scenarios also have risks, and the risks are enormous.
In return for the cash investment, the venture investor receives a stake in the funded company.
The goal is to get out of the company by selling his stake while making a significant profit. The ideal option for an investor is the company's IPO, but this is difficult. Also, they can sell their share to another investor for a higher price.
Venture capital is risky. The return on investment will have to wait 3-5 years, sometimes longer. However, with a good choice of companies for financing, the income will be significant, which is why investors are investing in such high-risk assets.
Capital flows to venture capital funds from its limited partners. General partners (firm managers) traditionally invest in their funds to demonstrate their interest in the "game" by aligning interests between general partners and limited partners.
As the venture capital market has become tighter, venture capitalists often compete to allocate funds in funding rounds. Many investors try to differentiate themselves by offering a set of services, often targeted to a specific group of companies, that they use to justify obtaining significant stakes in their portfolio companies. Venture investors can sit on the board of directors of the companies in which they invest. In theory, this should give them additional rights to manage and control their portfolio companies. Still, the rise of tiered voting share structures (usually in favor of the founders) and the recent tendency to cede power to the founders may mean that VCs have less energy than the recent past.
Most investment funds operate in the homeland of venture capital investments - the United States. About 1000 venture capital funds are working here. The most famous are Andersen Horowitz, Sequoia Capital, and Accel Partners.
Criteria for venture capital investment
As startup founders, we identified 10 criteria for venture capital investment over the years of communication with investors. Any startup owner can check their project and find vulnerabilities and fix it.
1. Market size
Venture investors expect that you create a product according to the current market needs and that it will be in demand and make a profit accordingly. You must understand the market and the needs of your target audience.
The startup unit economy builds on the number of potential users. It is the leading indicator of the existence of the market.
If your market has less than 10-20 million users, the investor probably won't be interested.
2. Hot niche
More often than not, hot startups get venture capital. Focus on hot startups. For example, it can be an on-demand economy or a sharing economy startup.
E-commerce startups or startups that partially duplicate existing products are not of interest to venture investors. It is already a proven market with precise numbers and many competitors.
3. Star team
Being passionate about your project idea is good, but not enough. It is important for venture capitalists that your team includes specialists with degrees from the best universities in the world.
You can mention that you were consulted by a successful founder who sold his startup for several million. It will give you an edge over others.
There is a diversity trend in the States right now. If one of the founders is female, you have an advantage too.
4. Full commitment
Investors expect full participation from startups: 20 hours a day, 7 days a week. Temporary employment is not an option.
5. Own money invested
As a rule, the start-up capital for startups is the personal money of the founders. It could be money they saved from a previous company, collateral from a bank, or an FFF.
Venture capitalists expect you to invest your money. You have to spend it on development, either design or marketing—minimum 10 thousand dollars.
Investors must be sure that you believe in the success of your project and are ready to invest all your efforts and money in it. If you haven't invested your own money, how can you even ask for money from others?
6. Financial forecast
CAC and LTV
It includes understanding the cost of attracting a client to a project - customer acquisition cost (CAC) and calculating how much the user will bring income to the business. In the USA, the cost of attracting one B2B client is about 2-5 thousand dollars, and the average American B2C mobile user will cost 30-40 dollars. These are rough figures that vary by industry and competition.
You have to show calculations of revenue and marketing budget for the next couple of years. Longer-term forecasts are inappropriate because the company changes strategies, the market and conditions change. But you need to know when the money runs out, and new ones are required.
Breakeven point. The moment when company revenues converge with expenses at the 0 marks. Venture capitalists want you to break even as early as possible. You can accelerate the process by reducing the costs of the company and the founder in particular.
7. Growth rates
Growth of user base
Project growth indicators that the CEO is ready to present to investors. The standard figure for weekly user growth for the United States is at least 5-7%.
Suppose your project was launched a month ago and shows unrealistic growth rates. Let you have 10-20-30-40-50 thousand users there, but they appeared in a month - your growth is going up. This phenomenon is called the "hockey stick" and is very popular among investors.
Technological breakthrough (speed, AI, robots)
Technological breakthrough. If you have the hardware, Internet of Things, AI (Artificial Intelligence), video download speed, or live stream technology, but you don’t know how to develop your project, make a bet on selling this technology to some big company. You can successfully launch a Kickstarter campaign and show its results. If the drive is successful, it will indicate that the buyer needs the product and have a good PR team.
