Is Your Startup VC Fundable? Ask Yourself These 3 Questions
VC funding comes with many implications to consider as a startup. But the main benefit? Gaining access to a boat load of money of course! More money than you could normally compile on your own, and the resources that come with that money.
And although it seems like a great time to be raising money, with unprecedented liquidity is flowing through VC funds right now, getting VCs to write you a check is still no easy task. Investors hear and receive hundreds, if not thousands, of startup pitches every year. In fact, according to Fundera, only 0.05% of startups end up raising outside funding from VCs.
So if you’re considering asking VCs for money, you want to make sure that you’re prepared and that your startup is actually VC fundable before you start firing out emails or walking into pitch meetings. So here are three questions to ask to determine if your startup is VC fundable.
1. Do you have a competitive or first-mover advantage?
Before facing investors, it’s important to understand how much of a competitive or first-move advantage your startup has. Will your company eventually be able to build a moat that is impenetrable? Or is your space saturated with carbon copy competitors who are all vying for their piece of market share pie?
Remember, seasoned VCs have probably seen it all. They’ll be thinking about whether a larger company with more money and resources can come along and steal your customer base. Or if a competitor can do what you do, only better and for cheaper.
They aren’t expecting zero competition of course, but they do expect you to think carefully about how well you can differentiate yourselves and execute if competition does pop up.
And if you’re doing something that’s never been done? Well, you just may have the first-mover advantage, which means that you can capture a bunch of market share quickly and retain it. Simply because you were there first and your products or services have found good product-market fit.
When answering these questions, think about how difficult it is to replicate what you’ve built. What barriers to entry are there? Do you have a significant and substantial lead in the market? Who do you see as your competitors right now and in the future?
2. Do you have a driven and inspired founding team?
A lot of the time, VCs aren’t actually investing in ideas, they are investing in people. More specifically, the founders of the company.
They want to see founders that are passionate, and not just because they want you to like your job. They want founders to be so obsessed with solving the problem your startup addresses that they’ll move heaven and earth to succeed.
They want to see you living and breathing your company. That’s why VCs typically don’t invest in startups when the founders are in college or working on it part-time. If they’re giving you their money, they want that sweat equity!
It’s not solely about work ethic, however. VCs want founders that have the emotional intelligence to run companies as well. Can you work well with others? Do you know how to delegate tasks and activities? Can you foster a thriving company culture? Can you perform and solve problems under stress?
There are probably tons of people who had ideas like Uber or Airbnb, but very few who could execute those ideas. As a startup founder, it’s possible you only meet VCs a few times before they decide to cut you a check, so you want to convey who you are as a person and show how you handle pressure as soon as possible.
3. Do you have revenue / is there a clear path to growth?
An analysis this year by Wing VC showed that 81%of startups that closed a seed round in 2020 were generating revenue, up from 73% in 2019. That means that it’s getting harder and harder for pre-revenue companies to raise funding.
It also means having some revenue greatly increases your chances of raising venture funding. So if you can, show some evidence that your product or service is powerful enough to make sales with scarce resources.In other words, be scrappy!
Regardless of whether you have revenue or are pre-revenue, startup founders also need to show a clear path to growth. The reality is that VCs are looking for 10-bagger returns, meaning if they invest $300,000, they’re hoping to make at least $3 million when all is said and done.
Why so much? Well, so many startups fail that investors need the success of one to make up for the failures of many.
It’s your job as a founder to clearly lay out in your pitch deck where the growth is coming from and how fast you can grow revenue and reach profitability.
These growth rates need to be fast and at a high clip because most VCs are seeking these returns in five to 10 years. You may also want to show investors what you can achieve on a conservative basis because investors will be questioning your revenue assumptions right away. They want to see a company that has a good outlook in a downside scenario and a fantastic outlook in a more bullish scenario.
A big part of the revenue and growth projections relates to the size of the market you’re going after. It’s important to understand that no matter how innovative your company is, it’s likely not investable if there is not a sizable market to purchase your products or services.
You may come up with a great company that solves a unique problem for a certain audience, but if only 100 people have this problem, your idea may still not make a lot of money and therefore is likely not VC fundable.
This doesn’t mean that you necessarily need tens of millions of customers. Especially if you have a product that sells at a super high price point. That’s why it’s important to evaluate and look at the dollar size of the market.
In some cases, the growth projections and market size may not be big enough for VC investors. In this scenario, it makes sense to take a closer look at your model and determine whether you can grow the company in other markets or pivot. If not, you may need to make the difficult decision of shutting down your company or going back to the drawing board to create value in some other way.
It’s not easy to raise venture funding for your startup, so it’s critical that you get extra prepared. Investors will have no problem finding the gaps in your startup thesis, and a better-prepared startup to replace you.
If you pay attention to the three questions on this list and can provide a solid answer for each, you’re certainly on the right path!