Show You Will Reach the Next Round

This week's tip: how to show you will reach the next milestone.

At my old fund, Octopus Ventures, we placed a high priority on data collection. Given the numerous moving parts involved in managing a VC fund, it was essential that we remain informed of all developments.

Consequently, we tracked everything from new investments and current portfolio companies to lost companies. One particularly interesting data point emerged:

Over 60% of our portfolio companies failed to meet their milestones.

It's worth noting that this observation came from a successful, tier-1 VC firm with a solid track record. We invested in the best founders, with realistic (often reduced) budgets. Nevertheless, over half of our portfolio companies were unable to achieve their stated goals.

Of course, this is par for the course in the VC industry - most companies will not succeed. However, when companies fail to meet their milestones, it leads to three things:

1. Hampers growth
2. Makes the next fundraising harder
3. They company ends up closing down

All of these are negative from a portfolio perspective, which is why they are at the forefront of investors' minds. Whether your company can execute is a major concern for investors and their colleagues.

This is a big decision if they invest into you or not.

As them investing into you in this round, is specifically for you to reach these milestones.

So, how can you address this issue?

Here’s 3 steps:
 

Step 1. Know where you need to be for your next funding round

This is the crux of the newsletter.

If an investor doesn't believe you can execute enough to raise the next round, why would they believe you can exit for a large sum? This is the biggest problem I see founders facing with investors.

You need to demonstrate the uncontroversial steps you will take to reach that next round. After all, the goal of your fundraising is to reach the next fundraising round.

So think about it in these terms:

If you are pre-seed: your milestones are to be seed ready.

If you are seed: your milestones are to be series A ready.

If you are series A: your milestones are to be series B ready.

Sounds simple enough right?

Here’s a general idea of where you should be at for each stage:

Step 2. Track the right data

I always talk about communication being important for a fundraise. This is another example of it’s importance.

An investor wants to know that you are tracking the right types of data points and asking the right questions that will allow you to succeed.

• If you aren’t focusing on building a product that your customers like: that’s worrying.
• If you are still have no clue how you will find PMF at Seed: that’s worrying.
• If you haven’t found the signs of PMF at Series A: that’s worrying!

Therefore, you must ensure that the data you have collected and are collecting gives you the ability to demonstrate that you will reach the next steps.

Let's take Seed funding, for example. You should be collecting data points that indicate how you will achieve repeatability and PMF. This could be done through cohort analysis, channel monetization, or even client onboarding. The investor wants to know if you are collecting the right information to convince them that you will succeed.

Step 3. There is momentum for the main data-points

Momentum is the lifeblood of a startup. Without it, a VC-backed startup is unlikely to succeed.

At the early stages, revenue isn't necessarily required, but some form of momentum is necessary.

During my time investing in companies, I saw many that lacked momentum. When momentum is lacking, investors are less likely to believe that you will reach the next milestone.

Going back to Step 1: your momentum should preferably be giving you a higher chance you are reaching your next round.

So, for example:

For pre-seed: you’re getting massive amounts of data on what your customers love and the product is improving. You will get pilots and/or early signs of revenue.
For seed: your tracking monetisation and revenue growth where both are growing. You will easily reach £1m+ in revenue by the time of your series A.
For series-A: your sales channels are improving by the month and becoming more and more repeatable. You know exactly how the sale process works and just need more people. You are growing 2-3x every year.

As you can see for all of these points - its less about random momentum in the business, but rather momentum that will allow you to raise that next round.