How to Objectively Measure the "Fundability" of Your Startup
Sorry, you can’t.
The decision to fund a company is a combination of a lot of human factors—an assessment of one group of humans by another group of humans, fraught with apples-to-oranges comparisons.
Yet, everyone’s got an opinion about how a company measures up, especially the founder. (If you want mine, I’m doing a little consulting now.) So, how do you know what truth is?
The other day, I had a difficult conversation with a founder who clearly felt like VCs were the problem in her fundraising process.
The fundraising process sucks for about a million reasons—not the least of which is that investors often lack clarity and transparency in their communication. Still, there is somewhat of a method to their madness. Because feedback is usually given quickly and somewhat dismissively due to the sheer size of the average VCs funnel, founders walk away from the process feeling like VCs didn’t quite understand what they were doing, or they don’t understand the market.
This is some of the worst thinking anyone trying to make a persuasive argument can make—that if you only fully understood me, you would agree with me.
Founders need to shift their thinking to an assumption of understanding—that investors who see thousands of pitches per year probably do understand what a founder is doing the vast majority of the time, and have simply decided that the risk/reward for investing in their company simply isn’t as good of a deal as others they’re currently looking at.
That’s a hard pill to swallow—that perhaps you’re objectively not measuring up compared to other companies. This can be the case at the very same time you’re experiencing bias, microaggressions, and discrimination. I wrote about how “both things can be true” here.
Today, I want to write about how to measure how likely you are to get funded, especially when compared to other companies. If you’re a Black female founder with revenue struggling to raise and you see two straight white dudes get $5 million for their Powerpoint presentation, it’s only logical to assume the process is stacked against you. Once you arrive at that conclusion, you’re probably not going to draw any useful conclusions about the bar for fundability or how to give yourself a better shot. I don’t need to remind such a founder how the world is stacked against them.
What I’d rather do is provide a useful framework to understand the objective ways VCs are scoring the opportunity—even if it doesn’t represent a complete picture. Below, I’ve listed a bunch of attributes a startup might have and how they push the decision-making needle one way or the other.
You’ll notice that many of the attributes have asymmetrical effects on the outcome. For example, being familiar with fundraising lingo and the finer points of SAFEs vs equity, etc. doesn’t really buy you many points with an investor—but coming off like a startup n00b really tanks your chances. On the other hand, if you sold your last company for hundreds of millions of dollars, that points a ton of points in the win column, but not having that isn’t so bad—because most founders haven’t done that yet.
Then, there are nuances. Having some revenue or no revenue isn’t a big sway either way—but having notoriously difficult to get revenue, such as a school district, government agency, or hospital, will score you a lot of points. Having a prototype doesn’t win you much in the fundraising process, but not having anything to show is clearly going to count against you.
Some areas are only downside. If you’re in travel, fashion, or DTC—good luck. The prior failures in those areas are going to require a lot of all the other positive attributes for an investor to overcome the perception that the whole sector is to be avoided.
If you have a technical co-founder or at least someone who can build on the founding team—that’s more table stakes. Not having that person will likely cost you a lot of points when VCs get concerned about how someone with low amounts of equity in the company will be able to run the build of a very hard thing to build on startup resources.
You sold your last company? Cool. Did you announce the number? No? Well, then that’s the kind of outcome that isn’t going to move the needle. Tell me how you exited your last company for $300mm and now we’re talking.
Perhaps the most unfair of all of these is when the founder is known to the investor—a former co-worker at the fund or a portfolio company, or someone they previously backed. Regardless of the outcome of their last go around, known people are de-risked. An investor is going to perceive that there’s little chance this founder just goes off the rails entirely because they have no idea what they’re doing. What’s also known is their startup network—the idea that whatever this founder needs to learn, they’ll be able to learn it quickly from people who have been there before. They’ll be one step away from everyone they need to connect with as well—and that’s a huge advantage that some random person off the street isn’t going to have, fairly or not.
Lastly, one of the hardest aspects of this to get right is sector vs thesis. If I’m known to invest in mobility startups, I review a ton of different business models. Being out of my sector area is going to hurt you, but being in it won’t get you a lot, because I’m not going to invest in most of these ideas.
What you may not know unless I’ve specifically blogged about it, is that I think we’ve reached “peak car” and that the use of city streets is going to radically transform as early as the next 10 years, having all sorts of effects around how we move people and things around urban environments. If you fit into that specific thesis within micromobility, that will give you a lot of points in your column—whereas being an autonomous vehicle play wouldn’t do that just because it’s in mobility.
There’s more being each one of these areas and this list isn’t comprehensive. If you want to dive in and hear where I think your raise might land with VCs, I’ll take 33% off my workshop fee for readers of this post. While I’m mostly coaching VCs these days, I’m doing a little bit of fundraising consulting here and there and I’m happy to be helpful if I can before you’re ready to go out.
