STARTUP, VENTURE CAPITAL, AND ENTREPRENEURSHIP

A founder’s guide to managing a venture capital-backed startup

An 11 pillar guide to discovering a startup idea, bringing it to life, managing it, raising capital, and potentially exiting as a unicorn

This piece of writing is ‘Work In Progress’ and will remain as such for now. I would appreciate your feedback and input. Wherever you think there is content to be added or updated, or corrected, just leave a comment and I’ll get back to you. The goal is to build an entrepreneur-based manual here for all to use or refer to. Thank you.

11 pillars to managing a venture capital-backed startup

Pillar 1: Finding and validating a startup idea

1. A. Startup: a definition

While there are different interpretations as to what a startup truly is, there are three common determinants among all available definitions. In essence, a startup is a company that is:

1. Designed to grow, or fail, incredibly fast, typically using technology
2. It’s an experiment to prove or disprove a non-obvious hypothesis
3. It aims to uncover something that has not been done before through a competitive edge

1. B. The four fundamental elements of a startup

Element 1: the problem

The problem: this is the demand side of our economic equation. If the problem is well defined and its hypothesis carefully framed and researched, then the solution should come easily.

In general, there are two methods for identifying problems:

1. Organic ideation: problem ideas that occur organically are more powerful as they are generally validated through personal experience, with readily being a burning issue for some time.
2. Deliberate ideation: these are ideas that are actively “thought up”, with teams of individuals brainstorming problems to solve.

Typical categories of startup problems

Overall, startup problems fall into 5 categories:

1. Upgrading a current solution: spotting a nagging problem and developing a scalable, improved solution to fix it, such was the case with Facebook and Myspace
2. Geographic expansion: applying a successful idea to a problem from one geography to another, this is what Rocket Internet is founded upon
3. Industry expansion: taking an existing product/service /process/operating model and applying it to a new industry, be it horizontally or vertically, such is the case with the use of the notion of ‘Uber for X’ in the food or grocery delivery industry
4. Riding on macro trends: identifying a macro trend and creating goods or services that enable it, such as the case with the COVID pandemic and the growth of remote working
5. White space: this can be deemed as a genuine invention, the creation of something entirely novel, such as Tesla and SpaceX commercializing electrical vehicles and space travel, which was achieved due to declining costs in electric battery manufacturing and building sustainable travel ships

Attributes of a good startup problem

In general, a good problem has to be attractive enough to be solved. Some common characteristics of good problems include:

1. They are painful, and still, people are willing to pay a lot to have it solved, which is the case of a lot of startups in their early days, such as Uber or Tesla, and SpaceX to come
2. They have scale, or in other words, are popular in demand. They could potentially have millions of users. Such as a social network or retail business
3. They happen frequently, for example, users run into the problem several times per day
4. They need urgent attention, to be solved right now, such as the case of a COVID-19 vaccine
5. They are growing and will accelerate in growth soon. Such as growing freshwater shortage in the MENA region
6. They can’t be avoided, such as due to a new regulation, such as a regulation that requires businesses to reduce their carbon footprint within a specific amount of time

Problem hypotheses need to be cross-checked

Try to identify the element and drivers of your hypotheses using issue trees, identify each driver’s importance, how determined you are to pursue solving those drivers, and how confident you feel it can be solved or you have the capability to solve it.

Build an issue tree for your problem, sense check the drivers, and see how determined and confident you are in solving the hypothetical problem

Problem hypotheses need to be validated

This can be done either through primary or secondary research. It’s best to start with secondary sources and then double down on important factors and topics through primary research.

Secondary sources of research include:

• Google search
• Existing startups
• Industry reports
• Startup graveyard and past failures

Primary sources of research include:

• Industry experts
• Polls and surveys
• Potential clients
• Competition

Element 2: the solution

The solution is basically what we will supply to the hypothetical problem or the new and innovative value proposition. There are three methods to innovate in solution for your hypothetical problem:

• Product innovation in creating new products: this can be achieved in many ways such as through improved performance of existing products, inventing new products, virtualization, and digitalization, or embedding data analytics from external sources
• Process innovation/creating new processes: such as new manufacturing processes, online shopping, automation, virtualization, etc.
• Business model innovation: which will need a shift in the previous value propositions and their operating model (i.e. how the value proposition is delivered). Such as sharing economies models disrupting the hotel industry, fixed fee service vs. subscription in the casing of streaming services, or crowdfunding vs. traditional mortgage and lending institutions such as KickStarted vs. banks

A startup’s guide to disruptive business model innovation

A framework for product strategy

Go vertical before horizontal

When starting to ideate, build a core before expanding. Find a niche where you will grow the fastest, either due to a latent demand or your ability to provide a superior experience. Most successful startups have taken this path. Take Uber for example; it entered the high-end taxi business in San Francisco, and then as it grew and scaled, it expanded into other verticals and other differentiated price points of its original service. Or in the case of Google, started with a superior search engine, and then gradually became the behemoth it is today.

In essence, to be successful at anything, you need to be focused and that is why going vertical initially is recommended.

Uber’s strategy, from niche, vertical, focus to market expansion

Element 3: the ecosystem

To be successful in delivering the assumed solution to the hypothesized problem, we need to understand the ecosystem around the problem-solution, to be able to find product-market-fit and scale. There could a larger scope of stakeholders at play that can help our new offering scale. Here is a sample drawing to consider when thinking of the ecosystem:

The ecosystem landscape of potentially influential stakeholders other than customers

Element 4: the unfair advantage

For every problem, there will probably be 100s of teams working to solve it, and once a solution is identified, those with access to resources such as capital, will copy the idea and scale faster. So you need an unfair advantage. Unfair advantages usually come in the form of:

1. The founders: if they are one of only a handful of people in the world who can solve the problem or if you are a serial entrepreneur with investor community connections who can bring in capital to build barriers to entry and Rockstar recruits
2. The product (value transfer interface): your product is 10x as good as the next alternative in terms of speed, price, etc. This is an important advantage that you need to build, but it will not last on its own, as products are easy to copy (unless patented)
3. Ready demand or acquisition: you can grow more quickly and cheaply than others. This can be a starting advantage, but ideally, it needs to be accompanied by some other more sustainable advantage. The best companies grow through word of mouth or by users using their product
4. Moats: which enable you to make it hard for competitors to out-compete you. Moats are less important for short-term traction but the most important for long-term success and the creation of monopolies. You need to build your hypotheses of moats in the initial days of inception.

Examples of moats include:

1. Network effects: The value of the product increases with each new user
2. Patents: often not long-lasting you can patent a solution (a drug), but not the problem (‘curing cancer’)
3. Brand: can be long lasting, but usually not apparent at the early stages
4. Low-cost distribution base: for example in the case of SaaS products, there are high R&D costs but the marginal cost of distribution is low or even zero
5. High switching costs: when your product/offering integrates deeply in your customers’ tech or processes, such as the case with many FinTech solutions

You don’t need to have all of these, but all the great companies have all. Some you can build from the start, while some can be developed over time.

