Two Tips For Raising Venture Capital

Per my previous post,  I recently did a presentation on raising venture capital.  It was great to talk to such a smart and energized group of entrepreneurs.  The link to the full presentation can be found here.

There were many great questions during the talk and many coalesced around both a) how to talk about the opportunity that the starup is targeting and b) when and how to talk about business momentum (in order to justify the valuation and capital raise).

In terms of total addressable market, the prospective investor is going to be looking for opportunities that are large.  So, be prepared to answer the question(s):  is this opportunity big enough? And can your team fill a need in this market?  In short, investors are going to be looking for a total addressable market (aka TAM) that is large enough where a small % of the market share that your company addresses could be an interesting business with a huge high IRR upside for the investor. If you are presenting an opportunity where in 5 years your $20 million in revenue equates to 50% of the TAM, then this is just too small. More importantly, a small market like this while fine as an cash flow business isn't going to offer the potential upside for a liquidity event (e.g., M&A or an IPO).  Investors will typically want you to have a healthy revenue line in 5 years equating to single digit market share.  Totally addressable markets of over a $1 billion dollars usually get investors’ attention.

In terms of telling the story, you have to have a story to tell.  You won’t be able to raise venture capital if there is no business momentum.  Assuming that you have some business momentum with customers and revenue which is the hardest part, you simply need to tell the story in a way that supports your future cash flow projections and valuation ask.  I really like this KPI graph from the Seattle-based company, familiar. 

Think about showing the overall market, your TAM, and possibly other comparable competitors. You will want to clearly state the starting point Year 1 and what Year 5 looks like.   When showing the overall market opportunity, build out market segmentation (by demographic, psychographic, SIC code, etc). You will want to get as granular as possible. Layer in specific detail around segmentation growth rates, if possible.
Lastly, you should be able to articulate why today is the best time to address the market opportunity. The slide should contain as much quantifiable data as possible in order to tell the story to the investor and convince them that this moment is the right time to invest. Make the investors feel like the market conditions are ripe to exploit your addressable market, and avoid making them feel they are too early in the opportunity.