How to navigate through fundraising?

#startup #funding #investments

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February 3, 2022

Well-well-well, 2021 was successful for venture capital markets. Fundraising hit records, and many investors registered historical return rates.

“The low cost of debt financing and its availability have made it possible for funds to offer attractive prices for companies without punishing the projected [investment returns] for the acquisitions.” © Martin Nussbaum, a Partner with Dechert.

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Brilliant, though some people may notice strong analogies with the dot-com bubble burst.

Concurrently, the tech stock market is experiencing quite turbulent times, as nearly ⅔ of tech companies IPO'd last year trade well below their offering price. Take Root Insurance as an example.

What's interesting, out of the world’s ten richest people, only one has watched his net worth increase in 2022. His name is Warren Buffett and he’s known for his conservative value investing strategy. Mr. Buffet gained roughly $2.4 billion, bringing his overall financial standing to $111 billion.

We are not Men’s Heath but we have TOP 5 things to remember from this post:

✅ Traction first – money second.
✅ Good founders are good to have.
✅ Efficient growth is not equal to just growth.
✅ Unit economics always wins.
✅ Investors like hot potatoes only on their plates.

That’s it for today. Soon, we hope to share the firsthand experience from Series A. Now, share your experience with us and follow us to stay tuned!

During the past few years, investing in startups could look like playing a hot potato game. And now those who’ve bought shares last have their hands burnt.

Not in all cases, but the current situation with valuations can’t last long. Considering how the year started, investors may decrease their appetite and return to a moderate funding style. Soon, we may see them picking up companies with the appropriate performance vs. hype in the niche.

Being on the investment track ourselves, we prepared a short guide to help early founders:

✅ Navigate through the complex fundraising world;
✅ Define the current stage of their startup;
✅ Approach the right investors and be better prepared.

During the past ten years, the startup journey from 0 to 1 hasn’t changed much, though the definitions of the rounds have. We present some “average” definitions and assumptions relevant for B2B companies. These may vary depending on the market, startup type, founders with previous exits, and other things.

One more thing before we start. We are not the ultimate authority here, please feel free to share your experience in the comments! Now, let’s discuss the main stages of the process.

Pre-Seed
Commonly known as an idea stage, with the ticket size starting from 100k (FFF + Accelerators) to 700k (Angels, Pre-seed VCs). At this stage, you should have:
✅Team. Well-balanced and complimentary group of people with a proven capacity to execute fast. A track record in the target industry is a big plus.
✅Traction. An MVP – be it a mockup, video, or beta prototype – that illustrates the concept and helps validate it with your customers.
✅Market. A Hi-Po environment with a room to build something big?

Seed
Set sights on the ticket size of 1 to 5 mln (Angels, Pre-seed VCs, Seed VCs, Series A VCs). To consider yourself ready for the seed you should have:

✅Traction. A basic version of a working product and early signs of customer adoption – LOIs, MOUs, PoCs, Pilots, etc.
✅Revenue. $1-200k ARR.
✅Team. The staff that covers product, sales, coding, and other core functional roles. Such a team is ready to earn money as it is.
✅Market. A competitive environment where the level of competition is manageable, but not critically low. If there are no direct or indirect competitors, there may be no need for what you are building.

Thanks to Ian Taylor, we know that Pear VC has a cool metric that helps define if you are at the seed stage:

“You do not change your deck/app / MVP each time to acquire a new customer.”

Draivn advice to reach seed from pre-seed in a time- and resource-effective manner:

Iterate fast. Validate your hypothesis with customers and leave the working ones.
Build fast. Focus on the core functionality, have a bigger product picture, but don’t overload your backlog.
Ignore market noise, including the rounds raised, press releases, and #wearehiring.
Sell-sell-sell. If you are in the enterprise market, focus on first founder-driven deals.

Series A
Although Draivn is not yet here, we use some smart people's ideas to define the nature of the Series A round.

First, set for the check size of $8-20 mln (Seed VC, Series A/ B VC, Corporate Funds) and the following deliverables:

✅ Market. Your project may be a one-billion company, and you can make it happen.
✅ Traction. Positive, scalable unit economics and efficient growth of >100% YoY).
✅ Revenue. More than $2 mln ARR and a plan to increase it fivefold in two years.
✅ Team. A scalable hiring plan for the growing company.

The core advice here is to focus on efficient growth vs. just growth. Avoid the situation when your sales and marketing costs are higher than the revenue. Use data to measure this performance. And please, do not manipulate it.

It’s early to make well-grounded predictions, but being fundamental and good-old framework guys, we have an assumption.

2022 could be a proper time to refresh fundamentals, which will help everyone interested in fundraising to prepare better. But no matter how promising the year looks, market conditions may be rockier.

“We expect it to be a bumpy macro year and that there will be updrafts and downdrafts for high growth risk assets. It is going to be more about the specific company and less about the excitement about broader industry growth in tech in 2022.” © Max Wolff, a Managing Partner at Leste Clearway Capital.

As for the Draivn team, we don’t need four lines to say a smart prediction. We need four words.

“Unit economics always wins.”

If you haven't reached positive and scalable unit economics, most likely, you are not in the position to raise mature rounds and especially go public.

Instead of fuelling your growth, these funds will boost your expenses and operational inefficiency. There may be a slight increase in revenue and customer base metrics. But the expenses will grow faster and disproportionately when compared to your revenue.

Here is an anecdote to illustrate the case. Let’s imagine two bodybuilders talking:

- Hey Bob, you have such massive eyebrows. How do you pump them?
- Well, I do pushups.
- But pushups are for the chest!
- Yes, mainly for the chest. But it also gets on the eyebrows a little.

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