Your Life is Driven by Network Effects

The Network Effects Manual: 13 Different Network Effects (and counting)

The 14th Network Effect: Expertise

The Tribal Network Effect (NFX #15)

1.C Validating your idea

Take a three-step approach to quickly validate your startup idea.

1. Cross-check demand, qualitatively. Which categories of problems does your idea fall into? Which attributes of a good problem apply to your idea?
2. Conduct a basic back of the envelope market sizing exercise. What would be the volume of demand for your solution? What percentage would be early adopters? What percentage would adopt your service in years 3 and 5? How much would they be willing to pay? What revenue targets will you be able to attain in years 1, 3, and 5? A good rule of thumb would be to think that you are aiming to reach $100M in year 5, what percentage of the total market does this translate to? 85% 0r 15%?
3. Is this something a VC would back?

• Team: What is your background? How do you complement each other’s skillsets and how do your combined skill sets address team-product-market fit questions? How will you execute? What factors will guarantee your success?
• Product-market-fit: What is the market size (i.e. how attractive is the opportunity)? What are your moats? Have you gained traction — why not? What would you need to gain traction? If you have what do your analytics say about the health of your growth? How viable is your solution?
• Business environment: Is the timing right? How feasible is your solution considering the ecosystem landscape? How scalable is your solution? What are the risks with your business idea?

The single biggest reason why start-ups succeed: Timing | Bill Gross | TED

A four-step guide to evaluating startup and new venture ideas

Planning for product-market fit before launch

Why Startup Timing is Everything

Pillar 2: Solution building through ‘Desing Thinking’

Design Thinking is a product design framework that aims to bring together the business founder with the technical founder to deliver the product or value delivery interface as a solution to the problem idea. What will be discussed here is a full-on and ideal set of steps to this methodology, and depending on the stage of product development that a team may be in, they do not need to follow all of the steps as a bible. You can deviate, start at a different step, availability of data, or the element that you are testing. The bottom line is that Design Thinking terminology aims to provide a guideline, like a lighthouse, to founders, so that they don’t get lost in a stormy sea or during the night.

Defining ‘Design Thinking’ — in theory, and action

Design thinking provides a non-linear and flexible human-centric approach to address problems worth solving | NNGroup

2. A The necessities for great Design Thinking

There are mainly 5:

1. The ability to empathize with the customers: to imagine and understand the world from multiple perspectives of the customers you are targeting. Suspend your own beliefs and biases when approaching the problem. (current and prospective). Great Design Thinkers a “people first”
   approach, imagining solutions that are inherently desirable and meet explicit or latent needs, paying attention to the world of their customers in minute detail noticing things that others do not, and using insights to inspire innovation.
2. The ability to have generalistic and integrative thinking: to understand the critical aspects of a confounding problem and create novel solutions
3. Have optimism: that no matter how challenging the problem, there is at least one potential solution that is better than the current alternatives
4. Enjoy experimentation: by posing questions and exploring constraints in creative ways that may take the team in entirely new directions. Believing that failing fast is the way forward. Willingness to tinker, test, pivot, course correct, and improve.
5. Cross-functional collaboration: which entails enthusiastic interdisciplinary collaborators who may have significant experience in more than one field, and have a willingness to work with different people around a common mission. The increasing complexity of products, services, and experiences has replaced the myth of the lone creative genius with the reality of the enthusiastic interdisciplinary collaborators. The best design thinkers have significant experience in more than one area of discipline.

Significant innovations don’t come from incremental tweaks — Tim Brown on Design Thinking

2.B Desirability, viability, and feasibility

Design Thinking sits at the intersection of human desirability, economic viability, and technical feasibility, where innovation is created. It aims to answer the question: “What can you create that people want (human desirability — validating market demand), with a sustainable business model (economic viability), that can realistically be built by you and your team’s resources (technical feasibility)?

Design Thinking sits at the intersection of human desirability, economic viability, and technical feasibility

2.C Design Thinking is different from lean startup and agile concepts

Design Thinking is used at earlier stages of customer-solution discovery | Image by GARTNER

Design Thinking is best utilized in the initial stages of founding a startup idea to define a customer problem and generate initial MVP concepts. When an MVP concept is found, Lean Startup can help shorten product development cycles and rapidly discover whether the proposed business model is viable. Lean Startup can help deliver customer solutions at lower costs. Agile methodology is used when a startup or company is more mature, has already introduced a solution to the market, and can be used as an iterative sprint-oriented development process, with incremental delivery and ongoing reassessment of product to satisfy market demand.

2.D Design Thinking is divergent and convergent processes

Design Thinking is divergent and convergent processes | Medium of Benjamin Hunter Miller

During the Design Thinking process, it is common to generate as many as 250 ideas, which are then narrowed down to as few as 25 concepts. These widening and narrowing at each phase are called divergent and convergent thinking.

• Divergent thinking is about opening the choices, looking broadly, and considering many different options. The rationale of divergent thinking is to avoid being trapped in the usual setting of the problem within a pre-existing set of solutions.
• Convergent thinking is the process of narrowing down options and selecting the most promising ones to be further explored and tested.

2.E The ‘Empathize’ phase (divergent thinking)

During the Empathize phase, we are seeking to acquire a deep understanding of the problem to solve. The focus will be on solving issues that matter the most. These are sometimes called “painkillers” vs. another concept called “vitamins”. Or you can focus on a product that is currently a vitamin but will gradually become an addictive habit that will eventually become a painkiller (e.g. the case of most social networks such as Facebook).

• Painkillers are solutions to burning issues that frustrate users and that they are willing to pay to see them get resolved. Payment can mean cash, giving up personal information as in the case with social networks such as Facebook or Instagram, or watching ads such as with Youtube.
• Vitamins are nice to have solutions, often of an incremental nature, that users may or may not be willing to pay for

Nir Eyal: Pain Killers & Vitamins | Product Design | Udacity

In the empathize phase, we need to adopt an ethnographer’s mindset by walking in the customer’s shoes, trying to set aside personal views and assumptions, and focusing on customer pain-points (i.e. pain-storming) at every step or touchpoint of the customer journey.

In this phase, we need to conduct a large number of empathy-driven interviews with different stakeholders with the rule of thumb of 50 to 100 interviews to remove the bias of friends and family from research. Ideally, one person needs to be doing the interviews with another person capturing insights, or taking notes. The goal with interviews should be to capture:

• What are people currently doing to overcome the problem?
• How are they doing it?
• Why are they doing it?
• How does it make them feel (e.g. angry, happy, frustrated, satisfied, stressed, content, bored, wasteful, …)?

It’s best if you let people talk, do not interrupt them, dig deep into drivers of their motivations, and why they cannot overcome their pain. But don’t create a bias towards your hypothetical solution — let them. Try to look for inconsistencies in what people say versus what they do, but for example, trying to observe their body language.

