Support for VC Funding

Supporting Founders Behind the Scenes

I’ve never been in the driver seat for venture fundraising. I’m usually in the passenger seat, holding the map. A map that usually looks like a treasure map with a red X that marks the spot. There’s no clear path to get to the destination and the scaling is off — it looks closer than it is.

A Hitchhiking Passenger

Because I have never been in the driver seat, I often in the past had imposter syndrome when it came to offering up my experience to help others. But someone pointed out to me, that as someone in the support role, I also get more opportunities to learn about different fundraising experiences in different companies. It meant that I was learning at the hand of different founder CEOs who had different stories and strategies to fundraising. I was also privy to the numbers they raised at and what business milestones were achieved to back up the story. That was more than most people had the chance to experience once when starting out, let alone more than a handful of times. While founders had to continue driving on, as the passenger I frequently hopped off and hitched a ride with another driver.

A Sounding Board & Number Cruncher

As a passenger on the ride, the support I provide is usually in the preparation leading up to the raise and any follow-up requests that result from investor meetings. The process itself is very fluid and can change somewhat in execution from person to person. Every person has their own idiosyncrasies and style when it comes to raising. However, with enough practice, the general outline is the same. The preparation process I boil down into the following steps:

• Strategy
• Numbers
• Ask
• Price
• Story

(Which just so happens to spell SNAPS, purely coincidental)

Strategy: What is your business trying to achieve?

First and foremost is to define your strategy and business plan. In your strategy, focus on how to grow your business and be clear on what are your product achievements, goals, and milestones.

Start 3 Months Prior: Ideally this is done at least 3 months prior to your planned raise so you can also execute on any changes that will be reflected in your numbers and story. This point is key. I can help only so much with the pitch. The best way to pitch is relying on your company’s performance to do the hard work.

Get Input from Investors: Identifying the few key items you want to achieve before that raise is imperative to that narrative. This is when you ask fellow founders, mentors, advisors, and potential investors — what do you want to see in our next round. By asking months in advance, you have time to incorporate any new goals, or direction shifts before re-engaging with investors.

Reflect & Think Deeply: More importantly, take some dedicated time to self-reflect. Carve out 1-3 days of uninterrupted time. Some founders may benefit from taking some time to away from the day-to-day work to really unwind then refocus on the bigger picture. They may do this alone or as a team at an offsite or retreat. I recommend unplugging from email, team chats, and silencing your phone. Let your mind achieve its greatest potential in envisioning your company’s future without the distraction of everyday life.

Deliver a Write-up: The deliverable here is a short-form memo of 1-2 pages presenting your strategy and your company’s vision and purpose. In layman’s term, it’s your business plan. But focus on the strategy aspect of

1. the company vision,
2. the product development, and
3. the go-to-market approach in equal parts

As an aside, the founder should also be putting together an investor list during this time to start reaching out and making sure they have an in for pitches.

Numbers: Your business by the numbers, from revenue to expenses

Turn that strategy into a financial model. This is where I spend the most time. The numbers are also your commitment as a founder to your investors, your forward-looking statements on performance.

Here founders will nitpick at pretty much everything that is set forth in a model. That’s why it’s important to stick to the most important aspects of the business. For those uncomfortable with an in-depth model, something as simple as a single sheet with ~100 rows can be enough. For those who want to be able to dial into different aspects, then the model can be 5-10 tabs long with lengthy formulas on each tab.

Modeling Approach: The approach taken here is usually top-down assumption driven modeling, with very basic functions. This approach is immensely intuitive and easy to follow. More importantly, if done well, the story within the numbers are self-evident and anyone can pick up the model to read it.

Timeframe: Generally, the numbers portion should mimic the sections of the strategy. The projections should be for 2-3 years into the future, with 2 years of historical data or all past data if your company is younger than 2 years old.

Sections of the Model: Financial models can be immensely lengthy, but usually it’s overkill. I think in most companies I’ve been with, the model became outdated every quarter. Stick to the basics and don’t overthink it.

