The fundraising story should help an investor understand (and be able to re-tell to colleagues) what you are doing, why it is important, why you are likely to build a large company, present some proof points that it is already working, and explain why you are the team to back. The primary goal is not to describe that a specific trend is important or what the market looks like.
I think the fundraising story for a seed round (or later) can be built using only six parts (which then can become twelve slides in a pitch deck and a large number of supporting documents if needed). The six parts of a simple fundraising story are:
Define the problem, why it is important, and if possible why it is not already solved.
What is your insight about the problem that allows you to solve in a better way than others and how big will the market be when you solve it.
Describe what your product does (in as clear, jargon-free language as possible) and the key advantages users get from using your product, and why it is better than the competition.
What is your current traction (e.g. growth in users, revenue and/or ARR) and what metrics (e.g. retention, renewals, NPS etc) show that your ‘economic engine’ is working already today, even if at a limited scale.
Present the the team and explain why it is the right team to build this startup.
How much are you raising and what you are going to achieve (not what areas of the company you are going to spend the money on) before the next round.
In which order you present the parts can differ depending on setting and medium.
This is an early version/first draft, so feedback is appreciated.
Iconiq Growth has released a very good benchmark report for enterprise SaaS companies. It is especially useful to understand the international benchmarks when building a SaaS company in the Nordics (where we overall tend to be a little less aggressive in driving ARR growth and have an emphasis on profitability earlier).
Iconiq also shares benchmark data on popular core SaaS metrics. Even if these metrics are for median and top quartile companies (and not top 10 %), it is clear that raising multiple, ever larger rounds of venture capital with less than top quartile metrics is going to be very dilutive for founders.
The median and top quartile SaaS companies covered are not profitable even at $50-100 million ARR, with average negative free cash flow margins of 35-45 %. So they need to raise a lot of capital.
My take is that either a SaaS startup needs to in the top quartile for ARR growth (with other metrics being roughly equal to competitors) or it should execute a much lower burn plan that can attract a wider variety of investors.
Raising money is hard. Raising money when things are not going well is even harder.
That doesn’t mean that every term sheet with a low valuation or tough demands is ‘dirty’ (as reading Breakit might make you believe).
There are dirty things like pushing the founder out and very short deadlines that in my mind always are dirty. In 99% of cases I’d put participating preferred liquidation preference as dirty, as in any normal fundraise more than 1x non-participating liquidation preference isn’t necessary.
But sometimes the situation is so bad that accepting terms that are normally considered dirty are better than going bankrupt. Because most often the alternative to accepting a ‘dirty’ term sheet is running out of money, not getting a ‘clean’ term sheet at an acceptable valuation.
One thing in company presentations that makes me write down a bunch of questions is seeing extremely high profit margins in the forecasted financials.
Among all the great software and Internet companies I don’t think I’ve seen a company, with the exception of Evolution in 2021, that has grown more than 80 % year-over-year at scale and had profit margins over 50 %.
Obviously that doesn’t mean it is not at all possible, but in most cases it is likely that the company is underestimating the costs of growing or overestimating how quickly it will grow. It is a type of ‘error’ that is called base case fallacy, a.k.a. the plan is not fully taking into account how rare something is compared to the standard outcome.
Raising venture capital for a startup is fundamentally a trade where entrepreneurs get cash and (hopefully) better odds to succeed, and in exchange they give up ownership and some control of the company.
Valuation, preference shares, and the shareholders’ agreement with all its terms are ways to define that trade.
Breakit continues to write about ‘dirty term sheets’ and Julia Dalin argues against preference shares when raising seed capital. For most startups I think only accepting common shares at seed will give a worse overall deal for founders, as they will get a lower valuation and higher dilution.
The reason is that terms have value. If you change terms, you are likely to see an impact on valuation. And of all the terms that can be negotiated, negotiating for common shares instead of a 1x non-participating liquidation preference doesn’t seem to give the most value for money when raising equity capital.