ten capital network
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Standard Raises by Stage and
Milestones
When asked how much a startup is raising for investment, they often quote
their total raise for the life of the startup. They lean toward the big picture
and the total amount they think they will need. However, approaching a
raise this way can be overwhelming and oftentimes, may cause the founder
to lose focus on the goal.
The ideal way to approach raising for investment is by breaking the raise
into smaller rounds. By doing this, the founder no longer has to spend an
excess amount of time on the fundraise process.
There are some things to consider when breaking the raise into smaller
rounds. Below offers some guidance on how to break down a startup
fundraise into tranches, or what some call, rounds.
1. Family and Friends Funding
Amount: $10k to $100k
The purpose of family and friends funding is that it helps set up your legal
entity, intellectual property, and basic prototype.
2. Pre-seed
Amount: $250k
The Pre-seed raise is meant for the initial research and beta product
development.
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3. Seed
Amount: $500k to $750k
This raise is for building out the product and closing initial customers.
4. Seed +
Amount: $500k to $750k
The purpose of the Seed + round is growing the sales and establishing
repeatable sales and marketing processes.
5. Series A
Amount: $1.5M to $3M
This raise should focus on growing your sales past $1M annual revenue.
6. Series B
Amount: $5M to $15M
The Series B raise is for growing your sales past $3M annual revenue.
One thing to remember is that if you raise too much money, too early in
the life of your startup, you will find yourself giving away too much equity.
In order to avoid giving up too much equity, it’s important to raise in
stages.
Milestones
Much like breaking a raise into rounds, it’s important to understand the
milestones to focus on during those rounds.
Milestones are typically broken out as follows:
1. $250k
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Here, you should be focused on the initial product and getting the business
off the ground.
2. $500k
Work on finishing the product and start engaging your customer base.
3. Another $500k
During this round, you should work to fill out the team and solidify your
business.
4. $1M to $3M
Your milestone here should be to grow the revenue.
Setting your milestones allows you to break down the progression of your
startup into, smaller, more manageable pieces. Additionally, reaching each
milestone can be seen as an accomplishment to propel you forward.
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Many investors tend to believe that if the company just had revenue then
the risk would be gone. However, this isn’t true; risks still remain even after
the company begins to generate revenue. Once the startup achieves
revenue, the next stage of risk comes up and that is:
Will they be able to grow that revenue?
There’s a risk for the investor at each stage of startup funding and this is
something all investors need to keep in mind. When one risk is removed,
another takes its place.
Let’s take a look at some of those common risks that arise at each stage:
1. Seed Stage
The main question at this stage is, can you sell the product?
2. Series A Stage
Here the risk tends to revolve around growth. Can you grow the product
revenue?
3. Series B Stage
This is when scaling comes into play. Can you scale the product revenue?
4. Series C/D Stage
If the company has reached this stage then you have to ask, can you
become a market leader?
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Each stage will put one risk to bed and then lead to another. When
investing, the old risk is always replaced with a new risk.
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Raising Money from Family and
Friends Raising money from family and friends is usually the first raise for any new
startup. However, some entrepreneurs are often reluctant to take money
from those closest to them because, in the back of the entrepreneur’s mind,
there is one big worry:
What if things don’t work out?
It’s a legitimate concern to have. Asking our family and friends for money
isn’t always the easiest thing to do. Not to mention, it can be particularly
hard when asking for a larger sum.
On the other hand, investors view funding from family and friends as an
indicator of support. After all, if your family and friends don’t believe in you,
why should the investor?
Keep in mind that it is natural for those closest to us to want to help us. If
they are not in a position to provide that help, that’s okay, just keep the
conversation open and honest. Here is how to approach your raise when
you are seeking funding from family and friends:
1. Ask for no more than $5k per person.
2. Tell those you’ve asked for the funding that it’s a donation and no
one is getting paid back.
Remember that most family and friends funding comes from those who
want to support you and don’t look for a return. By approaching the
funding as a donation, this also alleviates the challenge of valuing the
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business at such an early stage. If the business does succeed, and you want
to give back, consider doing so by offering $5k for one of their projects.
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In startup funding, you’ll typically raise funding in stages.
The first stage is the Seed stage. You’ll raise during this stage when you
have developed the product to some level and have something tangible.
During this stage, you’ll also potentially have some users/customers.
