Investment Readiness Level Guide: How to Boost Your Startup’s Attractiveness to Venture Capital Investors using the Business Model Canvas

 By Martin Luenendonk| 2017-07-24T22:39:38+00:00 May 8th, 2017|

Most startups will get to the point where they need to raise money from angel investors and venture capital investors.

The road to a multi-million business is not easy and additional funding might be necessary to reach the next level.

Startup statistics, especially in terms of finances perfectly highlight this difficult road.

Over 50% of startups fail in the first five years, with 27% of businesses surveyed by the NSBA saying they didn’t receive the funding they needed.

But should you just accept VC investment when it knocks on the door?

More importantly, should you even hope they knock on your door? What if they just slam it to your face once they see what your startup has on offer?

Consider the example of Andreessen Horowitz, an US-based venture capital firm.

They say 99.3% of startup investment applications are rejected. 3,000 annual inbound deals with only 15 to 20 getting funded.

So, what can your startup do to cause venture capital investors to see $$$?

How can you know that you are prepared to seek venture capital and end up being one of the 15 to 20 startups VC firms like Andreessen Horowitz invest in?

Let’s examine what makes your startup investment ready by figuring the answer to the hot question – are you really prepared to raise venture capital?

Investor readiness checklist

Wait! Isn’t every business ready to raise money?

The question ‘Are you ready for VC investment?’ might sound a little odd.

After all, you’ve set up your startup, you need funding to grow it so what’s the big fuss? Can’t you just find the investors who are ready to invest and pop the champagne?

Well, not quite.

Just because you have a business idea, perhaps even a product and some customers, you aren’t necessarily ready for investment – especially VC investment.

There are essentially two reasons preventing you from just being able to attract investment.

First, investment readiness matters because of the simple fact that money doesn’t grow on trees.

Even if you wanted to receive investment, you probably won’t get it. Now that sounds rather harsh but it’s the unfortunate truth.

And the proof is in the pudding.

According to data by the Small Business Administration, around 600,000 new businesses are started in the US every year. Out of these, the number of startups that receive VC funding is 300.

What’s the probability of your business getting VC investment?

You can calculate it by taking the 600,000 startups and dividing it by the lucky 300 that get the investment.

The result? 0.0005.

Now, that’s not great odds.

It’s easy to say then that VC money is certainly not available for every small business. You can’t just knock a door and ask for an investment.

But is this more of a case of not having enough money around rather than not being ready for it when it comes?

Could VCs just not have enough funds to give to your business?

While the world certainly doesn’t have unlimited amount of money to go around startups, the low investment numbers cannot just be explained by lack of available investment.

In 2016, VC firms invested a little over $69.11 billion in startups in the US. So, the money certainly is there for the right type of firms.

So, what does this mean?

Well, the reason VC investment might seem low is exactly the issue of investment readiness.

VC firms aren’t just handing out money – a startup needs to prove it is worth the investment.

VCs essentially examined a big portion of those 600,000 startups and realised only 300 are worth of investment.

I’ll go over this point in more detail in the following chapters.

However, it’s important to note the key thing about VC investing now: in order to attract the capital, you provide the investor with equity and a promise of return on the capital.

You’re not just getting money, you need to convince the investor he will get the money back and more in the future. Typically, venture capitalists expect a 10x cash return on each single portfolio company they invest in.

But there is another reason you need to think about investment readiness.

Your business might be able to get investment but it might not be good for the business.

Now, it might sound a bit strange. Someone offers you money and you turn the offer down because…it might be bad for you.

You’re probably saying ‘hold on a minute here’.

Most startups waste 6-12 months trying to raise money, because they aren't investment-ready. Click To Tweet

Again, it comes back to VC funding not being just something you take – you need to give in return.

You won’t be able to receive funding without agreeing to the terms – how much equity you give up, what kind of ownership structure you’ll be using, the specific return conditions and so on. These terms might be bad for your business.

