What It Takes to Raise Money as a Pre-Revenue Startup

A few weeks back, I had the opportunity to chat with a group of entrepreneurs through the Global Good Fund on every startup founder’s favorite topic — What you need to know to get funding for your early-stage company. And while there was a lot in that discussion, which if you’re interested you can watch the session, there was one question that stuck with me.

It’s a question that every investor is always asked — “What does it take to raise money for my pre-revenue startup?” The thing that kept me thinking was not that there is no one correct answer, but that every investor has basically the same answer.

That answer is the same because there are only so many major variables that investors can evaluate, but each investor weighs and processes those variables differently. Every investor plugs these variables into their unique “head calculus” to evaluate whether or not they should invest in your company. The whole thought process led me to recognize that, just like in any algebraic equation, it’s about how those variables are weighted and multiplied to maximize their impact.

What follows are 5 important variables that investors use to evaluate in their unique calculus, insight into how I use them, and some advice for how you can swap and highlight them in your pitch to compensate for lack of revenue.

5. Plan

For any company, regardless if they are pre-revenue or not, I need to see a well thought out plan for how they intend to go from where they are today to an attractive exit in five to ten years. What this means is a clear understanding of the next 90 days, the requisite 12–18 month milestones, which can be anything from product launch to $1M ARR depending on the stage of the company, and a big vision for winning over the next 5–10 years. Finally, I always need to see a clear use of funds and how the capital raise gets you to your 12–18 month milestones.

4. Product

The probability of someone investing in a “back of the napkin” idea makes it virtually a myth. To seek investment, you need to have at least a prototype of the product to share. A prototype can be as simple as a clickable mockup built in Adobe XD or a crude, but functional, alpha. Having a prototype prior to raising capital demonstrates grittiness, commitment, passion, and validates that whatever customer feedback or market-demand you’re forecasting on is real. For pre-revenue companies, I also usually only invest in “deep technology.” For me, this means a proprietary technology that is protected through intellectual property, such as a new semiconductor, novel IDS/IDP software, or AI and a large proprietary dataset. The goal here is to have an intellectual moat that gives the company a 6–12 month lead on any competitors. In addition, your company and product needs to have a clear value proposition that demonstrates a “need to have.” A few common ones are doing something 10x faster or cheaper, generating a significant emotional reward, or solving a significant unsolved problem.

3. Traction

Typically, when investors say “traction” they really mean “what is your annual recurring revenue right now?” What they are looking for as an answer to this question is “what data you have that proves customers will pay for your product?” For pre-revenue companies, there are several other ways to demonstrate traction. Founders can validate customer demand via unpaid pilots, Letters of Intent, downloaded open source products, or free users on a beta. Even if you have none of the above, you can use demonstrated evidence from surveys and conversations that you have had with potential customers as a substitute. And I don’t mean 10 potential customers, I mean 100.

2. Market

Understanding the market for your company is critically important, because it helps me understand whether or not your company is “venture-backable.” A venture-backable company is one that can get big enough to generate an attractive return for investors. A good rule of thumb is that if everything goes right, and you win every potential customer, your company would do north of $100M in revenue per year. You can estimate the total annual revenue generated for your business by multiplying the number of potential customers by the purchase price of your product or service. In addition, the most appealing companies to investors will also be riding a “massive wave.” If the success of your company is built on a major paradigm shift or technological advancement, think of the shift to mobile, the advent of the internet, or, as time will tell, the restructuring of work environments, this becomes even more exciting.

1. Team

The most heavily weighted variable for pre-revenue startups is the team. I look for a few characteristics that get me confident about a company’s ability to succeed and overcome the inevitable challenges. A startup should have founders with deep domain expertise, think cybersecurity operators starting a cybersecurity company not direct-to-consumer cosmetics. Software and tech companies need strong tech talent. A track record of leadership roles, management experience, or an accelerated trajectory in their careers, are great signals of team strength, drive, and perseverance. Recognizable logos don’t hurt either, think FAANG, McKinsey, or HBS, which demonstrate that the founders have already been through several rounds of vetting. Multiple founders with skill sets across multiple business functions — sales, business, tech, product, marketing — demonstrates a well balanced team. And, whether correct or not, most investors including myself heavily weigh the value of entrepreneurs who were previously successful founders.

The Hard Truth

The truth is, it’s hard to raise money with revenue, and it’s even harder to raise money without revenue. These five variables are manipulated and weighed differently by every investor, but the goal for every venture capitalist and angel investor is the same — to generate a significant, typically 10x plus, return on each of their investments. The decision to pursue an investment is more likely to be favorable if you can check all of these boxes, or provide a compelling argument that increases the value of a particular variable to compensate for the lack of another.

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