As a startup founder, I frequently receive questions from friends, family, acquaintances, about how this mysterious fundraising process works. In short, raising venture capital funds is a business deal in which you exchange equity, or a percentage of company ownership, for the capital your business needs to grow, in the form of investment funds.
Rapidly just raised our Seed round in February and now I am currently in the process of raising our Series A in the midst of COVID-19 and a faltering economy. From the early days of Rapidly, I knew the importance of data collection and I am now able to utilize our archive of user data in my venture capital fundraising process.
Data for Pre-Product or Pre-Revenue Startups
If you are pre-product or pre-revenue, you can still become knowledgeable about your industry and the potential growth for your business.
First and foremost, you’ll want to have a good overview of your industry. Who are the other competitors in the market? If you are in SaaS, you would want to know many companies are worth billions of dollars in your industry already. In the SaaS space, you will want to know of companies in industries that are growing fast. For instance, following the Bessemer Cloud Index is a great place to start. You can break down your particular market even further. In Rapidly’s market, we have 100,000 or more firms we can market our platform to. These firms generate $130 billion per year in revenue, with the top 100 generating $80 billion in revenue and another 90,000 small firms generating the remaining $50 billion. There is a large market potential for us as that is simply selling point solutions to third party firms. We can also tell a story about the adjacent markets including accounting software that businesses buy ($30 billion) and the cost of internal accountants and staff at large companies, also known as, the CFO suite ($60 billion).
Diving in deeper, you would want to know about the relationships within your industry. Is your market large, growing, fragmented? How much money is spent in this industry? In Rapidly’s situation, the tax and accounting market is large and fragmented, with $250 billion in annual spending in just the US. This includes third party industry software, in house accounting employees, spending for third party professional service providers. You need to tell a story about how you get a piece of the pie and how you replace the current alternatives with your product over time. One thing I have learned about our industry is that there is low hanging fruit but most VCs actually care about replacing internal and external accountants with software. It is the nature of the beast, right now we are complementing third-party firms but VCs want to see how ruthless you can be to replace headcount with software.
As a founder, you want to tell a story about the new products and new technological advances that are occurring within your industry. In the tax and accounting industry, people are coming out with new banking solutions, new payment solutions, new business models and they are being adopted by those in the industry.
You will be asked: why are you building this now? To that, I would answer that embedded FinTech apps are all the jazz right now. We have examples of other companies like Plaid and Credit Karma being purchased for billions. These mature companies show the potential for astronomical growth within the FinTech space. In accounting specifically, technology is allowing knowledge workers to automate manual tasks. This in our case will help professional services firms cut down on administrative staff while maintaining their current pricing. The bookkeeping and tax functions require manual processes, spreadsheets, paper mail, scanning, but artificial intelligence is helping to automate those processes out and remove some administrative work from their day-to-day operations.
Furthermore: how are you attacking the opportunity in a unique way that’s going to have an advantage? Is the opportunity you’re choosing going to seem compelling to an investor?
With Rapidly we have chosen to be a point solution by integrating with the software that is already out there. We’re not trying to build a tax or accounting software solution or bank product and enter those crowded, monopolized markets. But, this can get push back as mentioned earlier, VCs want you to replace people with software so helping people use technology to do their jobs better may not be that interesting to all VCs. We want to act as an add-on integration with the tools firms already use to make the experience easy for them and to have more efficiency but eventually we want to help firms and companies replace their administrative an IT staff with modern software they can use where they will need less people. There is always a job to be done and it should always be growing into big multi-year contracts.
Finally, if you don’t have any customers or revenue yet, you need to have your viable business model prepared, and be ready to communicate how you will find customers and generate revenue.
Data for Series A Stage Companies
As a tech company in a venture capital fundraising process, you should expect many data-driven questions from investors. At the series A level, the metric-based questions vary with what type of company you are. There will be more questions if you are a founder who has not previously sold a company in the 7-8 figure range. Most venture capitalists want to invest in founders who have already sold a company. They are trying to decrease risk so if you are a first-time founder with no exits, knowing your numbers is critical.
Generally, you can expect questions around tracking revenue, tracking customer acquisition cost, tracking where you’re going with your business and your ramp up time. Investors will place an emphasis on the actual value of each dollar you put into marketing that equals one new customer. Mostly, VCs these days are obsessed over product-driven growth so you should be able to explain at least one facet of your growth strategy that requires zero dollars of marketing spend. From an economic perspective, investors want to know that $1 into Google Ads spend will result in $2 of revenue. Having those financial numbers down is important. When you secure that customer, VCs will then want to see new logos from your new customers on your website as your company continues to grow.
You will be asked for cohort data, based on each customer, with how much money you’re generating for that customer. You should know the customer’s 12-month gross revenue retention: for every new customer, what is the retention number on that particular customer? What is your net revenue retention, including upsells and increased revenue from the current cohort of customers?
A SaaS tech company wants to optimize for more users and more usage per user. More new products and cross-sells can help to cut down on churn rate and customer acquisition costs.
Data Gathering Best Practices
Each business requires different data tracking and every company has a different technology stack where they monitor their user activity and marketing spend for example, which makes it so difficult to find an all-in-one solution.
An early-stage startup may not have the ability to sign on for an expensive all in one tool anyway, so you will end up hacking stuff together and testing what works best for your team. At a minimum, you want to track all payments and transactions in a formal report somewhere, plus have historical usage information on your users. For example, Rapidly uses LogRocket to monitor and track how our users flow through our product in their user sessions. Once your company reaches Series B and onward, you want to invest heavily in data tools to track engagement figures, go to market efficiency, payback rates, and sales funnels.
Data gathering can seem like an overwhelming task as a founder, but having your data gathering organized and put together can increase your chances with investors. I was asked recently by an investor about our gross revenue retention, and I didn’t have that number in the back of my head, but luckily I’m able to know where to look for that information and feel confident in its accuracy.