Your business might not be investment ready because the investment you are getting is not good for you.

Consider the example of Mike Belsito and his startup eFuneral. He, together with his co-founder Bryan, decided to turn down a six-figure sum because the investment wouldn’t have been beneficial for the startup AT THAT MOMENT IN TIME.

Belsito writes in his blog post, “We decided that given the size of the check they were writing, we weren’t ready to give up the kind of control that they were asking for”.

For them, VC investment just wasn’t the right thing at that moment – the startup wasn’t investment ready in the sense that what the business needed didn’t meet with what the investor was offering.

So, the key takeaway of investment and investment readiness is that yes, you probably do need the money with your startup.

However, needing money is not the same as being ready for it when it happens.

What does it mean to be investment ready?

So, not all startups are ready for the investment for the two reasons implied earlier.

First, your business might not be investable in the eyes of the investors. Meaning you aren’t able to convince the investor, they will get their money back and more.

Second, the terms of investment might not be suitable for your startup. For example, you don’t want to give up 30% of your company for only $200k or get $1bn and lose 60% of your business.

In either case, the essence of investment readiness is about exploring the potential partnership between the investor and the startup. You are looking to find an answer to the question “What could we both achieve with the investment?

The crucial thing to understand here is that investment readiness is not just a feeling you have. It’s not about the gut feeling.

You need to back up the gut feeling with proof – there are ways to find out your investment readiness other than just saying, “Yes, we need or want money”.

The point I’m trying to make here is that investment readiness isn’t a matter of your passion towards the startup.

The investor won’t just look at your enthusiasm and business idea and make an investment judgement based on that.

You need to understand that VCs are essentially just looking for a return on investment – if you can’t prove them they should be able to expect a return, then you are not investment ready.

So, what criteria are VCs looking for?

At its most rudimentary level, four basic factors determine how investment ready a startup is.

Inveastment Readiness

So, let’s move our attention to the VCs.

What does a venture capitalist really want from your business in order to invest $1m to $5m?

Venture capitalists and their specific needs in terms of making investments form a big part of the conundrum of investment readiness.

Raising venture capital isn’t the same as walking to a bank for a loan.

While a bank is essentially just hoping to get back what it borrowed, with an additional interest, a venture capitalist wants more than just his money back.

Let’s start exploring the impact of VC needs on investment readiness by examining the process behind raising venture capital.

What does it actually mean to raise venture capital?

It’s important to understand the process because it will help understand what your startup needs to do to attract VCs.

VC firms themselves have investors known as limited partners. These can be insurance companies, family offices, asset managers or even university endowments. So, VCs are not just responsible for their own actions and decisions, but they need the results to satisfy their investors.

This is important because it sets your mind to understand why VCs need proof of your startup’s investment worthiness.

So, what happens when investors get together to form a VC firm?

LP VC Startup cycle

This matters because LPs won’t keep providing money for VCs that are unable to provide them with returns.

Let’s say you gave me $5 every week because I’ve told you I’ll provide 3x returns for you. Now, if week after week I give you nothing, you would eventually stop handing out that $5.

The same would happen with VCs – they don’t want to make investment in startups that can’t show any kind of hope of getting the money back. They’d be out of business if they did it.

But there’s more to it.

The shocking fact is that according to a study by venture capital firm Correlation Ventures, 65% VC-backed businesses fail to return the investment.

It’s no wonder then they don’t just want to hand you the cash!

It’s also exactly the reason why they invest in startups that can create enormous growth potential.

Let’s look at an example VC firm and its investment portfolio. It would look something like this:

Venture Capital Portfolio

Now, if you examine the return for the total portfolio, it only amounts to 2.9x. This is actually lower than the minimum of 3x return VC firm investors expect.

However, since the firm will spend much of the investment in companies that are not going to provide a single penny or even break even, the returns expected from a single company are much higher – generally at 10x.

This is why the firms are also willing to take the punt with suitable firms – it only takes one or two startups to hit big to make the VC fund profitable.