If you don't make a profit yet and don't sell anything but only sign clients, and you will earn in a year, then your chances will tend to zero. The money, first of all, will be received by those start-up founders who will already have a certain amount of sales.
If we talk about b2c startups, then you should have from 1 to 10 thousand transactions - the minimum that will look at at the early stage. Considering that you have a good user base, 100 thousand users per month, and one of them pays you - 10 thousand per month. If you have a non-transactional business model, then substitute it by analogy for these indicators.
9. Legal documentation
Your startup must be legally registered by the standards of international law or the country you are a resident.
You'd better have an in-house lawyer who will accompany your startup throughout every stage of your venture capital fundraising.
10. Inspirational pitch
Financial performance and mathematical miscalculations are good, but all of this does not make sense if you cannot infect investors with your idea.
A good founder must have charisma. You must be able to communicate your startup in an exciting and inspiring way.
The best way to convince you of the benefits of your product is to visualize it.
Before getting a venture capital investment, prepare an MVP that demonstrates the viability of your idea.
According to DocSend, successful early-stage startups, on average, in the process of attracting around:
contacting 58 investors;
hold 40 meetings with them;
all this within 12.5 weeks (a little over three months);
to show a 19-slide presentation;
spend 3:44 minutes of investor time watching the presentation;
attract $ 1.3 million in investments.
How to communicate with an investor?
It is difficult to find an unambiguous answer to the question. There are many articles on this topic on the Internet. You should study all the materials and look for forums where startups share their experience.
At Sannacode, we have developed the following scenario for communicating with investors:
Rely on data in your investment thesis. It can be a market, world experience, patterns in related industries. It is independent data that will allow you to validate a hypothesis.
Logic versus experience. It's simple - you don't have enough experience because of your age, but the main thing is not to act successfully but to act logically and correctly. Try to use common sense to compensate for your lack of experience.
You can compensate for your lack of experience by bringing mentors, advisors, or independent board members to your project. It is not necessary to involve for the sake of the photo in the presentation, but an experienced mentor can often help a lot.
A simple piece of advice when communicating with investors - it is better to start communication with those who are lower in your wish list, with whom you do not want to deal so much. The basic questions and atmosphere are about the same, but you will be able to work out the process and avoid trembling in the knees.
The cold letter strategy works if it's well written. Look for warm intros/contacts. It is the best way. You can start by looking at your potential investor on Facebook or Linkedin and asking them to introduce you.
Investment materials needed for fundraising
Typically, the list of basic materials for attracting venture capital includes:
teaser or landing page - brief information on the project to check the primary interest;
presentation - you can make a shorter presentation (elevator pitch, which can be shown on the move or, literally, "in the elevator") and an investment memorandum that discloses all the components of the investment proposal;
the financial model is a business forecast for 3-5 years;
a description of the technology stack - sometimes this is not required, but the presence of a technical report will add positive points to you;
CCC - Clients, customers, contracts. You must be able to connect the investor with your clients and users and prove agreements.
The quality of investment materials is very important! Think about it, if you can't make a quality presentation that will interest the investor, then why can you make quality marketing materials that will affect your client or a sticky and user-friendly mobile app?
Typical investment presentation structure
The structure of an investment presentation, as a rule, has a typical format. It is not a problem for startups. You can stand out in something else. It's just that it is more convenient to run your eyes along with the familiar structure for a little more than three minutes.
We recommend breaking your presentation into 10 slides:
the purpose of the company
You can add to this list more slides:
strategy and development plan
use of funds
equity story (how an investor can exit the project, the potential for an IPO or strategic sale can be described)
You can also check out a template for a presentation by structure in Y Combinator. They have a template for a startup presentation.
You can start learning from Y Combinator materials.
Startup School is a free school for startup founders, where founders are trained with accelerator trackers and mentors. Must have for those who are just starting their own business;
Startup School for Future Founders - if you are just thinking about starting;
YC Series A Guide - A startup's guide to attracting Round A. Don't worry, most of the recommendations work for other stages as well, including the seed stage.
For example, you can look at the schedule of the process of attracting round A. In short, you need to lay about 12 months for preparation and from one to six months for raising the round. Somewhere in the middle are the three months that Docsend highlights in its research.
If you have a brilliant startup idea, we can help you implement it. Sannacode specializes in developing vending MVPs to help you attract venture capital investments.
Leave a request on the website and get a free consultation on your project.