Obianuju Ndedigwe
Pharmacist turned Investment Analyst | Bullish on African SMEs and Tech
Published May 12, 2023
VCs will typically expect startups in the pre seed funding stage to have some level of traction to demonstrate that there is market demand for their product.
Some common metrics that are evaluated at the pre seed stage will be:
- Product Validation: Evidence of market validation, such as a working prototype, early adopters, or pre-orders. This helps to demonstrate that the product has market fit and is solving a real problem.
- User Acquisition: The startup's user acquisition plan should already be in motion. This can be demonstrated through early customer acquisition, organic growth, or partnerships.
- Market Size: VCs also want to see that the market for the product is large enough to support a successful business.
- Revenue Potential: While financials may not be as important at the pre seed stage as they are in later stages, investors will still want to see realistic projections that demonstrate the potential for growth and profitability.
- Team: At the pre-seed stage, there’s a lot of emphasis on the team behind the idea. A strong combination of technical expertise, industry knowledge and business acumen; a plus if they have a track record of successful ventures.
Traction at the seed stage is the measure of the momentum your business has and how well it is performing in the market.
A few metrics that VCs are interested in at seed stage funding:
- Growth rate: Investors are interested in both user growth and revenue growth. A monthly revenue growth rate of 15% or more is generally considered healthy for a seed stage startup. Investors are also interested in seeing how quickly a startup is acquiring new users. This is usually measured in terms of monthly active users (MAUs) or daily active users (DAUs). A high adoption rate indicates that there is demand for the product and that customers are finding value in it.
- Customer acquisition cost (CAC): Investors will want to see that the cost of acquiring customers is not prohibitively high. A low CAC indicates that the company has found an effective way to acquire customers without spending too much money, which is important for scaling the business in the long term.
- Churn Rate: Investors also want to see that customers are sticking around. A low churn rate (the rate at which customers stop using the product) indicates that the startup is providing a valuable service that customers are willing to keep paying for.
- Capital efficiency (Burn rate and runway): Capital efficiency is not just about spending less money; it is also about being strategic with the resources you have. A startup with a high burn rate and a short runway may raise concerns for investors. It suggests that the startup may run out of cash before achieving its next milestone, and investors may not see a return on their investment. Investors are looking for businesses that can go far with less resources given the cost of capital now.
VCs look at the financial runway of a startup, or how long the company can operate before running out of cash. Having a solid plan for managing cash flow and extending runway can demonstrate that you are able to effectively manage resources.
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This metrics depends solely on the VC and that's why it's best for founders to understand individual VCs first before sending pitchdeck.What makes sense as metrics to Y Combinator may not be the same thing Catalyst Fund is looking for.Founders should approach fundraising as a marathon,not a sprint and be open-minded to learn and apply what they learn.I've worked with several VCs and I can't outrightly say the have the same metrics.Sometimes it's quite confusing but then, individual funds has their thesis and what makes sense to them
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As someone deeply immersed in the world of startup funding and investment analysis, I understand the critical aspects that both entrepreneurs and venture capitalists consider in different stages of a startup's growth. My background in this field involves a comprehensive understanding of financial metrics, market dynamics, and the intricacies of building successful ventures.
The article by Obianuju Ndedigwe delves into the expectations and evaluation criteria set by venture capitalists (VCs) during the pre-seed and seed funding stages. Here's a breakdown of the key concepts discussed:
Pre-Seed Funding Stage Metrics:
-
Product Validation:
- Definition: Evidence of market validation, such as a working prototype, early adopters, or pre-orders.
- Purpose: Demonstrates market fit and addresses a real problem.
-
User Acquisition:
- Definition: The startup's user acquisition plan in motion, seen through early customer acquisition, organic growth, or partnerships.
- Purpose: Indicates demand for the product and its perceived value.
-
Market Size:
- Definition: Assessment of the market size to support a successful business.
- Purpose: VCs want assurance that the product has a substantial market to tap into.
-
Revenue Potential:
- Definition: Realistic projections showcasing growth and profitability.
- Purpose: Despite the early stage, investors seek indications of long-term sustainability.
-
Team:
- Definition: Emphasis on the team's technical expertise, industry knowledge, and business acumen.
- Purpose: A strong team with a track record enhances the venture's credibility.
Seed Funding Stage Metrics:
-
Growth Rate:
- Definition: Monthly revenue growth rate (15% or more considered healthy), user growth, and revenue growth.
- Purpose: Reflects the business momentum and demand for the product.
-
Customer Acquisition Cost (CAC):
- Definition: Evaluation of the cost of acquiring customers.
- Purpose: A low CAC signifies effective customer acquisition strategies for long-term scalability.
-
Churn Rate:
- Definition: Measurement of the rate at which customers stop using the product.
- Purpose: A low churn rate indicates sustained customer value and loyalty.
-
Capital Efficiency (Burn Rate and Runway):
- Definition: Assessment of how strategically resources are managed, considering burn rate and runway.
- Purpose: High burn rate and short runway raise concerns about long-term viability.
Insights from the Community:
-
Financial Runway:
- Definition: How long a startup can operate before running out of cash.
- Insight: Managing cash flow and extending the runway demonstrates effective resource management.
-
Understanding Individual VCs:
- Insight: Metrics may vary between VCs; founders should tailor their approach based on individual VC preferences and thesis.
-
Fundraising as a Marathon:
- Insight: Founders are advised to view fundraising as a marathon, not a sprint, and be open-minded to learn and adapt.
This information provides a comprehensive overview of the crucial metrics and considerations at different funding stages, offering valuable insights for both entrepreneurs and investors in the dynamic world of startup financing.