The end goal of interviews is to map customer journeys, build customer personas, and try to find empathy with customer pains in a detailed, structured, and organized fashion. Here is an article by Jennifer Clinehens on ‘How to create a customer journey map’ that goes deep into explaining the concept:

How to Create a Customer Journey Map

2.F The ‘Define’ or definition phase (convergent thinking)

During the ‘Definition’ Phase, you put together all the information from the interviews to draw design insights. Make sure that you define the problem(s)/opportunity(s) from the perspective of the potential customers and aim to stay clear of designing actual solutions during this phase. Instead, articulate design principles that can guide multiple variants of a solution.

For example from

• Problem: ‘users are frustrated by the lack of ability to customize a product or service’

you can get to,

• Solution: ‘integrates product customization as an optional step in the purchase process’

Try to avoid long laundry lists and focus on highlighting one or a few customer pain points and their associated design principles. If no novel breakthrough opportunity becomes obvious, you may be at the risk of later on designing an ordinary and nondifferentiated solution. Make sure that you don’t jump too quickly onto a solution and prototyping; you need to understand the problem from every angle possible.

Fall in love with the problem, not the solution — Uri Levin, Co-Founder Waze

Design thinking — steering the ‘Inspiration phase’

2.G The ‘Ideate’ or ideation phase (divergent thinking)

During the ‘Ideation Phase’, you are generating multiple alternatives to solve the problem, meet customer needs and overcome their pain. Similar to brainstorming, ideation is not the time for critical evaluation or narrow focus. Teams need not become locked into a single solution. The volume and variety of ideas are the keys to a successful ideation phase. At the end of the ideation process, rank the ideas across several decision-making factors and decide which ones to prototype, as your sources are limited and won’t be able to prototype every solution.

Design Thinking — brainstorming through the ‘Ideation’ phase

2.H The ‘Prototyping’ phase (divergent thinking)

During the “Prototyping phase”, entrepreneurs put their ideas into the real world to gather data and feedback and learn. Design thinking is learning by making, or building to think rather than thinking about what to build. The faster ideas enter the real world as prototypes (i.e. a prototype is a visual and real-world expression of the designer’s intent), the faster teams can learn, redesign, or even pivot. Therefore, initially, we need to focus on low-fidelity mockups to quickly explore multiple possibilities at low go-to-market costs.

Good prototypes will fuel discussion and lead to deeper empathy with the customers’ needs, providing positive feedback to teams that they are on the right track. It’s better to consider prototyping multiple versions of a key feature and test it out on the customers and even ask the end-users to provide their design of the feature using only pen and paper. Prototyping and testing mockups with end-users, will boost your confidence and guide you towards high-fidelity mockups that have a more near-finished product look and feel.

• Low Fidelity Prototype: emphasizes functionality over the look and feel and omits granularity of details
• High Fidelity Prototype: closer to finished product in look and feel

Low Fidelity vs High Fidelity Prototypes

2.I The ‘Testing’ phase (divergent thinking)

During the “Testing Phase”, you are gathering feedback from users and deepening the level of empathy. A rule of thumb is to test your low fidelity and high fidelity prototypes with 50–100 customers. In human-centered design, designers test not only to learn about their solutions but also to continuously learn more about their users’ needs. There may have been things that you may not have discovered during the earlier phases such as during the empathize phase.

In this phase, focus on showing rather than telling the customer what your solution is about. Your solution needs to be simple enough for the customer to grasp it on the go. You need to listen to the user talking through the prototype experience rather than you guiding the user through your story. Aim to identify uses and misuses to figure out where your product isn’t intuitive. Follow up with empathy seeking questions such as:

• How did that make you feel?
• Why did you do that?
• What was confusing?
• What was unclear?
• What could be done better?
• How would you design, if you owned the product?

It’s crucial to prioritize features in the prototype based on ranking or laddering techniques so you understand what to focus on for success and developing a product roadmap.

Getting from product strategy to product roadmap

2.J The ‘Implementation’ phase (divergent thinking)

During the Implementation phase, teams move on to building the MVP based on the confidence they have gained during the iterative prototyping and testing phases. The MVP should be close to the final high fidelity mockup.
The iterative cycle then continues with further feedback from customers, tracking of live customer KPIs and metrics, and the introduction of new product versions which generally ends up in improved product performance to increase engagement rates and user attachment, rather than discovering new features, which should have been largely covered during previous phases.

Design thinking — testing the solution in the ‘Implementation’ phase

Pillar 3: Setting up the strategic fundamentals for a venture capital-backed startup

If the business strategy was all there was in startups everyone would have unicorns. Use strategic fundamental concepts at the ideation stage to ensure there are no killing assumptions you may have missed, give your thought process a structure, tease out big assumptions to test, and at the point of seeking investment as a common communication language with investors. That’s all.

There are 5 key strategic levers a startup needs to consistently review and assess:

• The opportunity — market size
• The right to compete — the right to compete
• The plan to make money
• The metrics
• The go-to-market and execution plans

1. The opportunity: the bigger, the better

You need to seek a large market size so that 7–12 years down the line, you are generating enough revenue, for venture capital investment to make sense. Now if your business isn’t that big, it doesn’t mean the end of the world. Businesses attacking small market sizes can thrive in other ways including loans from credit institutions such as banks. And below is the mathematical logic:

Market size: the bigger, the better

To better think of a market and what your startup will capture, it is best to use the TAM, SAM, and SOM filters to grasp a more calculative approach to market sizing.

• TAM — Total available market: is the total market demand for the product and service indicating the potential scale of the market.
• SAM — Serviceable available market: is the portion/segment of the TAM targeted by your products or services within your immediate reach
• SOM — Serviceable obtainable market: also known as Target Market, is the % of SAM that you can realistically capture

Here is a slide in AirBnB’s original pitch deck, addressing the TAM, SAM, and SOM market sizes.

Airbnb's original pitch deck, addressing the TAM, SAM, and SOM market sizes

To calculate your market sizes, you can use both a top-down and bottom-up approach using assumptions and data that you can find online or through primary research, but make sure that your assumptions are robust and you can present them to investors during a pitch meeting. Take a look at the following articles by Outlier AI and Artem Albul to better grasp the market sizing concepts.

Sizing Up: Market Sizing for Your Business

Start-Up Your Startup Properly: TAM, SAM, SOM!

2. Competition — how will you compete?

There are 3 prioritized questions you need to answer when thinking of competition

1. Are you entering whitespace? Is the environment you’re going into solving an unmet need with genuine whitespace?
2. If not a whitespace, is your offering10x better than what is currently offered? If the solution is being solved elsewhere, what will warrant customer switching?
3. Are you a product line extension for a major player? Be wary if your solution is an inbuilt feature of an existing product or service as your business may be void if an incumbent product line extends. Ensure that you are not playing to an incumbent's business adjacencies, and if you are, you need to have set reasons to back this ambition.

Do not play to incumbents adjacent product extensions — Video: Defining adjacencies | Engine US

3. The business model: how will you monetize your offering?

Almost every company fits into one of the following four types of business models, regardless of the industry or function they operate in, with each corresponding to how they create value.

