How to raise seed funding for a VR startup
Six tips to get to a term sheet with your frontier tech
I’ve been thinking a lot about VR startups and fundraising recently. So I was pleased to stumble across this great talk from Eric Romo, CEO of AltspaceVR about this very topic. I’m actively looking to speak with more founders working in VR, so I thought I’d take the time to summarize the key points to help organize my thoughts. A lot of the advice is equally useful for any founder of a new startup in any of the ‘frontier’ tech categories, whether that’s VR, augmented reality, drones etc.
I’d love to hear from any founders or investors with additional thoughts on this topic. Reach out via Twitter @haynes_dave
Here are Eric’s six main tips.
1. Tech Is Not Enough. You’ve Got To Solve A Problem
It’s a classic scenario and one that happens surprisingly often. A founder or a team stumbles upon some cool technological solution and wields it around looking for a problem. In VR, you have the novelty factor too. Some entrepreneurs jump into the space because they know that ‘VR is going to be big’ and it’s an exciting medium to be working in. You shouldn’t be building a VR startup just because you like working with VR. Never leave this impression with investors (and certainly don’t delude yourself).
You are building a company that is tackling a particular problem for a particular industry, or set of people, and just happen to be using VR to help do that.
There needs to be a real pain point and you need to explain why VR is the enabling tool that makes it go away. Saying that you are a ‘VR company’ is a misnomer. Rather, you’re an education company, a communications company, a games company, a media company. You are using a new technology to solve a problem in a way that wasn’t possible (or is 10x better) than before. Many industries are begging to be disrupted. VR is just the tool to do it. So, first piece of advice… start your pitch with the pain you’re solving.
2. Your Demo Needs To Be Amazing
Now you’ve described the problem, you’re going to need to elaborate on the solution. And there’s simply no good way of describing a VR product without actually showing it. Fancy graphics on a pitch deck or even a detailed video is going to do your product enough justice.
Your demo is your pitch.
And the bar has already been set by your peers who have already raised money, so you really need to blow people away. Your friends and family are probably going to tell you it’s awesome and investors will feel the initial thrill. But you’ll need to find people and advisors who are going to be honest with you and be good critics.
But wait… if your demo is your pitch, then why do you need a deck? Well, this is to show somebody that you truly understand all the moving parts of your business. And more importantly, that you’ve got what it takes to compel people to your vision. That will eventually include employees, customers and partners, not just other investors.
3. Don’t Waste Time On Your Market Slide
Okay, so things are going well. You’ve shown you’re addressing a real need and you’ve got the chops to build a product that meets it. Now you’ve got to convince your investor that your market is going to be big enough to make you a valuable company.
I’ve seen enough Market slides to know that anyone can make their industry sound big. And it’s usually bullsh*t. Getting a read on market size for early-stage startups is usually instinctual. The more disruptive your business, the more this is true. You can find data and triangulate towards something meaningful, but usually an investor just wants to see your thinking around how the market is moving, does it feel large and which part do you plan to address, both now and then later.
With the VR market, if you’re spending a lot of time predicting exactly how big it’s going to be in 3–5 years time then you’re wasting your time.
Nobody knows future market size. Oculus doesn’t know. Samsung doesn’t know. No one knows. You can use proxies, and you should be able to talk a good game, but modelling more precise numbers at this stage is likely not the best use of your time. In fact this battle is probably won or lost before you even come into the room to pitch. An investor will most likely already have a thesis on whether they believe VR will be big or not. In fact, if they like the space then they probably have religion about it. If they’re bearish, or want to wait 18 months to see how things play out, then you’re wasting your time trying to convince them otherwise. Fancy graphs and a bunch of extrapolated data points and top-down calculations aren’t going to help.
Spend your time figuring out a solid narrative on how you’re going to survive if the market goes slowly. If there’s only 1m units out in the market, if customer response is underwhelming and distribution remains tough, then how are you going to survive? It’s easy to talk about the upside. But you need to plan as if it’s not going to be big as quickly as you’d like.
4. Focus on validation not traction
That brings us to traction. Investors, especially in Europe, like to see signs of traction before they invest. Well, the bad news is that there is no traction in this space (yet). It’s not possible to have traction. The only wind in your sails right now is hype, whether justified or not. The reality is that a decent mobile app has more downloads in a few weeks than all the apps currently do in the history of the VR universe.
So in that context it’s difficult for you to be credible in showing real traction. You can’t use the traditional metrics, so saying you have ‘x’ thousand users is just noise. What you can spend your time on instead is showing what your hypotheses are and what you’ve done to test them. Run experiments to see if you’re getting pick-up from users.
You need to be able to show data that foretells product-market fit.
Then you can use this data to, for example, extrapolate how well something might do once we go from 1m to 10m units in the marketplace.
5. Show Resourcefulness and Team Strength
With all this in mind, the next thing you can do to put yourself ahead of the pack is show a track record of getting things done and on low resources. What have you done over the last year to show that you can execute? Demonstrate that you can ship things and with a high number of constraints and barriers.
To have done that you probably have great people working with you. So this is your time to shine. If you can demonstrate a world-class team, you not only build belief that you can execute on what you say you’re going to, but you also show inherent value in the business. VR is a cutting edge field, so the likelihood that you have team members that are smarter than most others in this field should be higher than in other more established markets. No-one wants to see companies end in an acqui-hire, but an investor will see this as a potential outcome which minimizes the risk of their investment simply going up in smoke.
6. Take the money.
VR is hot right now. And the fundraising landscape is getting tougher. So, if you’re out raising with a particular amount in mind, be prepared for people to offer you more. Of course valuations will only go so high, so that might mean taking extra dilution as a founder. So what should you do? Eric Romo’s advice is to take the money.
If you can use the money both meaningfully and responsibly then you should take all the money you can get and put it to work well.
There’s obviously a limit, but don’t be obsessed with dilution. You’re likely to be racing with others to be first to market and the future fundraising climate is unpredictable right now. Make sure you’ve got all the rocket fuel that you can take on board. There have been more companies that have failed because they ran out of cash than because their founders got disenchanted from not owning as much equity of the company anymore.
And if you’re lucky enough to get term sheets on the table then get the deal done as quickly as you can, and with the best possible people around the table. Time spent getting too fancy on deal terms is time spent not building your product and it’s not adding underlying value for your company. So when you get to the deal stage, get it done, move on and good luck. You’re going to have an amazing ride. These are exciting times.