During the Seed stage, startups usually raise $500k to $750k for this round.
When you are fundraising at the Seed stage, try not to raise more than
$750k if possible. Doing so means you’ll be giving up too much equity
which can be harmful to your business in the long run. The reason startups
end up giving away too much equity during this stage is due to the low
valuation.
The next raise you’ll be focusing on is the Series A raise. You’ll move to this
stage when you have an annual revenue run rate of $500k or more.
During the Series A raise, you can safely raise $1.5M to $2M. Keep in mind
that you can raise more if your growth rate justifies it.
If you find your startup has raised a Seed round but is not quite ready for a
Series A, then you may want to consider a Seed+ round. A Seed+ round is
essentially another raise at the Seed level, usually with the same terms.
The key point to remember here is that each round of fundraising brings
dilution. Do not forget that too much fundraising will become a problem
later because of this dilution.
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When it comes to funding your startup, the challenge for each round of the
raise is different.
1. The Seed round
The challenge during this round is to convince the investor you can sell the
product.
At this stage, investors look for evidence that you can build and sell the
product to customers. This means customer interactions are important at
this stage because it demonstrates to investors that you are already
invested in learning about the customers’ needs.
During a Seed round, it is helpful to have a list of at least 20 customers. Be
sure to highlight your interactions with them and show your plan to build
the product and close on additional customers.
2. The Series A round
During this round you must convince the investor you can grow the
business.
At this stage, investors look for evidence that you have systems in place for
growing the sales and building products. They look for processes that
create a repeatable, predictable outcome. A good example of this would be
your customer acquisition process showing a consistent conversion rate.
3. The Series B round
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This is the time when you must convince the investor you can scale the
business.
During a Series B round, investors want to see that you are now working on
programs and processes that take your customer acquisition, sales, and
product building to a new level.
Keep these challenges in mind when seeking funding. If you know what the
investors are looking for, you’ll be better prepared to show them that your
startup is worth the investment.
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In determining your raise amount make sure you are considering your
business needs for the next 18-24 months. Focus on this 18-24 month
window rather than the entire life of the company.
Your goal is to simply raise enough to accomplish the goals for that
timeframe.
1. Consider any revenue you currently have coming in and by how much
it will grow.
2. Estimate the amount of money you will burn through each month.
This is an important estimate so that you know how much runway
funding will buy you.
3. Set an ideal raise amount and a fallback plan in case the fundraise
comes up short of the ideal.
Keep in mind, for every $1M of funding you need, it will take you one
calendar year to raise it.
Based on the information above, you can determine how much you need to
raise and when you should start the campaign.
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Fundraise Triggers and When
You Should Raise
When launching a startup, there are key indicators that can signal when it is
time to start a fundraise campaign.
These common triggers include:
1. Closing a lighthouse customer account or achieving a revenue target.
2. Signing up a new team member or advisor.
3. Finishing a beta version of your software or an MVP version of your
product.
4. Closing funding from a lead investor.
In short, investors look at 4 core areas of progress. These 4 areas are:
Sales
Team
Product
Fundraise
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When you achieve a milestone in one or more of these areas then it should
be a trigger to consider launching a fundraise campaign.
When approaching an investor you should have a milestone completed
AND a milestone to accomplish with the funds to be raised.
Oftentimes, startups find it difficult to figure out when they should raise.
There is a strategy to consider when raising and raising at the proper time
could mean the key to success.
When thinking about when to raise, there are funding requirements to keep
in mind.
1. Make sure to calculate your cash burn and estimate the need for new
cash.
2. Keep in mind that preparation and timing issues will come into play.
Start your preparation 6 months in front of the launch.
3. Launch your fundraise six months before you need the funding.
4. Use the six months of preparation time to introduce the deal to
investors and educate them on your current status.
5. Seasons should be taken into consideration. Try not to start a raise
during early June. If possible, wait until late August to kick off a
campaign.
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Market validation is determining whether or not the product your startup is
offering is of interest in a given target market.
Product validation involves speaking with people in your target market.
Generally, this should take place before any significant investment into your
concept is made.
Product and market validation is important because you want to know if
the product works and if someone will buy it.
Investors look for evidence of this validation before moving into further
diligence, so it’s important to show this in your pitch.
If you are looking to provide evidence to investors, beta users are a great
way to show the product works. Beta users are also great because it shows
that there is customer interest. In many cases, the product is a website
providing some value in the form of data storage or analysis.
