Raising money can be intimidating, particularly for first-time entrepreneurs. Every investor has some unique criteria, however certain metrics always warrant careful attention when telling your story. At Pax Momentum, we review hundreds of companies every year and very few founders effectively articulate succinct answers to the investors’ most pressing questions. Ready to raise more capital for your startup? Honing in on our “5 T’s” will enhance your next investor presentation.
- Team: Putting external factors aside, a good team is the key differentiator between success and failure for a startup. When assessing the quality of a team, investors look at their professional and educational experience along with track record as an entrepreneur. A good team articulates their vision; they understand the problem they are solving; and they have specific goals for the success of their venture. Along with these headline features are some of the finer details, which speaks volumes: are they timely, well-prepared, polished in their presentations, and coachable? Ultimately, people invest in entrepreneurs more than they do in the product.
- Traction: The easiest way to measure past success and forecast future growth of a company comes from an assessment of traction. Traction is the ability of a company to generate revenue from savvy paying customers. Revenue is measured in terms of how fast it is growing, month-over-month (MOM) or year-over-year (YOY), as well as the kind of revenue--is it generated from one-times fees or is it recurring revenue? Pre-revenue startups have to be creative on how they convey traction. You might focus on non-paying beta customers or perhaps customers who express intent to purchase subject to a finished product.
- Technology: Technology refers to the core value proposition of a company--it’s product or service. Surprisingly, many seasoned investors rank this T lower than both team and traction. When assessing technology, investors dive deep into the problem that the product or service is solving--is it a “must have” or just a “nice to have”? Is there an associated risk with getting the product up to scale? Additionally, technology has some added insurance when there is solid defensibility, in the form of IP, trade secrets a first movers’ advantage. More than anything, how can you convey that you are building something that people actually want?
- TAM: Investors are looking for a total market or (TAM - ‘Total Addressable Market’) of at least $500m annually, and a positive market growth rate. Too often entrepreneurs will over-hype the size of the market into which they plan to sell, rather than the specific target sub-sector of the market that their product or service can actually serve. While size is important, many other factors play into an enticing market: is there competition from a few big players, many small players, or no players? What is your credible assessment of the competition and your ability to beat them? Are there tailwinds ready to propel your company? Is the market ripe for disruption? Yes, smart money invests in entrepreneurs, but they are equally thoughtful about choosing the markets in which to invest. Make sure to tell an engaging story about your target market.
- Terms: At a minimum, an investor needs to know three things right away: company valuation, how much you are raising, and what is the instrument (e.g. SAFE, KISS, Preferred Equity, etc.). You have a firm valuation if it is established by a credible lead investor. If you are negotiating a proposed valuation, substantiate your expectations with revenue traction, comparables, the strength of the team and intellectual property. Entrepreneurs are enjoying historically strong valuations. If investors are competing for your business, rather than bid up the valuation, consider bidding up the value add that you want from the investors. Too high of a valuation can cause problems down the road when you go to raise more money and are not able to attract a strong increase in valuation relevant to your current round.
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