Years ago, we invested in a startup that looked like it was on the verge of exponential growth. The year before, its user base grew from 100,000 consumers to well over 2.5 million. It checked all the boxes for growth, team and product.
However, we had miscalculated one risk. We didn’t know how committed users were. As soon as the monetization switch was flipped on, users were turned off, leaving quicker than they came.
It’s important to mention this because it’s a story that doesn’t get much press. But every VC has a history. If they don’t adapt their criteria and learn from it, they won’t make it. Over more than a decade of investing (and two boom/bust cycles), we have developed 9 milestones that companies must address before we’d consider investing. Here they are.
Billion Dollar Potential
To attract VC’s, your startup must have the potential to become at least a billion-dollar company. That may seem extreme, but keep in mind that for every ten companies we invest in, we expect five will fail, three will break even or generate modest returns and two will be home runs that have the potential to generate returns for the entire fund.
This means that your target market and industry need to be large enough. If you have a niche target market or are in an industry that’s still developing, you will need a clear plan and projections showing investors how your business will grow.
Growth matters. VC’s are looking for exponential growth, although that may vary depending on your product, industry, and target market. For example, an early stage SaaS company between $1 million to $5 million of revenue should have annual growth rates above 100%. This may seem daunting, but look at Slack’s early growth (https://techcrunch.com/2016/04/01/rocketship-emoji/). Slack is an exceptional success story, but remember that all investors are searching for the holy grail.
Buzz alone is worthless, but when paired with growth, it can set you apart from other startups. When customers can’t stop sharing your app with their entire online network and family, and user growth is coming more from word of mouth more than your marketing efforts, this is a signal that you’ve reached product/market fit. It’s a good idea to measure your net promoter score and how it evolves over time.
Your user growth numbers show investors that people are finding and downloading your app. But what happens when they get there? How often is someone visiting your app or using your service? High engagement means that you’re not only attracting people, but that you’re providing so much value they can’t stop using it. This also signals a lower long-term churn rate, making growth easier.
Painkiller, Not a Vitamin
Your product needs to solve a problem, not just be a “nice to have.” When you have a true painkiller of a product, your customer’s lives will change for the worse if they stop using it – even if for a substitute.
Earning revenue in the early stages of your tech startup is not required for a company raising for their seed round, but it’s extremely attractive. If you have yet to monetize, investors want to see you working with pilot customers, testing out future monetization plans. The more you can do to prove your business model and begin to bring in revenue, the better your chances of attracting investors.
A True Leader
When it comes down to it, you must have trustworthy and influential leaders. Since we are always closely managing our risk, knowing an entrepreneur is tenacious enough to overcome the inevitable trough of sorrow will make a difference.
The Ability to Recruit Top Talent
You can’t build a billion-dollar business by yourself. Nothing demonstrates leadership more than convincing other top talent to follow you. Highlight your star teammates and how they are the right group of people to grow the company.
Toughness and perseverance shouldn’t be confused with an overinflated ego. The first two are necessary for a startup founder; an ego isn’t. An ego causes young entrepreneurs to lose sight of some of the simple, yet important, parts of their business and is a big red flag that will keep investors away.
If you check these nine boxes, you’re ready to talk to institutional VCs. If not, keep building – if you’re idea is on the right track, you’ll get there soon enough.
Imran Ahmad is a principal at OCA Ventures, an early stage venture capital firm in Chicago. Imran has more than a decade of experience financing, investing and founding early stage technology and middle market companies. Prior to joining OCA Ventures, Imran founded multiple mobile and enterprise software companies, helped launch PayPal Here in domestic retail and international markets, and invested in healthcare and business services at JMH Capital. He began his career as an investment banking analyst for William Blair.