As an investor myself -- I have written checks to seven startups, three of which were sold for over $2 billion -- here's what it takes to win my money: a great CEO with demonstrated brainpower, original thinking, the ability to seize opportunities and attract world-class talent, and a business idea that satisfies an unmet customer need in a way that rivals can't easily copy.
Here are a a few tips to help you think like an investor.
Show that your company's getting traction.
If a venture capitalist has profited from investing in you in the past, it's much easier to raise money than if you are a first-time entrepreneur -- or one who has never sold or taken your startup public. "If you are a first-time entrepreneur you have to beg, borrow, or steal to get seed stage investors," says Paul Martino, a founder of San Francisco-based Bullpen Capital a provider of post seed stage financing. "They will invest if you can demonstrate that you are getting traction."
Keith Figlioli, a General Partner of Boston-based LRV Health, who before getting into the venture capital world helped Premier, a healthcare informatics company, go from $800 million to $1.5 billion in revenue before raising an IPO -- looks for companies that can grow what he calls "high quality" revenue. As he said, "Not all revenue is good. Unless there is a good product/market fit, the revenue could be episodic. I want sustainable, recurring revenue per member per month."
Know how much capital you want to raise.
Martino tells founders to seek different sources of capital depending on how much they are trying to raise. As he said, "If you are seeking to raise under $500,000, go to friends and family, under $3 million try to raise money from seed capital providers, for the next $5 million go to Series A investors. We are the third round -- and we look for companies generating $100,000 a month in revenue with five people who are trying to get to $5 million in revenue with 50 people."
Figlioli also believes that in general companies should vary the source of capital by revenue tier. As he said, "If your revenues are under $5 million, seek out individual investors, angels, accelerators and early-stage venture capital funds. Between $5 million and $20 million, you are past the product/market fit stage and have a line of sight to profitability, seek early growth private equity. Between $20 million and $100 million try private equity or growth equity."
Figlioli's way of thinking parallels my four stages of startup scalng: in a startup's journey from idea to building a large company. The takeaways of Figlioli's comments have specific implications for each scaling stage, as follows:
- Winning the first customer -- which requires a company to fit its product's features to benefits for which a customer is willing to pay. At this stage seek money from friends and family because venture capitalists are unlikely to invest and might overwhelm the founders if they did.
- Building a scalable business model -- designing business processes that will make the company's costs drop and value to the customer rise as it grows. Venture capitalists will invest here if the startup has a large base of paying customers, kept them buying over time, added new customers, and is boosting selling efficiency as the company grows.
- Sprinting to liquidity -- rapidly expanding the company until investors achieve liquidity through an acquisition or IPO. Venture capitalists and institutional investors like to invest in a startup if its revenue is likely to reach $100 million, a common benchmark for going public; and
- Running the marathon -- growing the company after the IPO so it is big enough to change the world. Once a company goes public, its CEO must continue to beat expectations and raise guidance each quarter while investing in new growth opportunities.
Martino sets a high bar for raising startup capital. "We look for companies that are growing 3-fold per year, have a customer churn rate below 10 percent a year, add revenues from existing customers at 20 percent to 40 percent per year, and don't make the mistake of hiring the wrong sales people. Hiring three wrong sales people can reduce your annual growth rate from 3x to 2x."
Figlioli often finds that founders struggle to scale their companies. As he said, "Product-centric founders are often not good at scaling. They are good at building products but in the transition from stage one to stage two, we often see a shifting of the management team. In stage two and beyond, we see a need for a strong governance structure. Sometimes a product-centric founder can remain as CEO if he or she hires a chief operating officer who does the basic blocking and tackling."
The key takeaway from these interviews is that each investor has a different perspective on what an entrepreneur needs to do to raise capital. You need to know the investor's background and investment criteria and tailor your pitch for capital based on that knowledge