In many conversations surrounding start-ups, VC or Venture Capital funding is discussed like a holy grail or the ultimate goal. The reality however, is that while a funding round might signal a new phase of growth it comes with a lot of responsibility. In this article we’ll run through the process from ideation to venture funding, keeping in mind that venture funding, in the grand scheme of things, is really just a new beginning.
With all of this in mind, we’ll be taking this from A to VC with the following four steps:
Preparing to fundraise
In this section, I'll aim to provide three ideas on how one might go about ideating for start-ups in emerging markets. These are heuristics and are tools that I use regularly. This shouldn't be treated as a one-and-done exercise but rather an ongoing process that can be visited regularly.
Most people expect ideas to fall in their laps
Timing is one of the most important factors in founding a start-up and therefore it's important to actively ideate and give yourself time. Unfortunately, most people expect ideas to fall into their laps, but the truth is that most founding myths are exactly that - myths.
Here are three ways to be more proactive in the process:
Method 1: Track international funding activity to identify trends
If you know what's happening around the world, you are better positioned to assess whether this might be a good opportunity in Pakistan. Generally, models trickle down from more developed markets like USA and China to emerging markets like those in Latin America with Pakistani players with similar models often arising last.
I like to keep a track of funding rounds by following some of the largest VC funds' newsletters and Linkedln accounts. Another approach is to search Y Combinator's directory of start-ups which is publicly available where any given cohort often has interesting companies with similar models across geographies. You can then assess a specific model with constraints.
Method 2: Speak to stakeholders
This is perhaps the most obvious advice; you can do as much market analysis as you want but one of the best ways to ideate is simply to talk to stakeholders. It's evident that agritech is a huge opportunity in Pakistan but for many of us, it's hard to envisage what solutions might look like. Conversations with farmers for example can help identify their pain points and guide research to help design solutions.
Method 3: Identify and track regulatory and ecosystem enablers
Many start-ups have been explored before but often the 'why now?' is the most important part. One way to ideate is to track the progress of regulatory enablers e.g., fintech regulation, healthcare policy, etc., and speak with stakeholders to better understand if and when these might change.
For example, in fintech, the introduction of Raast and the Digital Retail Banking regulatory framework are likely to enable a new wave of start-ups with a more expansive value proposition.
In the next piece, we'll explore how you might validate these ideas...
They say ideas are a dime a dozen and venture is one of the spaces where this is undoubtedly true. That said, some ideas are better than others. How do you validate an idea and ensure what you're working on is a real problem with scale potential? While it's possible to frame this as a process, the best founders do many of these things in parallel, not only for the pre founding stage but continuously.
Define what good looks like
This might vary but most venture investors are asking very similar questions about the team, the business they are solving and the market dynamics. However, the way you define a good market opportunity might differ. You might find a USD 5B market large while an investor might be looking for a USD 10B market. You might be seeking 20 per cent growth rates while an investor is okay with 10 per ent. The way to define what good looks like is to research peers. Find out what are the market sizes and growth rates of commonly accepted large markets and use this as a benchmark.
Research, research, research
There's a lot you can learn from the internet. Look for reputable sources such as articles, reports and podcasts speaking about the industry, problem, and solution space. You'll be surprised. If you find a founder in the space in another geography, then reach out to them. Reach out to people who have tried to solve the problem before and start to validate your hypotheses.
Run a trial
Now you know you're in a big market and some of your initial hypotheses are true, go out there and run a trial. Ask yourself what the most stripped down, least tech enabled version of your platform is and use this to serve your users. For example, if you're in the agritech space, rather than giving users an app to order from, ask them to order via whatsapp. Instead of creating an interactive menu, share a pdf. Instead of accepting digital payments stay cash only. Focus on replicating the value without the product and record your results.
In this process, you will build up a knowledge bank that you can assess across industries as well as develop qualitative insights. If you'd like to take this to the next level you can build out a framework to assess opportunities and include things like the size of the market, the size of the impact, the defensibility of the business and more by assessing them just like a VC might.
Preparing to fundraise
Venture funding is best suited for ultra-high growth businesses in very large markets and is closely linked to the early days of some of the most iconic companies we see today including Apple, Microsoft and Meta (Facebook). Venture funding is by no means the only source of funding but if you have decided to pursue it, here are a few thoughts about how you might prepare to fundraise.
