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Funding

“At end of each round, reach the speed where you can shift into the next gear.” ~P. Graham

Stages

  1. Pre-Seed: Receive a small investment (pre-product) in order to hit one or more of milestones in order to qualify for seed investment (hiring team member for prototype development). Average funding <$1 million, and valuation: $1-3 million.
  2. Seed: Signs of Product/Market Fit and traction. Angel investors and VC funds (some startup accelerators). Seed sizes range from  +- $150,000, to $1.5 million. Average funding $1.7 million, and valuation: $3-6 million.
  3. Series A:  Clear evidence of Product/Market Fit, and revenue growth,  and increasing ARPA (Average Revenue per Account). Necessary to develop sales and marketing processes, and to identify new channels. VC’s (some super angels). Average funding $10.5 million, and valuation: $10-15 million.
  4. Series B: Investors are looking for growth (requires hiring specialists), along with expanding into new market segments, revenue streams (possibly through acquisitions). Hitting milestones and making significant progress must be demonstrated. VC’s (some late-stage VC’s). Average funding $24.9 million, and valuation: $30-60 million.
  5. Series C+: Supports large-scale expansion (new markets, international, or acquisitions). After Series C, investment rounds can go on to Series D, E and further. Late-stage VC’s, Private Equity, Hedge Funds, and Banks etc. Average funding $50 million, and valuation: $100-120 million.
Source: cobloom.com

Recommended Video: Equity Splits

Funding Rounds (2:00)

Eazl

Getting the money which allows a startup to demonstrate the value they create for customers.

NOTE: video starts & stops at pre-assigned times

The Pitch

“Often startup founders start their pitch… with the solution to a problem, and that is completely wrong”. By contrast, a really successful elevator pitch first begins by defining the user problem, and only after that (if at all), a solution to that problem (Dave McClure 500 Startups). Dave says that starting with the ‘user problem’ from the very beginning, helps to establish a strong emotional context with the listener (potential investor).
 
It can also help to consider some different pitch scenarios, each of which may connect more closely to the person you’re pitching in front of. Therefore, first identify the listeners interests, and only then pitch the most appropriate message that resonates best for that particular listener. Finally, every elevator pitch must demonstrate how the startup can tap into the powerful, emotional, and evolutionary needs, that we all have as humans!
 

Typical Pitch Questions:

  1. How You Make Customer Happy?
    • All good pitches should outline how the idea makes customers happy, along with how it’s better and different from the existing products/services out there.
  2. What Is Your Market Size?
    • This matters because most investors want to know that you’re going after a potentially big business. There are two ways to think about market size: top down (reported market data), or bottom up (calculated based on number of users, size of transactions, frequency, value of industry in offline vs. online capacity etc.).
  3. What Is Your Business Model?
    • Describe how you will make money (is it a transactional or subscription-based model etc.).
  4. What Is Your ‘Unfair Advantage’?
    • Try to identify your unfair advantage. VC’s don’t like to take risks, therefore your market advantage must be based on your team, number of customers, revenue, intellectual property or patents etc. (define what your biggest assets are, and always emphasize what your advantages are over others in the market).
  5. What Are Your Competitors Solutions?
    • Investors want to know what other competing solutions are on the market, along with how what you’re doing is better than what’s already out there. Therefore, it’s important for you to list your most relevant competitors. Don’t leave competitors off your pitch if you want to begin a proper relationship with investors.
  6. What Is Your Differentiator?
    • Knowing your competitors is important but you must also outline why ‘what you’re doing’ is different. Therefore, it’s essential before the pitch to figure out how you can be better and different from all the other possible solutions.
  7. What Is Your Marketing Message?
    • Frame the problem or product that you’re selling in a way that’s interesting and compelling (volume, leads, conversions, revenue, cost etc.). Outline how you plan to get your unique message (solution) across to customers.
  8. Who Is Your Founding Team?
    • What skill-sets do the founding team have: Hustlers, Hackers or Designers? Hustlers figure out how to get customers, Hackers have engineering or technical depth, and Designers can frame product in a way that’s appealing. Remember that the breadth of founding team skills is critical.
  9. What Are Your Three Budget Scenarios?
    • There are three ways to spend money: hiring to build product, hiring to support marketing (campaigns, acquiring customers etc.), and overheads. You must prepare three budget scenarios that address three different levels of opportunity: small, medium and large. In the elevator pitch you should argue and demonstrate how you are going to hit those three milestones (small, medium, and large)?
Source: Dave McClure (founder 500 Startups)

ACTIVITY

Pitch Version 2

Now that you have progressed your idea, it’s time to write a new and improved Pitch-V2. Based on the 9 items listed earlier, create an awesome pitch for your startup.

Do It Now!

Investment Readiness Level (2:00)

Steve Blank

Common language to establish if ‘this is a viable deal’.

NOTE: video starts & stops at pre-assigned times

Investment Readiness Level (IRL)

The Investment Readiness Level (IRL) is a coherent number and a common language for evaluating viable startup deals. IRL was adapted from the NASA Technology Readiness Level framework (created 40 years ago). The NASA model had been used to help determine how close-to-ready any technical solution was, as rocket launch-time approached. Blank adapted the model for evidence based entrepreneurship.
 

Rank Business Model

The Investment Readiness Level can be used by investors to rank the technologies and the business models they are evaluating including: product market fit, revenue, plan for monetization etc. When using this tool, VC partners can define what investment criteria they value most, and how individual criteria rank against each other. Therefore, investors and entrepreneurs now have the ability to see how well they are doing on the path to commercialization.
‘IRL is imperfect, subjective and incomplete however; it represents a major leap over what was being used before, when there was no common language to compare startup projects’.
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LEVELS

  1. Level 1-2: Do we have our hypotheses, is the value proposition summarized, are the hypotheses transferred to the Business Model Canvas, and articulated? Is the value proposition detailed enough?
  2. Level 3-4: Have we discovered (validated) the problem/solution? Do we have a low-fidelity minimal viable product (MVP), and is it available and ready to test?
  3. Level 5-6: Have we validated the product/market fit? Is the right side of the Business Model Canvas validated (revenue, customers and channels)?
  4. Level 7-8: Have we validated the left side of the business model canvas (costs, activities, resources, partners)?
  5. Level 9: Do we have invest-able metrics that matter?

ACTIVITY

What’s Your IRL?

Based on Steve Blank’s Investment Readiness Levels, determine what level you are at now with your startup idea, and then consider what you need to do to take the idea to the next level!

Funding Rounds (3:30)

M. Skok, Harvard i-Lab

It’s important to develop a funding strategy that fits your particular needs.

NOTE: video starts & stops at pre-assigned times

Course Curator: Dr. Gerard L. Danford

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