As we mentioned in yesterday’s blog on the SIM Conference in Porto, the event has been established by Startup Portugal to specifically serve founder needs and interests – providing a wealth of insights into the investor landscape, amongst other things. One such source of inspiration was serial entrepreneur and VC Mike Sigal.
He talked about the myth of the VC “magical money fairy”, and explained the vital need for startups looking for investment to understand VC motivations. They are not, he clarified, mythical creatures with a magic money wand dedicated to realising startup dreams. They are interested in equity, not products, and in delivering returns on the money they raise from Limited Partners (LPs), not in the investment itself. If they don’t deliver, they go out of business.
VCs raise money from LPs based on a set thesis of factors such as fund size, number of investments, stages, sectors and geographies. Therefore, if a startup doesn’t fit with that thesis, they don’t get the money. “No fit, no funding,” as Mike stated.
This is why it’s vitally important for startups to do their research into investors, asking about strategy and thesis so that no-one is wasting their time. He recommended that startups seeking first round investment research the past investments of 100 qualified VCs before starting outreach.
This will help make the path smoother but, perhaps more importantly, it also shows that the startup knows their onions!
In what I’m sure was invaluable for many of the startups in the room (not to mention interesting for me), Mike went on to share insights into the “5T” framework that many VCs use to evaluate a startup investment opportunity – arming startup founders with the right information to make their search for investment more straightforward.
The first T stood for Trends. VCs look at what the market is doing, whether there is any impetus for investing now (like Zoom or e-commerce in Covid!), or momentum to take advantage of? Further to that, what is the total addressable market, and can it enable a startup to get to 100m annual recurring revenue (ARR)?
Next came Team. Is the CEO charismatic enough to sell their dream to investors, customers and potential employees alike? Does his or her team have the right mix of skills to get the job done? And how much would they depend on the VC? Although many offer support, the reality is that they’d rather not get too involved.
Tech is the third component. Although it’s actually very little to do with the tech or product – it’s all about the equity. Is there a compelling product, and willingness to pay?
Traction is the penultimate support for the framework structure. Does the company have customers and revenue already, and has it therefore already taken a certain set of risks off the table so that it’s ready and raring to go to get to the next level with the money the VC gives them? Does the business model make sense, and is it being run efficiently?
Last but not least is Terms. Does the valuation mean it stands a chance of delivering on the investment, and what level of control does the VC get? While VCs may not want control in terms of the business, they do need an exit clause in case something starts going wrong. Terms are also about optics – does the deal look good to co-investors?
Once startups understand these factors in their own evaluation, they can create a compelling narrative around their market momentum to inform their presentations and investment memos. When it comes to pitching, Mike stressed that it’s far more important to outline what startups plan to achieve with the investment rather than what they are going to spend the money on, and that they stick to a strict fundraising timeline. Nothing like a bit of FOMO (fear of missing out) to grease the wheels!