Venture funding is best suited for ultra-high growth businesses in very large markets and is closely linked to the early days of some of the most iconic tech companies in the world including Apple, Microsoft, and Meta (Facebook) as well as some of the newer companies demanding our attention. There are a handful of category defining technology businesses that have been able to grow through profits (see Mailchimp) but the reality is that to hit scale, most do it through venture funding.
Build an all-star team
A core team needs both the insight and the skill to build the product they say they will. If your product is heavy on operations, make sure someone covers that skillset. If your technology is relatively simple it might be less important for founders to be technical. Map out what your core competencies are and between the founding team make sure you've covered the major buckets.
Develop your fundraising collateral
Most people go from idea to research to pitch deck. I much prefer to go from idea to research to memo to deck. This middle step of a 'memo' is essentially a deck in word form. This serves multiple purposes but most importantly it allows you to get your content together without having to think about how exactly it's presented.
In this way, when you go to the last step you're more concerned about communication than content. You should also do at least some high-level financial modeling on spending and revenue drivers but the earlier stage and the less concrete your business model, the less important this will be.
Before directly pitching investors, try to start building relationships with the relevant stakeholders. Always ask if you know or can get warm intros to these conversations but cold reach out can also be highly effective.
I find that other founders and angels can be a good place to start. While analysts and associates at funds might be more willing to jam on ideas rather than pressing you for a pitch. When you're ready to pitch they can also act as strong advocates for you through the internal process.
Effectively preparing to pitch can take a process from good to great and beyond!
For early-stage technology companies, the fundraising process can be a very opaque one. Whether you are engaging with angel investors or VCs, your approach should be fairly similar. The purpose here is to shed some light as you enter these discussions.
Decide on deal terms
Before you go into the process you need to know three things really well. First, how much money are you raising? This should be based on getting you to the next milestone - I normally tell early-stage founders who are looking to raise another round in less than 9-12 months that they should look for enough funding for closer to 15 months as well as a healthy buffer.
Second, how much of your company are you willing to give up for this? Early-stage funding will likely be through a SAFE note so this refers to the 'valuation cap'. For a deeper understanding of these terms, check out https://learn.angellist.com. While things vary by stage, market and geography, pre-seed rounds can run from 10-25 per cent of the company.
Third, when will you be fundraising next? Or in other words what is your fundraising strategy for the next couple of rounds. These don't need to be crystal clear, but some idea can help guide conversations and signals a long-term mindset.
Assuming you've already started to build relationships and have started to do your homework, you'll need to start connecting with investors. Fundraising should be near enough the only business priority you have for the duration of the process (at least 4 weeks).
You'll need to keep a detailed excel sheet and ask for warm intros wherever you can. You should aim to take a bunch of 'intro meetings' in very close proximity to one another. Within 7-10 days you should be able to have first conversations with as many relevant investors as possible starting with those who are the highest priority for you e.g., similar previous investments, experience in the industry, comfortable with the geography etc.
Move lightening fast
The core to a good fundraising process is the ability to move fast. After intro calls, everyone's process will vary widely. If an investor asks a specific question, get back to them ASAP, definitely the same day. If investors ask for follow-up calls make time, aim to have these within a few days to keep the momentum going.
Leverage downtime to keep a 'data room' if you have high-level user data such as retention, ARPU etc. As well as this, keep an ongoing bank of frequently asked questions as they are likely to be common across investors and will allow you to get back quicker and quicker.
As the process goes on it gets harder to treat these as distinct phases. You'll have anywhere from 2 - 5 calls before getting on to discussing deal terms or getting a response. Keep investors updated if you're discussing deal terms with another investor as this can force them to move faster. Try to define deadlines e.g. we are aiming to close by X. We will need a response by Y, does this work for you?
Throughout this process, you should have spoken to dozens of investors with (hopefully) a few offers in front of you.
To go from idea to a venture backed business is no easy feat regardless of your background or previous experiences. By having visibility on best practices and some idea of how these things might work in the abstract, my hope is that entrepreneurs can begin to use this as a kind of guide and get their ventures funded.