But what does this mean for the startup?

Since the investor won’t know which firm will belong to the group of startups that make it big, you as the startup need to find ways to guarantee the investor you have the potential to make at least 10x return on their investment.

Let’s consider an investment example.

If the VC were to invest $1 million for a 20% stake in your startup, the pre-money valuation would be $4m. Post-money valuation would be $5m.

Now, to generate a 10x investment on the $1m, your startup would have to grow to a $50m company before the investor exists.

Can you understand now why big market and the ability to scale are so crucial in order to attract venture capital?

Your venture capitalist needs your firm to generate a big return, but at the same time, they don’t know which firm can make it and which cannot.

In order to increase their chances of limiting the fine line between success and failure, the VCs will use indicators and investment readiness to determine which startups at least have the chance to make a ROI.

Since the chances of creating a return from a startup investment are so small, the VCs must focus on maximising the return on investment.

Pitch Deck Course

For this, two strategies can maximise VCs ROI.

First, focusing on the market size helps.

Why?

Let’s consider the example above. In fact, let’s make it a bit more realistic and say your startup attracts a total seed funding of $5m.

For the 10x return to VCs, the startup would have to grow into a $250m company.

Now, your startup won’t have 100% of the market share. It most likely won’t even reach 50%.

A more realistic, yet optimistic option would be to make around 20% of the total market.

As a $250m company, a 20% market share would mean the overall market size would be around $1.25 billion. By global standards, that’s not a small market – even though it certainly isn’t the biggest.

This means the market size has to be big for the required returns – if the market share doesn’t offer a big prize of the pot, then investors will have a hard time making a return.

My startup is tackling a huge market that's ripe for disruption. Now, it's time to scale like… Click To Tweet

The second strategy involves focusing on startups with high growth potential with little investment effort.

The average LP investment cycle is 8 to 10 years. This means your startup needs to make the growth in this time or less for the returns to work.

Now, growing a business quickly in this time requires an idea that means you will start increasing profits and value without having to pump a lot of additional money in.

Josh Linkner, entrepreneur and innovator, wrote in Forbes that in order to prove your business model is scalable, you need to “be able to demonstrate at some point in your plan, you will be able to earn more money without spending more money/time to generate it”.

This essentially means you need a business that will continue growing and creating revenue without constant additional investment.

Linkner uses the example of a marketing business, which needs to spend money for every dollar they earn.

The business has to have a team to find new clients, communicate with the existing ones, build marketing strategies for the team and so on.

Therefore, as they grow, they need more people to do these things and therefore, more investment – they can’t scale up without additional input. Essentially, the VC would have to make an investment after investment.

VCs, therefore, are looking for startups that don’t need to spend a lot of money in order to grow – growth beyond a certain point will be achieved with just slight adjustments in input.

Steve Blank and the Investment Readiness Level

The above shows that examining investment readiness is tricky.

It’s tricky with a startup because you don’t really have any real metrics to go by. Right?

You are essentially taking a punt on the idea and possible success of the product on a market. You look for those ‘ideals’ outlined above but an investor would still be basing his or her investment on speculation.

Or is it possible to be more meticulous about it?

Steve Blank, an investor and professor, certainly thought differently when he developed the Investment Readiness Level.

Blanks Customer Development Methodology had earlier been the cornerstone for one of the most influential startup books of our time: The Lean Startup.

However, Blank went further. He wanted to identify a way for investors to determine whether a business is using the right type of model to attract growth – a repeatable and sustainable way to start a business.

He studies NASA’s approach to technology readiness and launched his own nine-step Investment Readiness Level.

Investment Readiness Level

Source: Steve Blank’s website

As the image shows, the readiness for funding becomes likelier the higher up the meter you move in.

It’s possible to attract investments at any level (beyond the first step) but the ‘hotter your startup gets – i.e. the higher it moves on the scale – the better its chances are of attracting investments from venture capital and angel investors.

