If you’re a first-time founder, you probably hate raising capital. Not because you don’t want the money, but fundraising can feel like getting a Covid-test every day, twice a day for a few months. (🥺 …)
Even if I am Tech M&A-oriented, I like spending some of my time backing first-time founders in the completion of their VC-fundraising processes with more ease and less stress.
To start, I would like to say that the VC fundraising process is highly competitive. (😒 Thanks Thomas…)
The decision-making process can be imagined as a flow going from the Analyst phase, going through the Principal phase, and ending with the Partner phase. (🤔 What do you mean Thomas ?)
One of my VC friends told me that last year his fund has received over 1,500 investments opportunities and has only made 4 investments. It must be a nice power law graph…
Therefore, VC fundraising is most about getting attention than about getting money. The more attention you have, the more you are likely to get funded.
In the Analyst phase, 80% of Analyst attention goes to 20% of opportunities. In the Principal phase, 64% of Principal attention goes to 4% of opportunities. In the Partner phase, 51% of Partner attention goes to 1% of opportunities.
It goes without saying that the famous power-law distribution (80/20 rules) can also be applied to VC’s attention. Furthermore, the more you advance on the decision-making process, the more the short head of the distribution tail is shorter. (😅 Wait, come again ?)
Indeed, 80% of the top 80% come from 20% of the top 20% and so on. Simplified, that means you can apply the 80/20 rules to itself. (🤯 OK, I give up)
Please, stay with me. (😤 OK, you have 1 minute)
Getting attention is one of the by-products of the Art of Pitch.
One of my main inspiring business-oriented books, Pitch Anything, states that getting attention is more about understanding and leveraging emotions rather than reasons. While that claim is undoubtedly true for Partners, I raise the question about Analysts and Principals.
In my opinion, it’s important as Partners and Analysts/Principals don’t share the same interests. Partners are the entrepreneurs of the funds, their success depends on yours. The main role of Analysts/Principals is to filter opportunities with a binary, metric-driven approach.
You either have the metrics or you don’t. Most marketplace startups I interact with tend to focus on metrics like GMV, net revenue, # of users, AOV, CAC vs LTV. (😎 Yeah like me)
While these metrics are fundamental, you will likely be in the 20% attention scope of the Analyst but have less chance to be in the 4% of the Principal. (🥺 That’s why I’ve been ghosted)
Principals’ role is to evaluate if your Marketplace has the fundamentals to become a VC-oriented success (at least several hundred million euros at exit) and it is all about eliminating market risk by understanding if you have control of all the variables for scaling. Hence, scaling your company turns into an execution play.
As a much more time-consuming activity than Analysts, they will focus on opportunities that seem to have these fundamentals (😡 I’m sure I have them).
So, how can you prove that you seem to have the required fundamentals?
Just by showing it! (😅 No kidding).
That’s why it’s worth taking the time to go one or two even three levels deeper (💪 OK, how do I do that ?).
Stage 1: Calculate CAC and CLV correctly
Every founder knows they do have to talk about CAC and CLV but a lot fall into traps when calculating them.
Don’t get it wrong again: https://www.speedinvest.com/blog/acing-your-marketplace-fundraise-series-a
Please also, do not use a use an esoteric way to match a CLV/CAC ratio >3. It will only yield endless debate regarding churn and its calculations.
Stage 2: Assessing your Liquidity.
Liquidity is defined as the probability of selling something or of finding something you are looking for.
How to illustrate your Liquidity: https://medium.com/point-nine-news/wtf-is-marketplace-liquidity-f2caca3802c0
Stage 3: Measuring your Share of Wallet.
Share of Wallet is defined as the percentage of a buyer’s spending (or a supplier’s earnings) within a given category that is captured by a marketplace as opposed to alternative channels.
How to illustrate your Share of Wallet: https://medium.com/point-nine-news/wtf-is-share-of-wallet-and-htf-do-you-measure-it-7fa3f01b1564
Stage 4: Evaluate your Growth Multiplier.
Growth Multiplier is used to evaluate the scalability of your growth engine.
The beauty of clearly defining the Growth Multipliers is that the bigger the round today, the faster you’ll grow and the higher the chances that the next round (and valuation) will hit a parabolic curve.
Hope it will help you!