As a pre-rev startup, how can I prove to investors that I have the potential to hit product market fit?
What data do investors really care about at pre-seed and seed? (Is it all gut-instinct or all spreadsheets?)
Why do investors keep telling me they want to see more metrics, and not biting?
These questions, and lots more, came up today in the first talk we ran as part of our Seed Sprint, a 4 week sprint designed to help startups close early stage funding rounds faster.
We were fortunate to have Richard Howard along to answer all these questions, and set our founders up for a week of collecting all the engagement data they need to prove that users LOVE (or will love) their product. Richard did not disappoint. An Active Angel with impressive startups in his portfolio (including the fastest growing EF company, now at Series A with A16Z), Richard knows what he’s looking for at the pre-seed and seed stage. He’s been a founder himself, and wasn’t afraid to admit how he struggled to find product-market fit (PMF), which ultimately killed his startup. He also has experience growing the likes of Uber and AWS in London, and pulled from all these experiences during his session
We had 165+ founders in our audience who benefitted from Richard’s knowledge, but we didn’t want to stop there. Here are some of his key learnings, take-aways and top tips.
Investors will take a glance at all your revenue projections at pre-seed / seed, but they know it’s made up at this point. Do your homework to prove you have done a bit of maths, but don’t spend too long on beautiful forecasts.
Want to figure out how to value your company and pre-seed or seed? Somewhere between £2m - £5m is probably realistic (although there are obviously exceptions given there are lots of different factors at play, especially team). Look at comparables to ascertain where you sit within that bracket.
Is NPS important? Richard believes actions speak louder than words. It’s great to have a high NPS score, it’s better to not lose any customers. Get, keep, and grow!
Total Addressable Market (or TAM) is one of the only metrics you have at pre-seed that can pique an investor's interest. You need the TAM to be large enough that you can keep taking increasing market share year on year, to demonstrate your growth potential
Investors saying they want more metrics? They might be talking about other investor interest. If there is another offer on the table, use that to your advantage, FOMO is real!
Speaking of investors, they’re human and therefore they have human emotions. Not only does that include FOMO, it includes greed - they want to return as much as possible from their investments, and your valuation is going to be a negotiation, so prepare for that.
How long should you take to ascertain PMF? How long do you have? Don’t bother hiring, seeking investment, or spending a huge amount of money on anything until you validate that customers need your product
Enterprise product (rather than consumer) and don’t feel ready to get out there and talk to your customers about your product? There is always a way, you don’t need to sell yet, but you can still pick up a phone or draft an email to get advice and feedback. It’s not fun, but cold outreach should be your new pastime.
Revenue generating? That’s great, but watch out. Once you’ve sold one unit, there will be questions and expectations to sell more. Not only that, but your metrics are real numbers now, monthly / annual revenues, real customers, real churn.
How important is growth? It is super important, and there are metrics investors look for at all stages to see tell tale signs of growth potential.