The nine stages from cold to hot investment readiness

While the approach is especially useful for VC investors to use when validating an investment opportunity, it can also help your startup identify its investment worthiness.

So, let’s look at each stage.

1. Complete first-pass canvas

The first step is to identify the business model for your business idea.

You can use it by taking advantage of the Business Model Canvas. The canvas below is by Alexander Osterwalder and you can download and print the canvas online.

Business Model Canvas

Source: Creatlr

What does each of these structures mean?

They essentially help you identify four main elements of a successful business:

  • Scalability
  • Problem identification
  • Problem solution
  • Market fit

On the left side of the canvas, you have four segments for:

  • Key partners – Includes things like members of your team, the social networks you have, and the local and global networks you can use. Asks the question ‘Who will help you?’
  • Key activities – Outline the methods you use to provide product/service, strategies you need to implement to receive results, and functions you need to focus on. Asks the question ‘How will I do it?’
  • Key resources – Lists the resources you need to make the product/provide the service, including physical resources and labour-based resources. Asks the question ‘What do I need?’
  • Cost service – Examines all the costs involved in making the product/providing the service, including things like salaries, equipment costs, manufacturing costs, and marketing costs. Asks the questions ‘What will it cost?’

These four segments essentially help you focus on the scalability of the business.

Learn more of how to work with the business model canvas works in this video.

You are verifying the business profitability and sustainability by answering those above questions.

If you look at the right side of the canvas, you encounter the customer segment. Now, it essentially asks the question ‘Who do I help?”

You determine whom your product or service is going to benefit. Perhaps more importantly, you need to focus on identifying why the customers are going to benefit from your product or service.

A good approach to filling out this segment is by identifying the customer gain and pain points. What are the issues they are having that might be solved with your product or service?

You might identify consumers hate having to wait at restaurants or that they find the process of accessing bank detail complicated.

This part of the canvas helps you with the problem identification.

So, once you’ve identified the problem with customer segment, you need to of course start focusing on the problem solution.

The following segments, at the middle of the canvas are going to help you with this part of solving the business model.

You will focus on the value proposition. You ask your startup ‘What do I do?’

You examine your product or service and you list down how it is going to help solve those customer gain and pain points you identified before. What does your product or service do to solve these issues in a way that also makes the customer want to pay for it?

Perhaps, you have an app that allows customers to place on order before they enter the restaurant or technology that makes accessing different financial accounts easier.

Of course, once you start answering these questions, you encounter the fourth aspect of the nine-segment canvas: the market fit.

The three segments at the left side and the bottom examine the following issues:

  • Customer relationship – Outlines the ways you will build and nurture customer relations, including issues like transparency and information safety. Asks the question ‘How do I interact with customers?’
  • Channels – Lists the different channels you will use to provide your product or service to customers, as well as the channels for marketing. Asks the question ‘How will I reach my customers?’
  • Revenue streams – Looks at the ways in which you are going to raise revenue. For example, will the product or service have a one-off fee, a monthly subscription plan and so on. Asks the question ‘How much will I make?’

As you can see, the first step is perhaps the hardest to take. It will require meticulous planning and understanding of your startup and the market it’s about to enter.

However, if you can nail down the first step, the following eight will seem a lot easier.

2. Estimate market size and perform a competitive analysis

After you’ve nailed down the business model, you want to turn your attention to examining the market size.

There are three key things to proving your investment readiness at this stage:

Market potential for business model

In terms of customers, you need to show your service/product meets customer needs and expectations.

As I’ve discussed above, you also need to showcase the market size is large enough for VC. Even if your business has a potential customer base and it addresses customer needs, you can’t raise venture capital if the growth potential is limited.

Your startup will also need to consider the competitive landscape.

Can another company replicate what you are doing? Can you create barriers to market entry? How?

It’s imperative to show your product/service is able to protect itself from competition – perhaps with IP rights and patents, economies of scale, exclusive customer access, high switching costs, or technological advantage.