• Revenue — with additional go-to-market metrics as relevant. This has a lot of variation and can be the generic SaaS revenue build, an e-commerce funnel, or a more complicated waterfall chart.
• Headcount Plan — showing timing of hires, expected salaries, and fully-loaded costs for benefits. Raises should also be factored in
• P&L — with line items for cash burn and cash balance — Usually for early stage start-ups, we skip the entire cashflow and balance sheet build. The focus is on the income statement that is a pseudo cash-based model. This is the master model in a lot of ways bringing in the revenue and headcount assumptions, then layering on all of the OPEX assumptions.

Targets to be Mindful of:

• Revenue growth — At minimum you should be market competitive; ideally it should be moderately more aggressive than what you can realistically achieve. For founders with their head in the sky, my job is pull them back down to earth. Being overly optimistic and aggressive can help you raise a bigger number, but you also have to deliver on those numbers to avoid issues further down the line. For founders who are stuck in the trees and can’t see the forest, I’m there to pull them out of the weeds. Being too conservative means you’re lowballing yourself and your team, exchanging a portion of your company for a price that is too much of a deal.
• Financial Ratios — Examples of ratios that can help investors benchmark you with other companies they are evaluating. Analysts at venture firms come from finance backgrounds, so financial ratios are natural way for them to compare your business to other opportunities they are evaluating. These ratios often make no sense to non-finance founders because there’s no meaning behind them. The purpose of them is for benchmarking purposes. Though flawed, these benchmarks in practice are one of the most useful and simple metrics to use to quickly gauge the basic financial health of a company. Here are some common ones usually used for start-ups:
  • Gross Margin
  • G&A as % of Revenue
  • R&D as % of Revenue
  • S&M as % of Revenue
  • Annual Revenue per Headcount
• Monthly Burn Rate — In a capital constrained environment, this should not be excessive. Many startups have leaned down and brought down the rate at which capital is used because of the rising cost of capital (except for AI companies). Benchmark how you are utilizing capital versus others at your stage in order to stay competitive. Most importantly, the sum of your monthly burn for the following 2-3 years OR until profitable / cash flow positive is how you get to your ask, i.e. how much capital you need to raise.
• Timeline to Profitability — This used to be a nice to have but should now be considered a requirement. Although most companies will not be able to achieve profitability as outlined in their model, showing a potential path to get there shows how your team thinks about building your business. It’s meant to demonstrate a real way in which your business will exit the capital sinking phase to become a viable, self-sustaining business.

For different businesses, there will be domain specific targets or metrics to be mindful of. In SaaS, you’ll have a whole swath of metrics. There are so many metrics that you can even write a book about it.

What other sections may be needed?

• CAPEX: Some businesses may need more complex models to address capital expenditures and similar costs. However, most investors for early stage companies won’t be looking for these.
• Schedules (AR and AP): This directly relates to cashflows and if your business have significant timing differences for AR/AP, then this should be modeled in. For example, if you can recognize revenue in the first quarter but don’t receive payment until the third quarter in the year due to payment terms or collections issues, then the business may be more cash constrained than expected.
• Sale Capacity Planning: If your business model is B2B and you rely heavily on a sales team to grow your business, then this is a must.
• Marketing: Similarly, if you rely heavily on marketing to scale your business, then modeling marketing spend, cost per acquisition, and payback periods are important.
• Cashflow Statement & Balance Sheet: More traditional business loans or venture debt may want something more along the line of this a full-fledged 3-statement model. There’s usually not enough ROI to justify the investment into such an endeavor for early stage companies unless asked for by investors.

Asking potential investors what their requirements are can be helpful here to ensure you have time to prepare. Alternatively, having a financial analyst resource on hand (like our team), can be helpful to address ad hoc, urgent asks from investors during the raise process.

Minimum Desired Outcome: The main outputs from this to nail down are:

• Revenue and growth, especially how you plan to get there and appropriately aggressive target growth rates
• Cash burn, monthly cash burn. In particular, the cash burn shows how much capital you’ll need to raise, i.e. the ask.

Ask: How much capital do you need?

The main output of your financial model is to help you determine what your ask is. The ask is the amount capital you’re looking to raise in this round, and how you plan to use those funds.

