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Q: The overwhelming advice from founders and VC’s alike is that founders should never ask for money “too soon”. What is “too soon” in your mind, and do you agree with this sentiment?
Nina: You can quite literally never be too early. Funding exists as early as an idea (or lack thereof) and all the way up to just before an IPO. Realize that the primary focus of any VC is to return money to their investors. If your business shows strong signs of doing that, at any stage, they should fund you.
There’s obviously a caveat— know your audience. If you’re pre-seed and you pitch someone that exclusively funds Series A rounds, you’re likely too early for them. On the flip side, you can also pitch a party that’s too early for you.
If your business is an obviously good investment, you can often stretch the limits of a VC’s investment thesis. If you try this and get a few no’s, consider sticking to VCs who squarely invest where you’re at. If you get even more no’s, reconsider your approach or venture capital as a funding source as a whole.
It’s really about finding the right investor, and understanding where you are with whatever it is you’ve built. Understanding your true stage and the relationship you have with who you’re pitching is imperative to a successful fundraising process.
Q: So if it’s really about finding the right investor, do you have any suggestions beyond the obvious for how founders should go about that?
Nina: The process is relatively straight forward. If you are going to pitch an Institutional VC, they are generally forthcoming with who they typically invest in. At the most bare minimum, go to their website and understand their investment thesis, aka industry, stage, previous investments, etc. If you can’t find that immediately, you can dig into their Crunchbase, Angelist, and even their blog content to see what they’re using their most recently raised fund to invest in. VC’s love talking about their thesis. The least you can do is educate yourself on it and use it as ammo to get the meeting.
I suggest using GlassDollar, which will show you even more granular data into check sizes, industry investments, and how much of their capital has been deployed. You can also simply reach out— whether it’s to a founder they’ve invested in or directly to the fund. Ask them how much ownership they are looking for, what stages they invest in, and what types of companies they invest in (especially if it’s a new fund).
When it comes to Angels and Non-Institutional VC’s, it’s trickier. Angels are investing their own money. I joke around with my founders that Angel money is hard to come by because they’re basically deciding between investing in your startup or buying a boat. Is your company better than the wind in their hair as they zip around on their favorite lake?
So research the person, look them up on Angellist or Crunchbase, check out Google Alerts to see what kind of investments they make. If that doesn’t work, just reach out to them. Ask them the typical size of investment they make and what they’re looking for right now. More importantly, ask them upfront if what you are building is interesting to them, and if they have invested in similar products in the past.
Q: What is the current thinking of weighting in terms of MRR/ARR versus traction for other KPIs in a SaaS based early stage startup?
Nina: Money in the bank is a great indicator of traction, but not always the best or only one. But, it also depends on the type of money. There’s subscription revenue versus transactional revenue. At Acceleprise, we’ll often see SaaS startups muddle those, and that’s not a good idea. If a startup has a lot of transactional revenue, that’s okay, but it doesn’t show that your business is seeing product-market-fit as a subscription service. A large amount of subscription revenue is often a very positive sign, because it shows they were able to get someone to commit to their product, not just try it out. This isn’t a hard and fast rule, but it helps to understand why you shouldn’t mix the metrics and why VCs will often dig in on that number to make sure it’s legitimately recurring.
While revenue is very important, it isn’t the end all be all. Many startups get funded without revenue. There are other indicators of traction like LOIs, SOWs, and referrals or unsolicited promotion/press of a company.
So I would reframe this— traction is the most important thing, but it can be shown in many different ways. Money in the bank is just one of them.
Q: It seems like with fundraising, you can’t get it when you need it and you don’t need it when you can (because you already have traction). Since most startups fall into the “need it but can’t get it” category, have you ever funded startups that did not have extraordinary traction?
Nina: We’re at such an early stage that most of the companies we see don’t have customer traction. We invest in companies that have anything from nothing except their product, all the way up to making money and getting subscriptions in, and have large LOI’s and 6-figure deals in the pipeline.
I’d say we’re pretty open to any pre-seed SaaS startups with a very solid team. We back founders over businesses in most instances because frankly, it’s a lot easier to pivot a business than it is to pivot a person. There have been situations at Acceleprise where we haven’t loved the business, but have absolutely loved the founder. We’re willing to work with that founder to pivot and build something great because that’s what we do. We’re in the business of building businesses, not improving people.
Needing money when you can’t get it is such a true statement. It’s a function of there being this crazy availability of capital but difficulty in getting it. I believe the issue arises when founders focus all their energy on institutional VC’s— that’s a mistake. There are so many other ways to get money for your startup. From inventory financing to Angels to simply building a business that creates its own money and letting the VCs drool from the sidelines, waiting to jump into the next round or never raise at all.
Another issue is that too many people go all in way too early. Just because you have an idea doesn’t mean you have to quit your job, hire a team and start a company. Take a moment to consider that you can keep working your 9-to-5 and work on your company from 5-to-9. Then, once it’s at a place that’s either self-sustaining or attractive enough for investors, you can pull the trigger on the 9-to-5. Stop following the hype. Build a real business.
Nina Stepanov is a VC at Acceleprise, a SaaS Accelerator backed by leading operators. Nina is passionate about supporting founders in making their dreams come true.