When Should Your Startup Seek to Raise Capital? Grays Peak Capital LP's Scott Stevens Discusses
When Should Your Startup Seek to Raise Capital? Grays Peak Capital LP’s Scott Stevens Discusses
Venture capital is the holy grail for any startup. When venture capital comes in, it almost always signals a change in fortunes for the startup. The startup can typically grow its team, accelerate its marketing efforts, and grow faster. But, if you have a startup, when should you seek to raise capital? The answer to this, says Scott Stevens, a partner at Grays Peak Capital LP, lies in first understanding the definition of a startup. A startup, he says, is a rapidly growing company going after a large market with a game-changing innovative solution. A hotdog stand or web design agency do not fall under this category. If your startup meets this criterion, here are four checkboxes Grays Peak Capital LP states you need to tick before going after venture capital.
1. Innovation Concept
The first thing investors want to know is what you are taking to market, says Scott Stevens. This idea goes by many names: elevator pitch, value proposition, unique selling point, etc. They all mean one thing: is your idea unique and compelling enough to get a sizeable number of people excited enough to buy from you.
This pitch determines whether your startup has a chance of raising funds or not. Keep in mind; however, that any startup with a killer idea can meet failure in the marketplace due to various unforeseen factors that may result in mitigating through a positional pivot. As such, the best startups have a running list of great ideas that they can pursue next in case the current idea fails, which is also something investors may seek.
2. Revenue and Growth
Any startup with revenue and predictable growth is a likely candidate for venture capital, says Scott Stevens. If your startup has no revenue and unpredictable growth, it will be difficult to convince an investor to put in money. To prepare your startup to raise capital, you need to stimulate revenue and growth. Most startups do this by releasing a paid beta and convincing early adopters to come onboard and pay for the service. Growth is then secured by using cheap customer acquisition strategies (such as a freemium model for SaaS) to acquire customers repeatedly. With this in place, you’ll have ticked the second checkbox on your way to raising capital.
3. Addressable Market and Market Share
Grays Peak Capital LP shares that most professional investors (venture capitalists) seek for startups that can yield them a 10X return on investment within the first five years. To achieve this, Scott Stevens says, venture capitalists look for startups going after a large maximum addressable market ($1 billion plus) and targeting a market share of at least 10% (equivalent to $100 million ARR). This may sound like a very high threshold to reach but keep in mind the definition of a startup (large market/high growth potential). You can always go after a smaller market and smaller market share and still build a profitable business (millions of businesses fall under this category), but a startup must meet these terms to become a viable investment target.
4. Team Composition
The fourth checkbox to tick is team composition, says Stevens. Investors invest in people, not technology or products. If you are a solopreneur, you should consider putting together a team to help you attract investors. Also remember that the better the pedigree of the team, the higher the chance of securing investing. For example, a team comprising former Google employees will attract funding faster than a team devised of former cashiers. Even though you may not have these credentials, adds Scott, you must be able to demonstrate your level of competence, especially in achieving your startup’s strategic goals.
What Matters Most
One mistake Grays Peak Capital LP sees startups making is preparing to raise capital too late. As a startup founder, you need to start preparing to raise capital from the day you conceive your idea. That means, at every step, you need to be asking, “Does this startup meet capital-raising requirements?” Asking this question regularly, says Scott Stevens, will help you make the right decisions that may help you raise funds. He adds a caveat to this – even the best startups can fail. So, keep in mind that raising capital is no panacea; building a successful business from the ground up using sound business principles is what matters most.
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