1. Asset Builders. These companies build, develop, and lease physical assets to make, market, distribute, and sell physical goods. Examples include everything from automakers to chemical manufacturers, big-box retailers, and distribution and delivery businesses.
2. Service Providers. These companies hire employees who provide services to customers or produce billable hours for which they charge. Examples include consulting firms and financial institutions.
3. Technology Creators. These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include software, big-data tools, and medical device companies.
4. Network Orchestrators. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create, and more. Examples include online financial exchanges, social media businesses, and credit card companies.

These four business models come to life and present themselves to the customer in one of the following five business archetypes:

1. Consumer digital
2. Consumer hardware
3. Enterprise software
4. Industrial hardware
5. Compounds and materials

These business models and archetypes, generally monetize their services in one or a combination of the following six monetization methods:

1. Enterprise or B2B sales and services, such as with the sales of SaaS products
2. Direct sales, as in the case of e-commerce platforms such as Amazon and direct to consumer retail such as Apple products
3. Subscription services, such as Slack or Netflix
4. Usage-based, such as with AWS storage
5. Transactional, such as Airbnb taking a share of the transaction made between its users
6. Advertising, used predominantly in social networks such as Twitter and media operators such as New York Times. This monetization business model is highly competitive and has managed to capture large amounts of VC-backed capital in the recent decades

Founders need to delineate how their startups will be monetization their offering, and what challenges they will need to address to make money. It is best to think of the following three when strategizing the viability of your startup idea:

• The business model
• The business archetype
• The monetization model

4. The metrics

Financial metrics matter to investors and should be founders’ top priority when setting up a startup, because:

• They can gauge the operational performance of your company such as user growth and retention, indicating the degree of success in current set strategies and possible future directions to come
• In the planning stage, they can aid in testing assumptions

Venture Capitalists and other investors anchor on a suite of metrics when making investment decisions, including:

• Revenue metrics: such as annual recurring revenue (ARR), revenue growth rates, average revenue per user (ARPU), revenue retention (churn)
• Costs metrics: such customer acquisition cost (CAC), cost of goods sold (COGS)
• Profitability (i.e. revenue minus costs): gross profit margin, and EBIT
• Unit Economics: customer lifetime value divided by customer acquisition costs (CLTV/CAC)
• Capital efficiency: venture capitalists will look for a startup’s net burn rate and institutional investors for net annual recurring revenue divided by the net burn rate (NARR/Net-burn). This metric will delineate how
  much does it will cost for the startup to get to the tipping point, whereby it can become in unit-economic terms, a sustainable business model, before venturing out into bigger investors and even an IPO.

There is a suite of other varying metrics that investors use to make decisions depending on the startup’s operating model. The video below from YCombinator and the article from Andreessen Horowitz will help gauge this concept.

Anu Hariharan — Nine Business Models and the Metrics Investors Want

16 Startup Metrics - Andreessen Horowitz

3 Phases of Financial Indicators for Startups

5. Go to market and execution plans

The Go-To-Market strategy is a tactical action plan that outlines steps necessary to succeed with a new customer or in a new market. Here is a previous article I’ve written about this plan, which in itself can be a massive and time-consuming endeavor.

The Ultimate Guide to the Go-To-Market Plan

This action plan needs to have short, medium, and long term horizons, with specific measures and objectives that will lead the startup to the vision it has set its eyes on, especially those it has pitched to the investors.

Pillar 4: the Team

‘Not the right team’ is deemed as the third top reason why startups fail based on CBInsights startup postmortem analysis and is usually a key decision factor for venture capitalists' investment decisions.

Why Startups Fail: Top 20 Reasons l CB Insights

In YC’s case, the number one cause of early death for startups is cofounder blowups. A lot of people treat choosing their cofounder with even less importance than they put on hiring. Don’t do this — Sam Altman, Y Combinator

The skillsets of co-founders

Depending on the startup, there will be a variety of responsibilities and functions that the co-founding team needs to cover. The co-founding team should cover or have a pathway to coverage of these functions demonstrating skills complementarity. But overall, in the early days, the required skill sets will fall under the following three broad buckets:

• Selling: this entails finding the right way to package the offering/value proposition and take it to the masses in the form of sales and partnerships. This may involve any stakeholders who is willing to make actual commitments to the product to drive the business forward.
• Building: the ability to wield lines of code or programming
  languages that deliver the product or value delivery interface, creating something new with existing tools and measures.
• Serving: ensuring that the final product does what it says. Understanding the customers better than anyone, knowing what it takes to create loyal clients, and what the product should be or not.

How many?

Historical metrics and numbers show that the number of co-founders can vary depending on the business idea and the business situation, as presented in the below figure based on Ali Tamaseb's research.

Source: Land of the “superfounders” | Ali Tamaseb

But generally, it is advised to have more than one co-founder because:

• It is highly unlikely that only one individual will possess all the necessary skill sets to succeed
• Building a startup is an emotionally tough task, and the co-founders can help each other push forward during difficult times and celebrate wins

How cofounders find each other?

This can happen in a variety of ways including:

• Personal chemistry: founders were good friends and then starting working on their idea
• Skillset recruitment: a founder started an idea and based on domain skills requirements, recruited other founders
• Common passion: founders had a passion for solving a specific problem and came together to build a solution, which is the case for a lot of ventures in the YCombinator

What founders need to look for is a founder that complements them and can work together for the long haul.

The traits of a successful co-founding team

The founding team can give a startup an unfair advantage and therefore it’s key to build a successful co-founding team. There are three key characteristics to a top-notch co-founding team:

• Different and varied skill sets: the more diverse the skillsets of the founding team, and the more their skillsets complement each other, the more it is expected to see them succeed
• Aligned but complementary skill sets: meaning finding extroverted co-founders for sales operations who want to be outside the office or on calls with customers, while introverted ones for product development, coding 10 hours in a day.
• Aligned personalities and habits: including interests, working styles, commitment levels, and problem-solving philosophies.

Building a co-founding team

Identify your strengths, things you are good at and passionate about, and weaknesses. Then look for an individual or individuals that complement you, depending on your need(s). The ideal co-founder(s) will possess the skills you lack.

The ideal co-founder(s) will possess the skills you lack.

How to identify a fit co-founder(s)

Get to know each other by being very authentic and take your time in exploring new people. Try to communicate very clearly and openly about your intentions and experience working with someone. Aim to explore, network, conversate, and go on trial dates, before co-founding.

To identify your co-founder(s), aim to ask these questions in the following specified areas:

1. Areas of interest: Do we have aligned areas of interest? If my areas of interest are specific/narrow, do you share an interest or are at least agnostic to it? Why do you want to build a startup?
2. Complementarity of skillsets: 3. Do we have complementarity of functional skills? What will be your role in the company? Are we both energized to work on the areas that ensure we have complementarity? Are there any parts of building a startup that is non-negotiable to you? What are your strengths beyond functional expertise? How do you feel about bringing on a third/other co-founders?
3. Personality, values, and mission: Would I enjoy sitting next to you on a 14-hour flight? What is your personal motivation to start a company? What values you cannot compromise on? How do you think about the timeframe and pace of success and exit? What number would you sell it for? When do we know when to stop? What do we do if we become moderately successful yet we are no longer excited by our product Business? What is your working style? Is there any must-dos to consider when working with you?
4. Working style and commitment: How would your co-workers describe you? What would they want me to know about what it is like to work with you? How many hours a week are you willing to work? For how many months years? What sounds like a light week? Do you have different expectations for different phases of the company’s lifespan?
5. Practicalities: How important are diversity and inclusion to you? Where should our startup be based? How do you feel about remote or distributed teams? What is the minimum monthly salary you need to survive? To be comfortable? To feel like you’ve made it?

50 Questions to Find a Co-Founder and a Startup Idea

Pillar 5: customer development and validation

I’ve written extensively in a previous article about the process of customer discovery, validation, and development based on the teachings in the book, The Entrepreneur’s Guide to Customer Development: A cheat sheet to The Four Steps to the Epiphany by Brant Cooper and Patrick Vlaskovits in the article below.

Customer Development: a product manager’s top priority

The only note that needs to be made here is that when setting out to conduct interviews towards customer discovery and validation, make sure you are creating bias in the customer towards your solution. That you are solely focused on the problem. Here are a couple of tips from the book The Mom Test by Rob Fitzpatrick for your to bear in mind during the customer discovery and validation phase:

1. Don’t reveal the product/solution idea during your interviews
2. You learn nothing from LEADING questions
3. Silence is ok, you want your customers to talk more than you
4. Quantity is not quality, find the right people to talk to, ask the right questions
5. Everyone wants to be helpful, and it is important to know when they say something to be helpful vs. truthful
6. You don’t need a working prototype, identify whether the customers are looking for something and ask them what it is
7. Never ask the user whether they will buy your product and never ask how much they would pay for your solution, at least not at this stage, as they still can’t grasp your value-add

Pillar 6: MVPs and product development

There are two key aspects to the technical product development side of your startup hustle.

1. Finding the right technical co-founder (in addition to the points mentioned in pillar 4: the team)
2. Building the MVP in a rapid and agile fashion

1. Finding the ‘right’ technical co-founder

Having a technical co-founder is key to a startup’s success. Technical founders can take the idea from paper to screen s they understand the product development cycle better. Based on experience, outsourcing builds in the early stages sets up a startup idea for failure. Furthermore, top-tier VCs highly value the existence of technical cofounders in a team, as it demonstrates the ability to work together as a team with varying skills and perspectives and will serve as an inspiration for talents to join the team.

Technical co-founders can be found through friends and acquaintances, coworkers, in hackathons, meetups, and events, via entrepreneurship programs such as YCombinator or Entrepreneur First, in college/school, or you can just roll up your sleeves and learn to code.

1.A The traits and skillsets of a superior technical co-founder

A great technical co-founder should possess the following characteristics:

• Think agile: or possesses the agility to run quick experiments for idea validation and continuous improvement
• Engineering skills with product mindset: to be able to code, but also to understand produce management, customer development, UX/UI design, etc.
• Commercial mindset: be able to identify commercial/business opportunities to grasp upon
• Data-driven, building backend capabilities for metrics and dashboards that can help the team make business-savvy decisions

The technical co-founder should preferably be a Full Stack CTO, however, his/her role will most likely shift across a spectrum as the stage of the product you are developing changes:

• Early pre-seed, and seed stages: the focus of the CTO will be on ideations, idea validation, MVP development, and talking to customers.
• Growth and scale-ups: in these stages, the CTO’s focus will shift towards hiring early engineers, product build and roadmap development, and strategy and data trends analysis

1.B Evaluating the ‘right’ technical co-founder

Aim to find answers to the following questions:

• Ask about how they would take a grand idea and minimize it to an MVP
• How they may have taken an idea from a napkin sketch to a product in the market
• Understand how they evaluate the technical feasibility of an idea and its risks
• How they would structure the process for designing a great UX
• How they would build, hire, and manage engineering teams

A framework for product strategy

Getting from product strategy to product roadmap

Getting the most out of product teams

Collaborating effectively in cross-functional product team settings

2. Building the MVP in a rapid and agile fashion

So what is the ‘MVP’ or the ‘Minimum Viable Product’? Well:

• It addresses a core problem: and is focus on a single or a limited number of key problems
• Is built with the least amount of resources
• The goal is to gain maximum insights from users
• The MVP is a product experiment in need of validation, it’s a business hypothesis, trying to find market fit

Because the MVP is built using limited resources, we need to be rapid and agile in our product development processes. This means:

• It should be built in a short amount of time (minimum), to be built in less than 1 month (ballpark figure), otherwise not an MVP. While it is common to hear that we can’t deliver a simple product anymore these days due to the competitive nature of the markets, then you probably haven’t found the strategically right idea (discussed in the strategy pillar) unless it’s in an industry where the barrier to entry is high due to market externalities such as Biomedicine and Pharma that require a high degree of R&D, highly regulated industries such as fintech, insurtech, or legaltech, and hardware and IoT.
• Launched before it’s perfect (viable)
• Needs to deliver the product to customers ASAP (viable), to gain feedback and measure engagement via analytics.
• Have processes that iterate the product cycle quickly (minimum and viable)
• Needs to have been clearly defined and targeted (minimum and viable)— should be summarized in 1–2 sentences

Be scrappy, but be fast — fail fast, fail often, pivot — be razor sharp focsued on your goals from the MVP

I’ve written a lengthy and detailed article on how to test hypotheses through MVPs and the frame of thought that should into it, which is below (Running hypothesis-driven experiments using the MVP):

Running hypothesis-driven experiments using the MVP

Making sense of MVP (Minimum Viable Product) - and why I prefer Earliest Testable/Usable/Lovable …

This will change the way you build an MVP (Minimum Viable Product) in 2017... | Hacker Noon

Some typical forms and types of MVP

There are several different types of MVP concepts that you can use to test your idea with the customer, and below are a few concepts to think of, depending on the problem you are trying to solve:

• Customer interviews
• Blogs
• Forums
• Laning pages
• Split testing
• Explainer videos
• Paper prototypes
• Ad campaigns
• The ‘Fake door’ or ‘Fake button’
• Audience building
• Micro-surveys
• Prototypes
• 3D models
• The ‘Wizard of OZ’ MVP
• The “Concierge” MVP
• The “Piecemeal” MVP
• Crowdfunding
• Single Featured MVP

You can find more explanations in James Church’s article below:

18 types of minimum viable product (MVP) that won’t break the bank

The product build cycle: what to expect

At different stages of the product development or build cycle, you can expect different levels of coding and technical resource dedication:

• MVP/Early-stage: None to a very limited amount of coding — this is the period to experiment for a business hypothesis validation that needs to be cost-effective, and a fast way to reach users and gather feedback. Hence product development/build coding needs to be kept minimal.
• Growth stage: Low amount of coding — in this stage, resources will be dedicated to growth, user adoption, and engagement, and finding potential product-market fit. Technical founders will aim to use API partnerships and serverless cloud functionalities to manage growing pressure to deliver scalability.
• Scale-up: High degree of coding — in this stage the business has managed to establish itself as a viable business, and the technical team is investing in unique IPs, custom features, and unique use-cases for differentiation purposes, cloud infrastructure, DevOps, automation, and data scale features.

