Last week, Mighty Capital General Partner Jennifer Vancini joined Founder Institute live for an interactive online AMA (‘Ask Me Anything’) event, where she answered founders’ questions about the fundraising process, shedding light on the perspective of the venture-stage investor. Mighty Capital invests in ‘early growth’ companies, at Series A and Series B stages—that is, after companies have already achieved some level of product-market fit, and are looking to scale through a strategic capital raise.
The following are 5 top fundraising takeaways for founders from the AMA event:
1. The Anatomy of a Great Deal
- Unique team (skills, ability, connection); passion
- Solve a real problem (or delivering on a need people are excited about, an opportunity)
- Differentiated Solution (can be technology, or can be your market segment or ecosystem)
- Traction (people want to pay you for your solution)
- Big enough market for venture capital
- How much funding you’ve ready raised, and what you’ve been able to do with that capital
- Have a vision to scale in such a way that you have a plan to generate returns for investors
Vancini’s slide deck included the following general template statement, which if a founder presented to an investor, would theoretically tick ALL the possible boxes on the investor’s side of the equation for what constitutes a great deal:
We are a unique team, excited to solve a big and hard problem. We came up with a sustainable differentiated solution. As a result, we are gaining solid traction, which we monetize fairly. So our financials look extremely promising, but to get there we need a reasonable amount of funding. We have a credible plan to generate significant returns for our investors.
2. Investors have their own Objectives & Considerations, discrete from those of founders.
- Venture Capitalists are seeking extraordinary returns—they want at minimum 3-5x cash-in/cash-out; a fractional % increase return over some number of years simply isn’t enough to be attractive.
- Time-to-Return matters - How long will it take to get this liquidity from the investment?
- Risk/Return Ratios - Every company and industry is different - a safer bet is easier to make; but if the potential return is enormous, investors can be willing to saddle some more risk.
- Portfolio Construction - This is something often not visible to the founder, but always present in the investor’s decision making: if a venture firm needs to make 25 investments this year from a particular fund, they may also be balancing a number of considerations in the background that have as much to do with the rest of those investments as they do your company. Examples might include what is the stage (e.g. they want to do 20 Series As and only 5 Series Bs); what is the industry balance of the portfolio; or is there a competitor already in the portfolio.
- Large Markets - Venture capitalists can’t make investments in startup plays that are merely regional, or that are just a potential smaller feature of another potential larger product. There is no exact one-size-fits all number since industries are different, but the investment needs to be truly venture-scalable.
- Defensibility - sometimes referred to as startup’s ‘Moat’, there should to be some ‘secret sauce’ or hidden advantage (or could be something public, like a patent or brand or leveraged partner or ecosystem) - something that can stop another market player from simply copying your product solution.
3. Traction: how much growth is enough?
This can be a squishy question, because it again always depends somewhat on the industry - in a life sciences company for example, they often won’t have revenue for a while yet, but lining up partners could be considered traction; or in healthcare, moving along through various steps in the FDA approval process would be considered traction.
- Ideally post-launch, tripling annually, or triple-double-double year to year, is good. The key is that the growth needs to be exponential. Doing $1M in revenue in year 1 to $2M in year 2, but then projecting $3M in year three is now showing linear growth, not exponential.
- High level for B2B SaaS companies, $1M ARR is good (Note here: Mighty Capital is Series A & Series B investor)
- At the Seed stage, showing that the growth is recurring is what matters—growth month over month, in both revenue and accounts, is a key positive indicator.
4. Why Investors (generally) Don’t Give Feedback with No’s:
Yes, this fact can be extremely frustrating for founders—but from the investor’s perspective, there’s not a lot of clear benefit to actually giving substantial feedback along with their ‘no' to a founder, particularly if it is a quick pass. This is because if the investor tells the founder why they’re not interested, it tends to lead to a circular conversation, with the founder replying back in a way that attempts to diminish or counter the investor’s point, still trying to sell the investor on their startup. Put simply, a no is a no, and remember: every founder will get mostly no’s—don’t take it personally, and move onto your next target investor instead.
PRO TIP: Vancini notes, get to know potential investors when you’re NOT fundraising! If you’re not actually asking for a check, you are likely to get MUCH more detailed and honest feedback.
5. Structure of terms that investors like to see:
Vancini says upfront that she could write an entire book on this topic, but provides the following quick examples for terms that investors like to see:
- Ownership investors - want to own a big chunk of a company, and will do follow-on rounds to achieve that %
- Other investors are targeting 3-to-5x cash-on-cash
- Venture Deals is a book Vancini cites as a great resource to dive deep on these topics, written from the founder perspective
- Convertible Notes: investors want a 20% discount, and a reasonable cap
- Outside boards preferred to inside boards (at least, at Mighty Capital)
- Liquidation preferences (preferred stock that is returned first, or even returned double, before other/common stock)
Watch Vancini's detailed answer to this question in the clip below, or rewind the video to watch the entire AMA event recording:
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