Elliot Trexler, CEO at Global Return Asset Management, made this point skilfully in a Forbes article. He wrote:

“A company’s profits are the result of its competitive advantages. Therefore, successful investment managers focus on whether a company’s competitive advantages will enable it to defend and grow profits.”

Trexler used the example of Uber and traditional taxi companies in his article.

If you think about it: both have the same product on offer, which is door-to-door transportation. Yet, investors wouldn’t pour money on a traditional taxi business, the way they did with Uber.

Why?

Because Uber was able to outline its competitive advantages against traditional taxi firms.

Its competitive advantages are multiple but at the forefront are the technology and the use of data. Uber has more information about its customers and the way they want to use the door-to-door service.

So, in a nutshell the better your competitive advantage, the more likely investors are to go after you.

3. Validate the problem and solution

Now, the third stage in the investment readiness level is essentially just about deepening your problem-solution validation.

Earlier on, you might not have conducted direct market research or presented the potential customers with your product/service and asked them to evaluate it.

However, at this stage, this is exactly what you need to do. Leave the building and talk to potential customers.

You should have a real discussion with customers (either B2B or B2C) and receive validation from them that:

  • The problem you have identified is real (hopefully even a must-get-solved business critical problem).
  • The solution you are offering is appealing and provides a real answer to the problem (hopefully your solution is 10x better at solving this pain than current solutions).
  • The customers would be willing to pay for the solution immediately if it were available right now (hopefully customers are already signing a contract with you, just to get early access to your solution).
Successful entrepreneurs validate their business idea with real customers. Click To Tweet

4. Prototype low fidelity MVP

At this point, your startup should be looking to introduce the minimum viable product.

MVP is essentially the smallest test you can come up with that will allow you to test your specific business idea. Note that it doesn’t have to be an actual product at this point.

It could be a crude prototype, only outlining the basic structure and problem-solving abilities. You can use product prototyping software like InVision in order to create a good-looking MVP cheap and quickly.

But it could also just be a simulation, either of a product or a service.

The purpose at this point is just to focus on validating the problem – you want to ensure you have understood the customer pain points correctly.

There’s a great post about creating a low fidelity MVP here. It’s worth checking out if you want to learn more about what investors would be looking for at this stage.

The important thing at this stage is to have the MVP test with real customers, not with your team or family and friends.

Watch this super helpful video on validating your business idea using the business model canvas (includes real-life case studies).

5. Validate product

Revisit the business model canvas I introduced at stage one.

In the fifth stage, you move on to taking a closer look at it and essentially determining whether your analysis and guesses (aka hypothesis) have been correct.

So, at this point, you’d be validating your product by ensuring it has the right market fit.

How to show traction?

Your startup should have already sold its product/service to actual customers and found channels that are sustainable and profitable for selling the product/service.

Paying customers are the best form of showing traction – if you have paying customers without the need to raise capital, you are going to increase investor interest.

Why?

Because you are showing you don’t need a lot of money to make a viable product and start creating a customer base. Essentially, you show signs that with a bit more investment you could quickly attract even more.

Now, you don’t need to have paying customers in order to show traction.

Interested customers and the so-called free customers are also good.

Perhaps you have letters of intent from interested customers or testimonials showcasing appeal of the low fidelity MVP.

You can also benefit from free customers, i.e. users. Giving free samples of the product can be useful, especially if you can highlight to the investor they like using the product.

Let’s say you have an app and you give it to 100 people to try free.

Now, if out of those 100 users, 85 use it every single day for 30 minutes (aka high engagement), you are clearly on to something with the product.

While these users are not paying to use the app, they still choose to use it without any requirement to do so.

6. Validate right side of canvas

Now, take another look at the business model canvas.

The right side was about the problem identification, the solution and the market fit. For passing stage six, you need to have validated the predictions you made at the start.

