Fundraising · Investments

A formula for seed funding?

Dimitry Rotstein Founder at Miranor

February 25th, 2016

Lately there have been a lot of similar discussions here about fundraising: When (or if)  to seek investment? Am I ready for investment? What makes the investors invest?

All these are basically the same question, and, no doubt, a hugely important one. So, after reading all the discussions, I've summed them up in the following list (adding anything else I could think of as well). Can you think of any other factor?

Now, I submit that if, after going through this list, you manage to get a total of 10 points or more (the more, the better), then you have a good chance of finding an investor. If you get less than 10, then keep working on your startup - you're not ready for an investment. For those who have ever done fundraising (successfully or not), try testing this hypothesis - calculate your score (at the time you were fundraising) and see if your score matches the actual outcome. Did you get 10+ points but you fundraising failed, or vice versa? In either case let me know.

 

Strong factors (+10 points each):

- "Shark founder" - founder who've made an 8-9-figure exit recently, and/or well connected on the highest levels, and/or a teenage progeny

- "Hockey stick" - huge and exponentially growing number of users (or, better yet, revenues)

- "Personal pain" - your startup can make something that certain investors sorely need, e.g. a cure from illness (for private investor), vital technology (for industry-based VC)

- "Personal favor" - the investor is a very close friend / family member

 

Medium factors (+4 points each):

- "Dream team" - your team is the right size (2-4 founders + advisers), with all the talent and experience you need to go to market (technical+business), and great interpersonal dynamics

- "Endorsement" - a reputable person/organization has vouched for you (including accelerators and incubators)

- "Strong business plan" - big and growing market + competitive advantage + validated business model + marketing strategy + exit strategy

- "Strong traction" - significant and growing user base, even if not exponential, preferably including paying customers (even if few)

- "Strong IP" - you have patents (or at least patent pending)

- "Copycatting opportunity" - your startup is based on (inspired by) a big recent success in another niche, segment, or location (e.g. Tinder for employers&employees, Uber for boats, Netflix in China... just some random examples)

 

Weak factors (+1 point each):

- Exceptionally brilliant idea (can't imagine one, but sure, why not)

- Having a working prototype (at least you got proof of concept)

- "TMM" (Too Much Money) - the investor doesn't care about money, in fact tries to get rid of it (e.g. so those rotten spoiled kids won't get it)

- "Jedi mind trick" - your power of persuasion is extraordinary, you could sell snow to Inuits

 

Negative factors (-5 points each):

- You are a "solopreneur" (a sole founder with no team)

- You've been fundraising in vane for more than 6 months, with no real progress on the startup

- There are some (though not critical) legal issues with your product/business (e.g. possible patent violation, disgruntled former co-founder, etc.)

Roger Rappoport Partner, Procopio

February 25th, 2016

Further to Dimitri's comments, take a look at my website http://accesssiliconvalley.net/ and view some of the video fireside chats with VCs, to get it "straight from the horses mounth" as to what investors are looking for. In particular, have a look at the fireside I did with Ann Miura-Ko last week. She is the co-founder of FLOODGATE, one of Silicon Valley's most sought after early stage investors (they invest $500K-$3MM), and are investors in Lyft, Chegg, Task Rabit, Twitter etc. Ann talks about what they are looking for, and, in particular, whether or not the company can become a "category king." There is also lots of other good information and insights for founders related to funding and fundraising, both from the founder's perspective, but also the investor's perspective.

It is very often difficult for a founder to view an investment and their company from any other perspective but their own. Investors are looking for investments where there is little or no risk and the potential for significant upside. Obviously this is a rarity, but it does frame the way in which the company should position itself for funding.

When I prepare clients to meet investors, we try to assess all of the risks that are associated with that particular company. The three key risks that you would want to address for an investor or our execution risks, technological risks, and sustainability. So if you have a being there done that team, the execution risk is mitigated. If you have already built the product the technological risks are also mitigated. However if you have outsourced your technological development then there is some technological risk, and you would try and mitigate that risk by pointing to your virtual technology team that will come on board once you receive funding.

I believe that if you try in view an investment in your company by viewing the investment from an investor's perspective rather than your own, you will be far better prepared and have a greater likelihood of achieving an investor meeting and ultimately funding.

Rob G

February 26th, 2016

Yes, for my second startup it's a match.  Also for my third.  

Carl Fricke Environmental engineering, water resources, cleantech, energy, venture capital, strategic planning, web apps

February 27th, 2016

Adding to Dimitry's list, one should strongly consider independent-minded and qualified people that can supply unvarnished, honest:
- help in defining and deploying the minimum viable product
- understanding of the particular competitive market and can quantitatively demonstrate (prove) what customers will buy (traction)
- opening doors, delivering strategic partners and/or initial paying customers to the table- the most important element in any business (which the company then needs lead and successfully execute to work on in order to close the deal)


Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

February 28th, 2016

This is excellent, well done Dimitry!

Dmitry Kroshka Marketing, Strategy, Partnerships

March 4th, 2016

I don't know if anyone picked up on this discussion, but this is actually pretty good. I'd argue that you need at least 15-18 points in today's market to get an A, plus some form of monthly recurring revenue. -D

Bryan Brewer Startup mentor, educator, and entrepreneur advisor; focus on helping companies raise investor funding.

March 2nd, 2016

Dimitry,

Your "formula for seed funding" makes a lot of sense. In fact, it covers many of the same elements in my free 20-question Minimum Fundable Company Test.

One comment about your formula -- I would include "Strong Traction" as a Strong Factor worth 10 points.

Nicely done.

Liza Taylor Communication Specialist at Keyideas Infotech

March 13th, 2016

Thank you for elaborating on the scenarios of seed funding, Dimitry. Seed funding is a myth in today's current scenario. Unlike 10 to 12 years ago, where VCs and Investors are chasing new ideas. No matter how good the idea is, every unicorn has existed through bootstrapping. The most common form of funding among tech entrepreneurs is via credit card, even though the interest rate is high. But the points that Dimitry has mentioned are important for entrepreneurs because it really means business and it's not just a lab for experiment. 

Dimitry Rotstein Founder at Miranor

March 14th, 2016

"...every unicorn has existed through bootstrapping"

Could you name a couple of such unicorns? Every hugely successful startup I know of has been extremely well funded, and pretty early too. Instagram had raised a $500K seed, $7M Round A, and $50M Round B before being acquired by Facebook. WhatsApp had raised a $250K seed, $7M Round A, and $50M Round B. YouTube raised $3.5M even before the official launch, and $8M more over the next few months. And so on.
In fact, according to statistics, startups are much better off on average if they raise venture capital (that may not necessarily be a causal factor, but the connection is undeniable). See some interesting figures in https://www.linkedin.com/pulse/investors-good-startups-dimitry-rotstein?trk=mp-author-card

In my understanding, the best way to succeed is to bootstrap yourself through MVP, product-market fit, initial revenues and business model validation stages, but then raise as much as you can for the growth stage, otherwise you're risking being overrun by the competition.

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May 17th, 2017

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