Many entrepreneurs approach me for funding for their startup. The biggest misconception most have is that they must first raise funding and then they can launch and grow their business. In reality, the ones who raise funding already have a growth story and can communicate it effectively to the investors.
Investors funding startups seek market validation and product validation. The product works and people will pay for it. There are some investors who fund deals based solely on the team, the space, or the technology but these are rare examples. Most are seeking what I call the “Growth Story”. They look for an operational revenue model in the business with increasing numbers on sales, team, product and fundraise.
If you have substantial revenues say a $1M then the investor assumes you have a growth story going at some level and will start looking for the limits of the growth story- how far will it go without funding and how much further it could go with funding. Later stage investors will look at the growth story to see how well you can scale it.
If you don’t have substantial revenue you must validate the business model and use metrics to show how it works on the following levels:
Activity – basic activity of the business which includes leads, downloads, trials, etc.
Unit economic metrics- the unit economic model shows the cost of customer acquisition and revenue.
Growth metrics- the user base and usage of the product is growing.
Most startups can show activity metrics but alone it won’t engage the investor. Typically the activity metrics show a number of users and customer engagement but since it’s not related to what drives the business it doesn’t mean much.
If your company is pre-revenue then you can show how the business model is “profitable” just on the unit economics level. At the core, you can generate leads, qualify, and close them for revenue that exceeds the cost of acquiring the customer. Over time, you can improve these numbers. In the early days of a business the revenue is not large. Most investors know that and don’t expect large revenue. What they look for is repeatable, and predictable revenue. Showing unit economics at the core of what you are doing will generate interest.
The growth metrics show the number of users increasing and use of the product increasing over time. Daily active or monthly active users should be going up and to the right. If the business has seasons or cycles, then one can use six month moving averages to show the slope of the growth rate.
Scott Adams once wrote “Losers have goals. Winners have systems.”
A startup pitch deck filled with forecasts alone is just a set of goals.
A startup pitch deck showing how the business model is currently working is a system.
It’s best to show up with a pitch deck showing how your system is working today.
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies