Business leaders have a rare opportunity to raise capital these days. That's because there has never been so much money chasing after a relatively small number of companies that have what it takes to multiply a venture capital investment 10-fold or more.
The amount of capital seeking to invest in these startups is exceptional. How so? PitchBook reports that in 2021 U.S. startups raised $330 billion -- nearly 100 percent more than in 2020. What's more, this month some 900 startups were valued at over $1 billion.
I've lost the battle to invest in such companies. Before Fitbit went public in June 2015, I asked one of the co-founders -- in whose previous company I had lost my investment -- whether I could buy pre-IPO shares in Fitbit. The answer? "No, you are not important enough."
These days, it is even harder to be important enough. As the New York Times reported, investors are conducting intensive research on a startup's customers, competitors, and technology in an effort to prove that their capital is the most important.
One startup that has been on the receiving end of this ardor is Hinge Health, a provider of online physical therapy programs, which in the past year or so has raised a whopping $900 million -- $300 million in early 2021 and another $600 million last October.
Co-founder Daniel Perez received over 20 reverse pitches from investment firms, which included dozens of its customers and data on its competitors. One investment firm even hired a basketball star whom Perez admired to make its investment pitch.
With interest rates rising, the Nasdaq plunging, and special purpose acquisition companies (SPACs) mergers trading way below their initial prices, I do not think this feeding frenzy is sustainable.
But if you are a business leader who is struggling to raise capital, you could save precious time if your startup had the characteristics of Hinge and its peers that can raise hundreds of millions of dollars without too much effort.
With the caveat that it is hard to pivot much from your current strategy, here are four things that will make investors fight to write you checks.
1. Aim at a huge, fast-growing market.
If you are targeting a market with total revenues below $1 billion, you are almost certainly going to get the cold shoulder from investors unless that market is growing very rapidly and will soon top that level.
You'd be better off targeting a larger market. That's what Tel Aviv-based Wiz, an Israeli cloud security startup launched by Microsoft veterans, has done. As I wrote last October, with $610 million in four rounds since it was founded, Wiz's valuation soared 11,000 percent from $500 million to $6 billion between December 2020 and October 2021.
Wiz passes this first test -- it targets the $18 billion cloud security market that is growing at 26 percent a year.
If your startup is targeting a smaller or slower-growing market, consider whether you could target your company's offering at one with the heft and growth of cloud security.
2. Provide a much better product than rivals do.
Investors clamor for companies whose product customers prefer to those of rivals. I am guessing that those reverse pitch decks that Perez received contained summaries of interviews with happy customers.
Wiz wows its customers by getting its cloud security product up and running much more quickly than that of its leading rival. As CEO Assaf Rappaport told me, Wiz won a Fortune 5 customer, because unlike the incumbent, who had only gotten 10 to 15 percent deployment of its product after 24 months, Wiz achieved 100 percent deployment four weeks after it started.
If your customers benefit from such compelling reasons to switch from rivals, you pass the second test. If not, you need to retool your product until customers are craving to buy it.
3. Grow revenue at least 100 percent a year.
Happy customers are critical -- but investors salivate the most for mind-blowingly fast revenue growth.
Wiz is a case in point. Index Ventures, which invested in the company's $100 million Series A round in December 2020, says it took Wiz less than six months to reach $2 million in annual revenue -- way better than the 35- to 40-month pace of the average startup.
If your company is growing at this pace, you will have no problem attracting capital. If your revenue is growing more slowly than that, you should investigate why and take action. Here are some questions to consider:
- Is your target market growing too slowly?
- Do you struggle to persuade customers to buy your product?
- Are you getting enough inbound customer interest in your product?
- Do potential customer perceive that rival products offer more benefit for the price than yours?