Two more Dear Abby posts are up! It’s been really interesting to see what people are asking. Last week, an entrepreneur asked me whether taking VC funding is necessary at all. This is an increasingly hot topic, particularly as equity crowdfunding rule changes have the potential to impact the early-funding landscape. Here’s an excerpt:
Does every startup need venture funding? Sometimes I wonder if founders think they need funding because it is said so often that they simply start believing it. Do you think if a startup has a true solution and an effective story, venture is needed?
– Female founder, health startup
There are definitely situations in which venture funding is not needed. The primary things to consider are how competitive your market is, and how quickly you are likely to reach a point where your business is bringing in cash. If the market is competitive and a first-mover has a clear advantage, outside funding may be a good idea.
If your true solution and effective story yields results – meaning you begin to gain widespread adoption during the early bootstrapped phase – the dilution you’d take from venture funding may not be worth it. Venture capital is for scaling more quickly than otherwise possible and not every company needs (or wants) to do that. GitHub is one example of a company that became successful without venture funding; they provided a service that their customers loved, and they grew organically. While they did eventually take VC funding, their first round – $100 million – happened when the company was four years old and needed some cash reserves and capital to continue to scale.
This week’s question was about metrics. Specifically, which metrics are most important to monitor following seed capital, while looking ahead to a future Series A raise. It’s a question that reflects the entrepreneur’s desire to avoid the “Series A crunch.”
Once a promising seed-stage company is funded, what are the business milestones that stage-A VCs like to see before investing?
-Female technologist, San Francisco
Meaningful ones! That answer isn’t a cop-out; it really varies according to the type of business the company is in. Generally speaking, the metrics that matter are the ones that track meaningful customer engagement with your product. B2B metrics are very different from B2C, and investors evaluating a company will compare your metrics to comparable companies in the same sector.
Seed stage capital is for finding product-market fit. You want to show trends over time which demonstrate that fit: user numbers continuing to increase, revenue (if you have it) picking up, a growing number of enterprise clients moving through your pipeline. The specifics may vary, but ultimately you’re looking to demonstrate your market is excited about what you’re building.
Keep the questions coming!