Your startup would have been able to validate the five key segments of the Business Model Canvas:

Important business model canvas elements

You have tested your product, created real relationships with customers and started seeing traction in the market.

This doesn’t mean your startup has to be making money at this point – you can still operate at the early stages and have problems taking off.

However, you are showing the ability to generate revenue and more importantly to offer value for your customers.

Remember, the whole idea of attracting investment is to kick it up a notch – therefore, you shouldn’t have to be a multi-billion company, making millions in profit at this point. After all, you wouldn’t require VC investment if this was the case!

7. Prototype high fidelity MVP

As you continue to gain traction and more importantly generate revenue, you should move on to create a high fidelity MVP.

What this means is that your startup should have a defined end-stage product customers will want.

Since you used the low fidelity MVP to validate the problem, the high fidelity MVP is about identifying the solution and ensuring you have this right as well.

The key here is to ensure your startup has a well-defined vision of what it wants to provide, to whom it wants to provide it to, and how it will move forwards.

You should have a more refined idea of your target audience and the solution you are going to provide – i.e. identifying the vertical markets or geographies you are aiming for with the product/service.

8. Validate left side of Business Model Canvas

So far, you’ve almost validated the whole Business Model Canvas. It’s time to look at the fourth piece of the puzzle: the business scalability.

Now, this was all about the left side of the canvas. At this point, you would have found proof for the four segments of Key Partners, Key Activities, Key Resources and Cost Structure.

At this stage, your startup is still growing.

Therefore, you don’t need to have scaled the business at this stage. However, you do have to highlight the ability to do so – especially after the venture capital investment.

In order to validate the left side of the canvas, you need to demonstrate results and traction in the following aspects:

Results and startup traction

Once you achieve those four objectives, you achieve another big startup marker: your business becomes profitable.

As I stated, it doesn’t yet mean your business have to be making billions or have scaled itself to the full potential.

However, by this point, the startup should be making a profit or at least show a clear path towards profitability.

9. Validate metrics that matter

The final stage is about maturing the business.

If stages 1 and 4 are about the seed stage investment and stages 5 to 7 Round A or B, the final two stages in the investment readiness scale are all about later stage investing as well.

As I mentioned at the start of the chapter, your startup can (and should) attract VC at any point of the scale/stages. However, the higher your startup ranks in the investment readiness level, the more attractive you become for the VCs.

This is because at this point you are starting to show real results.

So, basically, you can decide to invest 6-12 months being on the road and trying to raise venture capital with a very low chance of getting the money because you are level 1 investment ready.

Or, you can bootstrap the first two investment readiness levels from your own money (maybe $30k), raising a small round from angel investors (maybe $200k) in order to reach investment readiness level 5, so you have good chances of raising venture capital at a higher startup valuation.

Higher startup valuation checklist

Indeed, the final investment readiness level is all about focusing your efforts on achieving the most important metrics.

What are the metrics that matter?

According to the venture capital firm I mentioned at the start, Andreessen Horowitz, there are both business and financial metrics and product and engagement metrics that matter.

I’ve created a chart for you to examine out of those 12 metrics the VC firm thinks are the most important.

Bookings
vs.
Revenue
Bookings is the contract value the company has signed with the customer. It’s essentially the payment obligation of the customer to the company.

Revenue, on the other hand, is recognized when the service has been provided.

Recurring revenue
vs.
Total revenue
Services revenue is non-recurring, while products have higher margins and is more scalable.

For investors, recurring revenue is always preferable.

Gross profit Generally includes things like all costs associated with production, delivery and support.
Total Contract Value (TCV)
vs.
Annual Contract Value (ACV)
TCV is the total value of your contract with the customer, which can be a short length contract or a long-term contract. It should include all value from recurring charges to one-off payments.

On the other hand, ACV shows the value over a 12-month period.

Life Time Value (LTV) Showcases the present value of future net profit from your customer over the whole duration of their relationship with your business.

You can find calculation examples here.

