Raising Money for Your Start-Up

Scott Hartley, Venture Capitalist & Author

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8 Lessons (1h 2m)
    • 1. Trailer

      0:48
    • 2. Intro & The Funding Landscape

      7:15
    • 3. Determining your Capital Needs

      8:44
    • 4. How does an Investor Think?

      10:24
    • 5. Building your Pitch Deck

      7:23
    • 6. Thinking about Market Size

      11:06
    • 7. What's your Company Valuation?

      9:00
    • 8. Articulating Valuation to Investors

      7:38

Project Description

Design a pitch to raise money for your start-up

Intro & the Funding Landscape

  1. Define your sector, stage, thesis.

    After learning about the various types of entrepreneurial capital, what is your current stage of investment? Should you be pitching to angels, seed investors, or traditional institutional venture capitalists? Learn how to define your stage, sector, and capital needs, and how to identify an investor's thesis to know if they are a potential partner.

    Share your pitch based on your current definition of your product.

Determining your Capital Needs

  1. Define your hypothesis

    What do you need to test to prove a hypothesis about your business that would significantly lower the future risk of its failure in the eyes of an investor? How can you test this hypothesis cheaply, and what metrics do you need to track in order to prove it? What does success look like? 

  2. Calculate your burn rate

    By adding up your costs to run the business, calculate your monthly burn rate. Based on the hypothesis you're testing, you will require some period of time to test this thesis. Know your burn rate so that you will know how much capital you will need to have a runway sufficiently long to successfully test your idea, and prove your hypothesis. 

  3. Calculate your runway

    Typically the runway to test an idea is 18-24 months. This gives you ample time to test your idea and collect data around metrics that can prove your hypothesis. Remember, the point of testing a hypothesis is to reduce the perceived risk of the business so that investors are able to place a higher valuation on your idea, and therefore you are able to raise capital at a lower cost of capital. 

How Does an Investor Think?

  1. Position your idea within the nine criteria.

    Walk through the nine outlined criteria and define your business. Where are you strong? Where are you weak? Ask your friends to define your company for you, your problem, solution, team, technology. Hearing someone else articulate your ideas will reveal how it's perceived. 

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    Share your answers to the above nine criteria.

Building your Pitch Deck

  1. Define your TAM

    Identify your total adressable market, and sector. This is the top-down market size, and potential opportunity. 

    Total Addressable Market (TAM)

  2. Define your SAM

    Identify your sizable addressable market (SAM), namely the market sector, but the specific subset within this sector that is open and possible to acquire with your business. The SAM is a more realistic look at the market TAM. 

    Serviceable Addressable Market (SAM)

  3. Calculate your CAC

    Think about all of the channels to acquire customers. Blending the average cost per channel, how much does it cost for you to acquire a user. This is your customer acquisition cost. The key to a successful business is keeping the lifetime value of a customer greater than CAC.

  4. Calculate your LTV

    Lifetime value is a function of how many customers you have (n), how long you can keep them (retention), and how much money you can make off each user (average revenue per user). Think about the average revenue you can generate per user (ARPU) and how you can increase this. Define your LTV by thinking through these inputs.

    Lifetime Value

    ARPU

Thinking about Market Size

  1. Define your market size

    What general scale are you targeting? Does your idea have potential to scale to millions of dollars in revenue? If so, let's think about how to frame this. If not, that's also fine, but we should be pitching to the smaller part of the capital pipeline where investors don't have hundreds of millions of dollars in fund size that they have to manage and return.

  2. Define comparable companies

    What are some comparable companies in your sector? Have any achieved sale or IPO exits? If so, how much revenue were they doing when they exited? What was the value of the exit? What is the implied exit multiple on how much the company sold for divided by their revenue at the time of the sale? This can be a benchmark for your industry and where you might need to target your scale for success.

  3. Define exit multiples

    What are the successful companies in your space, and what was their exit value divided by their exit revenue, or the amount of money they were making when they sold?

  4. VC math exercise

    Do another VC math exercise. With the assumptions we used in the slides, think through what "moves the needle" on a VC fund of $250 million, of $100 million. What is the size fund appropriate for your company to pitch to? What is the pathway to sufficiently scale the potential for an exit that firms can see as "moving the needle" on their fund? What are some funds in this range of size? If you don't know any off the top of your head, use a tool like Quora or Crunchbase to identify funds at different fund sizes.

    Crunchbase

    Quora

What's your Company Valuation?

  1. Define your proxies of value

    What proxies of value are strongest for you? If you have profit or revenue, what is it, and how is it changing over time? If not, what are other proxies you can look at like growth month over month, user installations, proof of consumer willingness to pay, engagement metrics, hiring commitments, press, etc. These are all proxies of value. Additional investor interest, or syndicate, can also signal to investors that your idea is smart and coveted by others.

  2. Define your raise

    Based on your hypothesis, burn rate, and runway, how much are you looking to raise today, and why? This coupled with the VC's ownership target will imply a valuation. This valuation is a dance between your raise, or amount of money you're targeting, and their ownership target, typically around 20% equity. 

    How VCs calculate valuation (Mark Suster)

Articulating Valuation to Investors

  1. Define your raise

    Define the amount of money you're targeting. Is this realistic with the type of firm you're talking to? Why?

  2. Analyze ownership targets

    Think about the implied valuations if the VC firm targets 10%, 15%, 20%, 25% equity ownership. How does this change if you raise more or less money? What are you willing to negotiate on, and what's non-negotiable for you? If the VC comes back with less money or a bigger ownership target, where are you willing to negotiate? The amount of money you ask for will require data and metrics. If the VC comes back with a stronger ask on ownership or less money offered, it's a signal that perhaps your traction or data needs work. How can you improve your sell?

  3. Practice your pitch

    Walk through your pitch. Walk through your raise, why you're raising, and how much. Walk through your hypothesis and your burn rate and your runway, and why you need to raise this money today. Know the parameters around the implied pre-money and post-money valuation. Remember, the pre- is just the post- minus the capital raised and wired to your bank account. Know how to articulate your needs and what it means for valuation. 

    Pitch to friends. Pitch to the mirror. Pitch and film it using the camera on your laptop (QuickTime). All of these can make you more comfortable outlining your needs when you get that 60 minutes with a venture capitalist. 

    Upload a recording of your pitch to Youtube or Vimeo and share the link on your project page. Or upload your pitch deck to your project page.

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