Michael Seibel — How to Plan an MVP | YCombinator

Pillar 7: Traction with early customers

In pillar 3 we defined the go-to-market plan as:

A tactical action plan that outlines steps necessary to succeed with a new customer or in a new market. Here is a previous article I’ve written about this plan, which in itself can be a massive and time-consuming endeavor

But we also need to break down this high-level definition into phases to better outline what activities need to happen for growth. One way for this breakup is to view growth in two phases of pre and post-product-market-fit:

• Pre-product-market fit phase: in this phase, the goal is to validate hypotheses through initial traction. This traction can be through non-scalable customer acquisition efforts. That is completely fine
• Post-product-market fit phase: in this phase, the goal is to accelerate customer growth by focusing on scalable customer acquisition efforts through detailed go-to-market plans and competencies

Another segmentation method is to look at growth efforts in terms of traction, transition, and growth phases:

• Traction: in this phase, the goal is to find product-market fit, which customer retention and engagement serving as the main metrics for monitoring. Generally, growth teams will be small in this phase with only the co-founders using 2–3 channels to communicate and sell the offering, aiming to find minimum but steady flowing numbers of customers.
• Transition: in this stage, the business idea and product have been established as a viable business model. The goal is to discover growth levers and tactics, with the cost per acquisition equalling the lifetime value of the customer (i.e. CPA=LTV) so that burn rates are not too high. In the ideal scenario, the startup should have identified one main growth channel and that channel is bringing in customers exponentially. Here, there may be the need to establish an internal cross-functional team within the sales or marketing team consisting of business and technical employees.
• Growth: in this phase, the business should be moving towards sustainably profitable business growth. Metrics should hopefully be indicating that CPA<LTV, leaving the business with profits. There could potentially be several different channels that are bringing in new customers. And growth may require its own specialized growth hacking team.

I have written extensively about product-market-fit in the article below, but here are some sure signals that indicate you have product-market-fit:

• You are repeatably and profitably acquiring a passionate fan base of customers. You have super fans when the customers want your product so badly that you can screw everything up and still succeed. You have super fans when customers are buying your products as soon you make them.
• Customers can’t live without your offering, there is a huge buzz around your offering (e.g. clubhouse)

Rahul Vohra Shares Superhuman's Product Market Fit Framework

• Your 1, 3, and 6-month customer retention among cohorts is promising

Product A has product-market-fit, product B doesn't: when the retention curve flattens it shows that some cohort of users are finding enough value to stick around

• You are experiencing exponential organic growth
• You have high Net Promoter Scores, when you NPS > 60 and more than 50% of users are coming from organic traffic

The One Number You Need to Grow

• Your LTV/CAC ratio is larger than 3 (experience-based)

Planning for product-market fit before launch

Rahul Vohra Shares Superhuman's Product Market Fit Framework

The Never-Ending Road To Product Market Fit - Brian Balfour

Cold launch: very little number of customers

Before a main public launch, you can launch your offering on multiple occasions, mainly to gather initial customer feedback. This cold launch can happen in multiple forms including static site launch, among friends and family, and/or online communities. But it’s best to have your cold launch be among your network as they will most likely invest time and provide feedback.

First 100–1000 customers

In this stage, startups and founders will use non-scalable tactics to attract customers. Lenny Rachitsky did a study on the tactics used by successful B2C/consumer startups and made the following discoveries:

• 7 strategies accounted for every consumer apps’ early growth.
• 1 strategy, perk crowdfunding, accounted for consumer hardware products’ growth in the early stage
• Most startups found their early users from just a single strategy. A few like found success using a handful. No one found success from more than three
• The most popular strategies involve going to your user directly — online, offline, and through friends
• To execute on any of these strategies, it’s important to narrowly define your target customers
• The tactics that you use to get your first 1,000 users are very different from your next 10,000

7 tactics that the big B2C/consumer startups got their first 1,000 users | Lenny Rachitsky

Typical characteristics of B2C customer acquisitions include:

• Short sales cycle
• The end-user is the single decision-maker
• Low customer lifetime value (i.e. LTV)
• Need to keep customer acquisition costs low (i.e. CAC)

How the biggest consumer apps got their first 1,000 users - Issue 25

On the B2B side:

• Ten strategies accounted for the early growth of B2B enterprise startups
• Most startups found their first customers from just one or a few strategies
• The most popular strategies involve leveraging personal networks, building virality into products, leveraging online communities, and listing on product sites
• To successfully execute any of these strategies, it’s important to first narrowly define your target clientele

10 tactics that the big B2B startups got their first 10 clients | Lenny Rachitsky

Typical characteristics of B2B customer acquisitions include:

• Longer sales cycle
• Multiple stakeholder decision-making processes
• Usually high LTV
• Potential to have higher CAC

How today's fastest-growing B2B businesses found their first ten customers

In addition to the above core tactics, depending on your business, and what growth levers your business stumbles upon, you can initiate a cross-functional growth hacking or growth marketing team to try to find ways to acquire and retain new customers at relatively low-cost expenses. I have written in another article extensively about this topic and won’t dive into too much detail here. You can find the related articles below:

The Complete Growth Marketing Playbook

The Product Marketing Foundations Guidebook

Collaborating effectively in cross-functional product team settings

To grow and scale, consider the following tips:

• Understand where you are in your product-market-fit journey
• Get your first users from your network
• Launch
• Focus on finding product-market-fit and measure your leading growth indicators in the process
• Get creative with an internal cross-functional growth hacking team if you can, but it’s not for everyone

Here is another article I’ve written about product launch which can help you find structure when thinking about your product launch:

The Strategic Product Launch Playbook

A few other sources on growth include the following influencers:

Growth Engineering | John Egan

John Egan

Andrew Chen

Andrew Chen

The Growth Marketing Handbook | Julian Shapiro

Julian Shapiro

Brian Balfour | Growth & User Acquisition

Brian Balfour

Lenny

Lenny Rachitsky

Pillar 8: Commerical aptitude — sales

What we know is that +95% of startups fail either because there was no actual need for their solution, i.e. did not attain product-market-fit, or because they ran out of cash, i.e. weren’t able to sell and bring in revenues. And this is exactly why sales is crucial for a startup as it helps startups get to product-market-fit due to being closer to the customer with immediate and unfiltered feedback while delivering income to prove the business model.

Furthermore, in a competitive marketplace, you need to take your offering to the customer. You can’t wait for customers to reach out to you as in the process they will most likely find your competition first. Outbound sales can be a cheap and cost-effective way to bring in and convert these customers.

