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Hard truths about your first VC round, Part 2 : the six pillars of startups analysis and therefore of your pitch

→ missed the first part ? click here

Your future investor’s analysis is all about benchmarks, based on 6 pillars which are (1) market (2) competition (3) team (4) business model (5) equity story and (6) traction. Your mission during the roadshow is to make it very clear that you reached the top 10% of all startups for each of these.

1- A billion dollar market

Has to be big enough so that the VC can expect a 5–10X return on your current valuation when the company is acquired or IPOes. Usual minimum size for a market is 1B€ worldwide for B2B and 1B€ in your home country for B2C (ie~10B€ in Europe). Good way to show us that: use both top down (“Gartner/Xerfi says…”) and bottom up (“1000 target clients willing to pay 30K€/year…”) methods to assess the market.

2- Competition, to some extend

You have competitors and our analysts will dig them out, so it’s no use to hide anything. Best way to talk about it: assess objectively their strength (usually they are bigger and more established) and weaknesses (old products, not in Europe…). If they are not Oracle or IBM, but smaller companies, it’s good to add data on what they do, how much they raised, what geographies they cover, how big their teams are, when they were founded… because it helps us to assess the threat and shows that you are actually monitoring them.

One thing to point out about competition is that VCs have been burned before by investing in third or fourth players in a market. Even second players sometimes find it hard to raise a round because of this “winner takes all” paradigm that we all have. This is probably a stupid way to look at the world: most often it does not make sense because the market is big enough to have lots of new players who succeed, but it’s kind of hard wired in all the VCs now because of all the money that has been lost in 3rd and 4th players in the past (in e-commerce, private sales, on demand, marketing automation…).

You have to take this into account when you present your company’s positioning: if you are indeed the fourth player on a market, then you have to be creative to show that you are the first player of something else.

And finally, it’s best if you have a really strong barrier to entry (technology, network effect, exclusive content or partnerships…) to defend your position against new entrants.

3- A kickass team

It’s best if you have right from the start a diverse team, with a technical founder (bonus if technical founder is the CEO for lots of tech businesses).

What VCs like in teams are: previous accomplishments (coded a website at 12 years old, sold a company already, was awarded best salesperson at previous job…), competitive mindset (elite university, sports champion, former elite tech job at Google or Criteo) and relevance with the challenge addressed by the company (new grads rarely do fortune 500 B2B for that reason).

What is even better is that you can show that you managed to hire top players as well, and that the whole team is high level, not just the founders.

4- A scalable and virtuous business model

Show that you have a business model with nice perks:

  • high basket
  • high margin
  • some recurring component (subscription, repeat…)
  • some viral part (“our community loves our product and that’s how we take advantage of it…”)
  • a positive contribution margin (if you remove all variable costs including marketing, you’re still profitable on a unitary sell). If that’s not true on every sell of your product or service, show that the ROI is quick (e.g. 6 months is an acceptable payback time for SaaS or on demand).
  • some magical twist to generate new clients for free 
    Example : supply -> drives content -> drives SEO -> drives free revenue is a classic. A Little Market and La Ruche qui dit Oui are well known for that.

Important bit: show that the model presented is real by providing historical KPI data for the last 3–6–12–24… months.

5- An equity story that checks out

VCs will check that the founders are still motivated after the round and that there is nothing too weird with the cap table (for more details about that, see our minimum framework).

They will also check that the amount you are raising (=your valuation since the dilution is standard, between 20% and 35%) is not too high compared to what you’ve accomplished so far. It’s usually better to (1) not give out the valuation you are expecting and (2) slightly underprice yourself at the beginning of the roadshow to limit the risk and generate competition. Trust me on that: it will help you get both a roadshow that went smooth and top conditions.

6- Traction

Traction can offset all the other pillars if it is extravagant… and kill your deal if you don’t show any. 5% per month is usually considered a bare minium, over 10% per month cool, and over 20% per month super super cool.

In terms of “volume”, expectations for a Series A/B of over 2 millions are high. VCs usually want millions of revenue to invest millions of euros.

Especially in B2C, after all the high growth super stories who have emerged in the last two years, even marketplaces grown to 2–3m euros of volume in 2–3 years are now perceived as …mundane by the VCs. This is revolting for the founders because 95% of the VCs could obviously never grow a company to that volume themselves, and they should not be allowed to classify this performance as “not that great” because it is actually amazing and f***ing hard.

Sadly, this does not mean that they are wrong about not investing, it’s a benchmarking issue: there has been a number of B2C marketplaces with over 10m€ in sales two years after launch on the venture market (ManoMano is one), and investors are deemed to consider this “the new minimum” to do their job right. Same goes for adtech: under 1m€ of volume the first year, some VCs will seriously ask you why you don’t make more money because there has been a bunch of high-growth examples (recently A.mob, TabMo…) who have established a really high bar.

If you did not grow that fast, it does not make your accomplishments less amazing. On the contrary. 
But it will make it more difficult for you to raise money from VCs.


And we’re back to my previous point. Venture capital is a challenging, unforgiving place where only the top achiever gets to stick in the investors memories, establish the bar, and get more funding. Building success stories with venture capital is nothing like a party, it’s more of a really hardcore marathon. And that’s also why the success stories who emerge from this ecosystem are celebrated so much, because an entrepreneur who choses to go through this and manages to emerge on the other side has experienced his/her fair share of harshness. 
For the record, I’m personally okay with that. I just want to make sure that you know the game and the mindset of the other players.

→ Go to part III : how to beat the VCs at their own game

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