Gross Merchandise Value (GMV)
vs.
Revenue
GMV is the total sales volume of product transactions on the marketplace during a specific duration.

Revenue is different. It’s a portion of the GMV the marketplace takes for itself. It consists of fees , such as ad revenue or service charges.

Unearned or Deferred revenue Most SaaS companies only recognise revenue over the term the contract is being delivered. The ‘booking’, however, goes to the balance sheet as deferred revenue.
Customer Acquisition Cost (CAC)
Blended vs. Paid
Organic vs. Inorganic
The CAC should always show the full cost of the customer acquisition, per user basis. This means including things like referral fees, credits or possible discounts.

What this means is separating between blended cost (including the users you generated organically) and the customers you’ve acquired through paid channels, such as marketing.

Another way of looking at this is separating the organic customers and inorganic customers (customers as a result of marketing, for example).

Active users Purely the number of engaged users.

The key is to be clear at how your startup defines ‘active’.

Month-on-month growth Looks at the average of monthly growth rates.
Churn Outlining the different churn rates of the startup, which can include monetary churn, customer churn and net monetary churn.

Gross churn: MRR lost in a given month/MRR at the start of the month

Net churn: (MRR lost – MRR from upsells) in a month/MRR at the start of the month.

Burn rate Refers to the rate of which cash is diminishing. At the start of a startup, burn rates tend to be high.

Monthly cash burn: cash balance at the start of the month – cash balance at the end of the year / 12

Now, you shouldn’t just look at those above metrics and focus on ALL OF THEM with your startup.

Some will be more prominent for your business than others. These are so-called leading metrics.

It refers to the parts your startup is doing well with and which are generating the most revenue and profit for your business.

You might have other metrics that aren’t yet doing as well. However, the idea here is to use your strengths in order to scale and optimise the startup and to move it to the next level.

Stop and ask five questions to reveal your venture capital readiness

There’s one more way to figure out if you are really prepared to raise millions in venture capital.

You can ask your startup five questions and use the answers to determine your investment readiness level.

Now, these questions essentially gather the points I’ve discussed above, both in terms of what VC are looking for and the nine-steps for investment readiness.

So, what do you need to ask your startup?

Is the market big enough to justify venture capital?

As I discussed earlier, VCs are looking for startups with demonstrable market opportunities – they won’t be able to make their money back if your market only offers limited growth.

If the market for your product doesn’t seem huge and it doesn’t offer enough growth opportunities, you aren’t going to attract investment.

Now, there isn’t any definite number to put on the desired market size.

However, if the total addressable market is less than $1 billion, your startup might not be big enough for VC investment.

The bigger the potential is – the bigger the pie available in the market – the more likely it is that investors have a chance of making a big return (remember they want 10x).

Is there momentum for the product/service design?

You need to demonstrate a real momentum in the market for your product/service.

How can you show momentum?

With a proper explanation of your competitive advantage, perhaps in terms of your intellectual proper, the business model or the barriers of entry.

How can you show success in these?

This will depend on your industry and the market. It could range from being able to find customers at a lower cost than competitors, the ability to generate higher margins or the opportunity to go global fast.

If you are able to show traction in terms of gaining customers, you have gone a long way of showing there is momentum.

The quicker you’ve grown the customer base, the better. It shows people are interested and excited about what you have on offer.

My startup already has some freaking awesome momentum. Let's switch to the next gear, Baby. Click To Tweet

You, of course, won’t necessarily have enough proof in terms of achieved result. If your startup is at the seed stage, you might not even have a prototype!

But the way to show momentum isn’t just by showcasing big results – you can also convince investors by providing them with a plan of how you are going to achieve it.

You could, for example, show customers are interested with a market research report. You could point to previous consumer studies that have highlighted a problem consumers hate having and which your product solves.

Momentum doesn’t always have to be about the financials.

However, momentum is also about being able to show there is enough interest in the whole market to help you create huge returns.