There are 5 stages to the maturation of sales operations in a startup:

• Stage 1 — initiation: The founders will be the 1st sales employees, going through the sales cycle learning curve, aiming to discover product-market fit.
• Stage 2–1st hire: Here the goal is to take on this new hire as your full-stack sales responsible, managing the entire sales process end-to-end including lead generation, qualification, closing new business, and managing existing accounts. Depending on the scale of your business, you can set an Annual Recurring Revenue as a target to initiate the hiring move (e.g. five-figure revenue such as $50k). You need to define several characteristics for the individual you will be hiring, including: ‘Would I buy from him/her?’ ‘How relevant in his/her experience?’, ‘Is he/she a hustler?’, ‘Would one of him/her be enough?’. Set an onboarding and training period where you go along with him/her to all sales meetings and sitting in on calls, reviewing outcomes and your sales philosophy. This is the best time for you to define your sales culture and values while also helping the individual enjoy their job. Set up sales targets and goals based on your corporate vision and resources and align his/her compensation accordingly. A rule of thumb is that each salesperson needs to bring in annual recurring revenue of ~3x their pay. In terms of tools, you may be fine with an excel sheet for now.
• Stage 3 — splitting sales and support: When you have reached a six-figure ARR target (e.g. $250k), it’s time to separate sales from support, hiring two people with sales and support personas and backgrounds. The sales employee will be focused on new business and clients, while the support person will focus on upsell, cross-sell, and churn and retention. You will also need to invest in an actual and specialized sales CRM tool. You need to set clear, targeted, and transparent goals and compensation schemas in place. You still need to invest time to train the individuals; repetition will be key to learning.
• Stage 4— set up customer success: When you have reached a seven-figure ARR target (e.g. $1M), you need to develop customer success as it is much easier to sell to current customers than new ones. The goal of customer success will be to decrease churn and increase customer lifetime value. It’s best to recruit people with prior experience or promote/shift people internally. And the focus will on the top customers who are currently generating 80% of your revenues.
• Stage 5— build a professional sales team: segment customers and specialize your sales team based on openers vs closers, verticals, and/or deal size, depending on your market dynamics. Recruit sales leaders and managers, build sales operations and invest in sales-focused marketing. Formalize training, coaching, hiring, and onboarding and develop sales playbooks. You will need a sophisticated sales CRM tool in this stage, such as Salesforce.

Overall, you may manage to make revenue without a structured sales team, but revenue generation efficiencies will be low. Read the following article from Andreessen Horowitz below:

Hire a Head of Sales | Peter Levine | Andreessen Horowitz

Pillar 9: Early-stage marketing

You need to have an agile marketing mindset in a startup as there are 3 main constraints with marketing in a startup setting:

• You don’t have a big budget
• You can’t plan too much ahead, i.e. unlike in a corporate setting where you may have an annual marketing plan
• You can’t build a massive plan, you need to be targeted to maximize ROI

This means that early marketing hires will need to do roughly ‘everything marketing-related’ at an early-stage startup, which can be a great experience.

Marketing efforts at an early stage startup

There are 3 main buckets of marketing activity at a startup:

1. Growth marketing: consisting of SEO and app store optimization, customer acquisition funnel optimization, building referral, and viral features, retention, and churn, performance marketing (i.e. paid ads), analytics, and tracking, and content marketing
2. Brand marketing: consisting of brand building, storytelling, branding visuals, key messages discovery, brand awareness, and branding campaigns
3. Product marketing: consisting of user research, customer testimonials, competitive analysis, pricing, product positioning, product launches, and copywriting

The Complete Growth Marketing Playbook

The Product Marketing Foundations Guidebook

The Strategic Product Launch Playbook

Public relations at startups

PR and public communication can play wonders in new startups. There are three main streams of activity that startups can work on in this regard:

• Media relations: that can consists of creating and pitching the company narrative, relationships building, writing and pitching news stories, crisis management, product reviews, and monitoring media performance and mentions
• Events and conferences: consisting of speaking engagements, hosting own events, networking events, sponsorships, holding booths and events in conferences, and delivering keynote presentations
• Social media: this can also consist of building a presence on social media, monitor social media campaign performances, responding to customers/followers on social media, content creation, influencer partnerships, and encouraging user-generated content

Positioning

Positioning in marketing helps explain an offering product ways that lets anyone repeat it to their friends. No matter how long or detailed-oriented your product is, you need to be able to boil it down to its essence and sum it up concisely and clearly in a few sentences. If not, it means that your product lacks or avoids important points. Geoffrey Moore’s value proposition statement or positioning framework sums a marketing positioning in a few sentences:

FOR ((target customer)), WHO HAS ((need statement)), ((product/brand name)) IS A ((market category)) THAT ((key benefit statement/compelling reason to buy)). UNLIKE ((primary competitor alternatives)), THE PRODUCT ((unique differentiation statement)).

So for Netflix, it would like something like this:

For millennials who want on-demand entertainment, Netflix is an online subscription TV service that works seamlessly. Unlike HBO or HULU, Netflix releases original content for binge-watching.

For Amazon Web Services (AWS):

For growing companies who need to control infrastructure costs as they grow, AWS, is a cloud hosting service that is highly flexible. Unlike Google Cloud or Microsoft Azure, AWS offers a complete portfolio of cloud services.

For Uber:

For anyone with a smartphone who needs a local ride, Uber is the next-generation taxi service that provides a simpler, more convenient, and higher quality transportation experience than conventional taxis.

Picking your market category is a difficult task but necessary as the category:

1. Determines when the product gets considered
2. Defines the competition
3. Shapes expectations
4. Guides evaluation

To better guide yourself around the positioning strategy, read this article I’ve written with a focus on product positioning strategy:

A framework for product strategy

Startup’s marketing efforts focus: customer growth

In no preferred or prioritized order:

• Getting the early customers, either by launching a product first, or building an initial follower base, or a combination of both
• Developing the go-to-market strategy and product launches
• Marketing effort optimization, which will generally focus on the funnel conversions, where customers are leaking, issues with the user experience, and monitoring channel spend and ROI if advertisements are made

A rule of thumb on ad spend: only pay for users if you are making money and have sustainable revenues

Pillar 10: Communication — the pitch deck

Venture capitalists and angel investors expect a specific format to your pitch deck and a structured storyline that tells them how you got to where you are and why they should invest in your idea. This structure includes:

• The product-market fit story: which will need to talk about the demand side of your value proposition or the customers, the pain or problem you are trying to solve for them, and the solution, or the value delivery interface, which entails your product(s) and/or service(s), and how it will be delivered such as your sales channels.
• Strategic opportunity: the market sizes, TAM, SAM, and SOMs and how you have calculated these figures including your assumptions, which may be tested on the stop or later on in the evaluating process, and the timing as to why now it the best time to launch your startup
• Market positioning: the competitive forces at play in the market, potential substitutes and competitors, and your differentiating factors or advantages that give you the right to play
• The business model: your operating model and how you plan to monetize services
• Past performance: any metrics important to your business model including ARR, CAC, LTV, cohort-based retention rates, etc.
• Go-to-market and execution plans, including what was done previously and what was achieved, promises for the short, mid, and long term, and during the rundown of the current cash asked for
• The founding team: its suitability for the task, how well you can execute, your skillsets and the many details discussed earlier, and any board members from earlier rounds of investing
• Financial ask: what stage of fundraising you are in, how much you have raised, what you are looking for and the why for it which will require a financial model in a spreadsheet with underlying assumptions of the model to be manipulated and cross-checked including potential revenue promises and costs

How to Structure a Pitch Deck for Investors

What is a Pitch Deck Presentation: A complete Presentation Guide with examples

The Ultimate Cheat Sheet for Your Startup’s Investor Pitch Deck

How to Create a Winning Investor Pitch-Deck

Here is Uber's first pitch deck

Pillar 11: Investors and fundraising

A startup needs capital to grow and the amount of capital needed to grow towards profitability is usually well beyond the ability of a couple of founders to finance. High growth companies almost always need to burn capital to sustain their growth before achieving profitability. Furthermore, having capital or managing to raise capital to invest into hiring key staff, public relations, marketing, and sales can be considered a competitive advantage.

