Many early founders are curious about how to successfully gain venture funding. There isn’t one signifier of success. What we’re after is proof of key ingredients or a signal that key ingredients are inevitable. I’m writing a five-part series of blog posts where I’ll unpack what venture capitalists are looking for when making early-stage investments.
Before you plot your pitch though, you need to know your startup is ready for venture capital.
Venture capital can be thought of as “acceleration capital.” As most know, “acceleration” is literally defined as “a change in velocity.” When applied to a startup thinking about pursuing funding, the keyword in that definition is “velocity,” which implies there is some trend in the business. While there are exceptions to this, which I’ll discuss later in this series, raising capital makes sense when there is some positive trend in a business that can be accelerated with additional capital.
Here are five signs that it’s time to raise money:
1) You have something repeatable — The “candy machine” works. You can expect a certain output (candy) according to some input (a quarter). You identified your customer persona and product messaging, which consistently leads to paid customers, and you’ve uncovered a repeatable sales motion. An important exception to this repeatability framework is startups that have high starting costs. For example, a new hardware business will require an upfront investment in testing and prototyping before it can begin acquiring customers.
2) You have a roadmap for the next set of milestones — Don’t raise capital without a plan for how to use it. Understanding your startup’s version of a candy machine corresponds with what your business will achieve with additional capital. Define what results you can expect as you invest this capital across your business. For example, you plan to hire three salespeople, which will enable you to forecast a potential increase in revenue and you can also map product milestones to business outcomes.
3) Your customer demand outstrips your ability to deliver — You have more inbound leads than you can reasonably qualify; or, executing the next stage in your product roadmap will unlock more revenue in existing accounts and advance current prospects to paying customers.
4) You understand your customers and why they love you — You should be able to articulate the value your customers receive when they use your product. If you think your product is delivering “X” but your customers actually value “Y”, you’re likely to invest in the wrong things with additional capital.
5) Your current set of customers are referring new customers — People’s favorite products are the ones they tell other people about. Venture capital can help extend your reach beyond organic referrals.
With a better sense of the right time to raise capital, we can explore some of the top criteria VC’s care about. Stay tuned and read the next post in my series to find out what VCs look for in early-stage investments.