The momentum is currently building in industries such as fintech. A VC might find your fintech startup more interesting, than let’s say an animal welfare startup, because the current market momentum (the money) is in the fintech sector.

Do you offer something unique to customers?

At it’s most basic level, VCs are looking for products that are unique and which have a compelling value proposition to offer, so that your startup can become the category leader in its market.

If your idea sucks and you have no competitive advantage, you won’t have any hope of making it big in a competitive market.

Now, not all great ideas end up being great products or services. A good business idea might fail all the other investment readiness tests.

However, if you aren’t able to differentiate yourself on the market and offer customers something unique, you can’t dream of attracting an investment.

Investors aren’t looking for the next Google in terms of a search engine. What they are after is someone who will become as big as Google.

Put it another way; you don’t want to convince a VC your startup is as good as Facebook. You want to convince them that you’re much better and different.

Does your economic model make sense?

As I’ve talked about before, startups that are ready for investment are able to show they are scalable.

Your business model has to be one that is able to bring in more revenue without constantly increasing the costs – you want to add more customers without increasing the costs significantly.

If this question seems to be your obstacle, it’s crucial to look around you.

Examining different startups can help you identify the economic models other similar firms have implemented. This boils down into understanding the unit economics or order economics of your business model.

The key to answering this question lies in analysing your funding requirements.

You need to be able to demonstrate how much funding your startup needs to scale and a detailed operational and financial model for facilitating and accelerating this growth.

VCs want to see a realistic outline of things like cost, accountability, cashflow and management systems – this doesn’t need to be based on an actual figure.

It just needs to be realistic and detailed. This will show you’ve thought about your economic models, instead of just over- or underestimating your numbers.

Is your team able to produce results and grow with the product?

VCs are extremely interested and focused on your team.

Some have even implied talking to an investor is almost like going on a date. You are trying to impress the other person and to form a partnership.

VCs are not just going to fork out cash for you – they can also offer expertise in attracting other investors, expanding your market and developing your business model further.

However, you can’t just expect the VC to do the work for you.

If you can’t showcase you and your team are able to achieve the targets you’ve set, then VCs won’t stay around to take a change.

What does a high calibre team look like?

High calibre startup team

If you can present your team as strong, skilled and adaptable, you can start melting the ice around VCs quicker.

Investing in your startup requires a lot of trust by the VC. You wouldn’t trust a sleazy sales person who promised you the moon and gave you the wrong vibes.

Therefore, a VC won’t invest in a team that is talking the same language, doesn’t show competency and which isn’t willing to listen what the VC has to say.

Determining your startup’s investment readiness – the key takeaways

So, what makes your startup prepared for raising venture capital?

Investment readiness is not about what your business wants or necessarily even needs.

If you want to raise venture capital, you need to prove to the potential investors that the startup is able to provide value.

Essentially, your equity must be sellable to investors.

In a way, you need to stop looking at your business from the inside and step into the shoes of the VC.

What will they benefit from investing in your business?

By knowing what your investors want – the equity shares and the returns they need – you can start figuring out how you can provide this with the team.

Furthermore, I’ve tried to highlight the different ways you can look at your investment readiness.

I’ve explained it through the eyes of the VC investor, the nine-stage model by Steve Blank and the five questions can help reveal how attractive your business is to venture capital.

At the heart of each of these ways has been the combination of three things:

startuo attractiveness

You need to make sure the potential market size is out there, you need to ensure your product has the capability to enter and take a slice of this market, and you need the right kind of team to achieve this.

Now, what do you think? Would you say one of those three plays a more important role in raising venture capital than the others?

Also, which investment readiness level is your startup currently at and what are you planning to do in order to get to the next level?

2 Comments

  1. Malte Schulze May 8, 2017 at 11:12 pm - Reply

    Great read! Nice job of combining different concepts from consulting and startup work!

    • Martin May 8, 2017 at 11:26 pm - Reply

      Thanks a lot, Malte. Your feedback means a lot to me! 🙂 Cheers, Martin

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