On the other hand, raising venture capital financing is hard. A promising startup may receive 20 “no’s” for 1 “yes” and most of these “no’s” have more to do with the circumstances of the investor than the startup.

Venture capital financing options

Venture financing usually takes place in “rounds” which happen in specific orders of

• Preseed, with friends & family or by an institutional preseed investor such as Entrepreneur First
• Seed
• Series A
• Series B
• Series X
• Acquisition or IPO

Pre-Seed Fundraising Report and Pitch Deck Best Practices | DocSend

2020 Seed Fundraising Report and Pitch Deck Best Practices | DocSend

Series A Fundraising Report and Pitch Deck Best Practices | DocSend

Sometimes there are “bridge rounds” in between the priced seed/A/B/C rounds, giving startups runway to build upon their metrics and performances to pitch to investors in the coming rounds.

Financing options for startups: what you can raise

There are five options in front of entrepreneurs to raising capital:

• Equity sales round, which means setting a valuation for your
  company and thus a per-share price, and then issuing and selling new shares of the company to investors.
• ‘SAFE’ or Simple Agreement for Future Equity, which is mostly used in the US and during the early rounds, is an agreement between the startup and investors wherein the investors invest money in the startup in exchange for the right to purchase stock in the future equity rounds subject to certain parameters set in advance in the SAFE. The terms of a safe will almost always be simply the amount, cap, and discount if any.
• Convertible notes, which is similar to a SAFE, but is a loan that has a debt and interest component and maturity date, with repayment requirements if not converted.
• Grants and subsidies, that are generally provided by government-supported funds to stimulate technological advancement and growth through R&D and to make the economy more competitive in a specific sector. Many grants are match funded, meaning that to be eligible for a grant award the applying business must be able to raise finance to provide 10-70% of the overall project cost.
• Crowdfunding, which has become an increasingly popular way for
  startups to raise capital to finance product development, especially if it’s hardware. While it might look easy to launch a crowdfunding campaign,
  there are certain points to consider. Crowdfunding can mean that you do not need to give up equity and it can be a great way to test the market demand and get validation. However, it doesn’t “find investors” for you and if your offering is desirable, it doe not mean that you have an investable business.

Investor types: who to raise from?

There several options to choose from when raising capital:

• Friends, family, network: these people can help you get your idea
  off the ground with few strings attached, but their capital will not be deemed as validation and can place strain on your personal relationship
• Angel investors: they can provide strategic introductions, are usually quite hands-on, and can be deemed as external validation if they have expertise in the area of the startup idea. But they will account for a big portion of your seed round, will rarely lead a round after seed, and their ticket sizes are not large and can vary from $10k to $100k.
• Venture capital (VC) and family funds: usually this institutional money will bring governance, operational help, and a network of introductions to the startup. However, they will require a large amount of networking to be given access to and require a lot of follow-ons.
• Corporate VCs: such institutional investors can become your potential customers in the future and will grant unrivaled industry network access. On the downside, you need to be with them for the long haul, you need to define and set expectations early on, they can be slower to react as the VC is not a focus, and there may be conflicts of interest with their customers.
• Crowdfunding: this option can be a great marketing and community building tool for B2C products, however, you will need to deal with a large number of investors and you will need 30-40% committed before you
  launch.

When is the best time to raise?

There’s no fixed timeline and it could vary for every founder and business model. When founders are ready to tell their startup story, they can go out to raise money. And usually, when founders can raise money, they should.

The problem with fundraising is that it requires near-constant attention for 3–6 months and therefore can be quite grueling. Investors generally write cheques when the idea they hear is compelling and when they are persuaded that 1) the team of founders can realize its vision and 2) the opportunity described is real and sufficiently large.

How much to raise?

Founders raise money to hit specific milestones and therefore need enough money to actually hit those milestones, with some buffer to account for mistakes or delays. In choosing how much to raise, founders are trading off
how much progress that amount of money will purchase, credibility with investors, and dilution of theirs and other investors’ shares.

The goal should be to raise as much money as needed to get to the next “fundable” milestone, which in the pre-seed stage will usually be a minimum of 12 months runway and 18 months for subsequent rounds. Therefore understanding the startup’s monthly cash burn and mapping out the startup’s important timelines and the cash it will realistically require to achieve them will be key to fundraising.

The valuation

It is very hard to value a venture in the first round of financing based on normal business metrics and traditional valuation techniques on current revenue/profitability. Therefore it is best to let the investors or the market set a price or cap for a startup. The more investor interest a startup generates, the higher its value will trend.

However, if this course of action is impossible for any reason, then it's best to find an investor to tell you what you are worth, usually by looking at comparable companies that have robust and valid market valuations. The important thing with startup valuation is not to overoptimize.

Founders should also aim to find a valuation with which they are comfortable, allowing them to gain access to capital that will enable them to achieve their goals with acceptable dilution. Raising valuations that are too high or too low can cause adverse effects to the companies and investors. Too high valuations may result in down rounds and too low can cause too much dilution.

3 Ways Angel Investors Value Pre-Revenue Startups

Setting up meetings with investors

Investors are often swamped with irrelevant and/or low quality
pitches, therefore spamming them with cold emails and pitches will most likely not be successful. You will need to understand what a particular investor is looking for and include a couple of “customized hooks” in your e-mails and pitches. Personal investor introductions and referrals can help you rise above the noise factor but only when the links are strong.

Aim for “soft” pitches early in the journey such as ‘I’m working on so and so and would appreciate your feedback,’ before mentioning your intention to raise capital for your startup. Try to be professional at all times and ask for feedback if rejected. Think of turning rejections into relationships resulting in future advice and leads.

Make sure to check this PDF file from Crunchbase, Guide to Raising Capital, an amazing guide for a founder to prepare for raising capital.

Raising Startup Capital eBook - Crunchbase

This section is for related content such as books, podcasts, essays, and videos. Let me know if you have recommended material and I’ll add them here. Thank you.

Recommended books

Other recommended articles or newsletters

Benedict's Newsletter - Benedict Evans

Featured Essays at Andrew Chen

Recommended podcasts

Masters of Scale, an original podcast hosted by Reid Hoffman

The a16z Podcast Network

Exponent | A podcast about tech and society, hosted by Ben Thompson and James Allworth

Recommended videos