The chances that you will get the product up and running are fairly high.
Getting the product out there isn’t the most difficult part of a startup’s
journey. However, knowing if someone will use your product is another
story. More importantly, the bigger question becomes, will they pay for it?
Customers who pre-pay for your product are a great group to have in your
corner. These types of customers are appealing to investors and they also
check the market validation box. Pre-paying customers demonstrate that
you are solving a real problem.
If you don’t have anyone paying for your product, then you’ll need to look
toward your pipeline metrics showing the number of:
Downloads
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Trials
Pilot programs
While this is not the same as a paying customer, it does give a leading
indicator that the customer will most likely buy what you are offering. It’s
also helpful to show the funnel prospects go through when engaging your
product. This includes lead generation, qualification, closing, trials, pilot
tests, and signed customers.
Investors look for a consistent signup percentage on the leads going
through your program. While the absolute number of signups may not be
high, the repeatability of your model can be a compelling piece of the
puzzle to an investor.
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The 10x rule is, perhaps, one of the most important rules for startups to
master and has the potential to spell a major win for your raise. The rule is
simple:
For startups to displace an incumbent, the offer needs to be 10x better
than the current alternatives.
Too often, startups go to market promising their customer an ROI of 10, 20,
or 30% better. The problem is, that’s not enough to win over customers
from an established player. Established players in the game have the
advantage simply because your startup is an unknown quantity. This means
that you have to make a compelling and enticing offer if you want a shot at
going up against the established players. This is where the 10x rule comes
into play.
A 10x improvement comes through cost reduction and increased
productivity.
Here’s an example:
If a startup launches a product that is 5x cheaper and provides 5x more
value, then that startup is offering a 10x improvement.
If your business is struggling, then you need to ask yourself:
How is my offer 10x better than the competition?
If you are unable to come up with an answer to this question, then it is
possible this inability to answer may be part of the challenge you have in
closing customers.
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In order to come up with an answer to the question, imagine that your
product is 5x cheaper and 5x better than the competition. What does the
product look like and what is the price?
Spend a little time imagining the above and you’ll soon have a vision of
what to build and how to price it.
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The first vision of a business usually seems pretty clear. It might even seem
grand. Then something happens... All of the sudden, upon launching the
business you find it doesn’t exactly fit with the market. Maybe it wasn’t as
clear as you originally thought, or maybe it isn’t as grand as you had hoped,
so you pivot.
It takes 3 pivots to get to the growth phase of your startup.
The first is the Target Market Pivot. This is when you find the right market.
The next pivot comes when you have to change your business model to fit
the economics of that new market. This is the Business-Model Pivot in
which you find the right way to structure your business.
Last is the Team Pivot. This final pivot entails finding the right people to
grow and run the new business model.
The originally envisioned business almost never is the one that takes you all
the way to a growth stage. And that’s okay because you’re only 3 pivots
away from that growth stage.
It’s easy for entrepreneurs to entangle themselves in the idea behind their
business. They may even become obsessed with it. More often than not,
this idea is placed on a pedestal and it becomes the one idea to end all
ideas. And why not? A person wouldn’t dream of putting the effort into
starting a business propped up on a bad idea. It is not uncommon for these
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entrepreneurs to believe that investors will write them a check based on
their idea alone. After all, it’s a great idea.
There is no denying that many entrepreneurs have great ideas. However
the thing to remember is:
No matter how great your idea is, standard startup metrics apply.
New technologies have the power to capture the imagination and lead to
even bigger ideas. We often look at technology as a way to change the
world and shape the future. We saw this happen in 2017 when blockchain
took the world by storm. Blockchain was responsible for sending startups
through a hyper funding phase. However, what we shouldn’t forget about
blockchain is that this phase only lasted for a short time. This is when those
standard startup metrics really come into play.
Standard startup metrics means:
1. You have a platform set up with users on it and line of sight to
revenue.
2. You have market validation and product validation – the user likes the
product and will pay for it at some point.
3. You, too, may be excited about your idea, product, team, or more but
don’t forget the metrics.
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About TEN Capital
TEN Capital Network provides funding as a service to companies
anywhere raising venture capital. Its network of over 11000
accredited investors represents venture capital, angels, family
offices, and high networth individuals.
©2020 TEN Capital Network
www.tencapital.group