How I calculate the ask

• Sum Monthly Cash Burn: From the monthly burn, take the sum of the cash burn starting from when the company cash balance hits 0 and sum up the burn for the time period you want the funds to last for.
• Determining the Time Period:
  • First Principles — The capital should last you long enough that you grow into your valuation. By the time the funds dry up, you should be cashflow positive OR have reached the milestones to command a step-up valuation that supports another raise.
  • Enough to Weather a Downturn - During the 2008-2021 period, capital was cheap, so founders raised almost every year. The time between raises is longer now with the higher cost of capital. For my own conservatism, I’d recommend that start-ups raise for 2-3 years of runway. It’s enough runway to weather any volatility in the market and provides more time should the team need to hit its targets
• Get a Worst Case Scenario: One easy way to do this is assume that you’ll spend all the money you plan on spending, but you generate 0 revenue from all of this spend. This is a quick back of the envelope that works well enough for companies that are just in the early stages of generating revenue. Because honestly, it’s really hard to make money these days.
  • If you want something more elaborate, then a second model can also be built. This tends to overcomplicate things (like “which version are we talking about?”), that unless it’s necessary, aim to avoid.
  • OR a compromise is to build in some scenario modeling that allows you to flip between multiple scenarios. This really boils down to the founder’s comfort level.

Price: What valuation are you going for?

Then comes the dance — at what valuation should you raise that ask at? I say it’s a dance because like most negotiations that come with pricing, neither side usually likes to offer up the first price and both sides are trying to figure what the other side is thinking. That dalliance is one I’m not privy to. What I am privy to is how to methodically approach the pricing based on acceptable practices.

Note that I call here acceptable practices because even in the soundest pricing discussions, most start-up pricing models don’t follow standard big corporate or academic best practices for valuation. You’ll notice that up until this point we haven’t mentioned any fancy pricing models, and you don’t even hear the most basic of financial modeling terms like the time value of money and discounted cashflow. Those methods are both too complicated to apply in practice and usually don’t aptly fit start-up growth trajectories.

The Venture Capitalist Tom Tunguz has some great articles on valuations. Here are some of my favorites:

The Three Eras of Startup Valuations

How Markets Value Software Companies in 2023

The 100x ARR Multiple

We’re going to talk about three approaches to get a semblance of a pricing for discussion:

• Revenue Multiple — This is the most widely talked about and understood pricing approach. First and foremost, it’s relatively simplistic. You can read more about revenue multiples here.
• Benchmarking Comparables — This is probably the most appropriate method. Companies in the same space at the same stages are more similar than they are different — similar addressable market size, similar revenue potential / competing for the same customers, and similar macroeconomic factors. The main drawback is access to data and defining what is a true comparable.
• Step Up — This is probably one of the weakest approaches, because it’s not based on first principles. Just because you raise X in Series A and doesn’t mean you should raise Y at a Series B because everyone else has raise X * Step-up Multiple = Y. Yet it can help as a sanity check — a ratio. Read more about step-up benchmarking here.

Story: Nailing the Pitch

Bringing this all together, it’s time for the founder to craft their story. The result is what everyone knows about the fundraising process: the pitch deck. But it doesn’t have to be a pitch deck. For some founders it may be drafting a script, getting in front of a camera, and recording a video. For some founders it may be a long-form memo that spans multiple pages with a lot of dense text and some hand-drawn diagrams. Most of the time, it’s a pitch deck. There’s a lot that has been written about pitch decks, and we ourselves have put our own spin on it.

But regardless of what medium and what form “the pitch” takes, the focus is nailing down the narrative.

• How do you envision changing the world?
• What will you do to make that change happen?
• What will your company look like in ten years?
• Why are you the team to do this?

This is where founders are asked to think big and back it up with whatever chops they’ve got in their arsenal. One of my husband’s investor uses the phrase “reality distortion field” that a founder needs to create to tell a compelling story.

At this point, we would also put together the visuals, key metrics, and cleaned-up financials for investor pitches to back up the narrative. We’d nail down the numbers and the ask as part of the presentation to finish off the story bringing things back to the negotiation table.

This is My Stop!

This is where my part in the journey wraps up and the founder drives off into the sunset without me. They’re going to reach out to their network to start running through the pitch and the numbers. They’ll start having initial investor meetings, then partner meetings, and then hopefully a term sheet to top it all off. I’ve been lucky enough to be on the end destination when the money hits the bank and hope to be again sometime in the near future. But until then, I’m looking for my next ride to hitch.