Editor’s note: Sunil Rajaraman is the co-founder and CEO of Scripted.com, a marketplace for businesses to hire freelance writers. Follow him on Twitter @subes01.
When I talk to my friends who are not currently at startups, or the Silicon Valley, the perception is that VCs and individual investors are throwing around investment dollars like drunken sailors. Outsiders think that there is a bubble, and that any company with two engineers and an idea will get funded (though there is some truth to that in certain cases).
The reality is, competition has never been fiercer for startups, especially at the seed stage, to close a round. The pendulum may have swung for Y Combinator companies, but not everyone else.
I am a non-technical co-founder of Scripted.com – a marketplace for businesses to hire freelance writers. We recently closed a $1M seed round led by an institution (Crosslink Capital) – I wanted to highlight some of the lessons I learned along the way, and pass along a few tidbits for those of you who may be in the same situation.
Get Ready for an Uphill Battle
Both my co-founder and I are non-technical (even worse, we are MBAs). We both hail from highly quantitative backgrounds, and I worked for one startup previously, but nothing of note. If you are in the same boat as us, get ready for a long, uphill battle. We had a VP of Engineering lined up at the start of our raise, but he was not full-time when we were going around and making our pitches. If you aren’t ready for your raise to take a full 6 months, you should find a plan B ASAP.
Looking back at my inbox, it looks like we received a total of around 120 intros to individual angels and institutions – a little over 10 folks invested in our round. Remember that batting average does not matter when it regards to funding, just results.
Lose Your Pride With Regard to Valuation
Everyone talks about the crazy valuations that YC companies are getting these days, the uncapped notes, and other miscellaneous things we have not seen in previous years. I have unfortunate news for you if you aren’t in YC, or another reputed incubator – you are not going to get those kinds of terms, so check your ego at the door.
Referrals Work, but only if the Right People Refer You In
It goes without saying that the best VCs will not take your meetings unless you get a referral from a strong source. We learned early on that entrepreneurs who have successfully raised or exited companies are the best way to get in the door. We were fortunate enough to put together a really strong advisory board before we went out for our raise, and it helped quite a bit.
We tried a more scattershot approach with regard to referrals very early on in the process, and it did not work. Stay away from people who want equity, or compensation in return for intros. We had one guy who had the audacity to ask us for equity in exchange for an audience with an angel group. I recorded my conversation with him and play it back for my own amusement on occasion.
Traction Matters Much More For You
You need to have traction, and paying customers if you want to complete a seed raise. YC entrepreneurs have a great reputation, rightfully, for being product visionaries. The use case for their seed funding is much different than yours – they receive a lot of seed funding to build product – you will need a lot of seed funding to grow a business. By the time we completed our raise, we were already doing tens of thousands in revenue a month, and it was still an uphill battle.
You Need a Business Model You Can Explain in One Sentence
For us the pitch was: “We sell content to businesses for a flat rate, and take a percentage of each transaction.” Whatever the equivalent is for you, you need to be able to explain it clearly and concisely.
You Are Going to Get Your Market Size Numbers Ripped to Shreds
No matter how you size the market, be ready to get ripped to shreds. It goes without saying that VCs want to see a multi-billion dollar market, but how a VC reacts to your numbers could depend on what they ate for breakfast that morning. The way we started pitching our market, was very similar to the way we explained our revenue model: “our market is any business that needs written content”. We found that worked better than trying to walk through a bottoms-up analysis of each segment within the market for writing.
Play to Your Strengths, Have a Great Story
I realize that I am not a product visionary, nor will I ever be. I am good with numbers, and so is my co-founder – we are also hard-working and successfully pivoted the company from a previous product. Our story was compelling, we figured out how to acquire customers, and it was very clear to the folks that decided to invest in us that we are not going to give up. Whatever the story is for you, figure it out what it is, and back it up with facts. Our story was about execution – we had a decent (not great) product at the time, but we were raking in cash. Now that we have a full-time engineering team, the product has gotten better, which has made the sales cycle easier.
Besides, being a product visionary doesn’t sound all that fun to me…I don’t want to have to take a bunch of glamour shots and play the role of tortured artist.
The Slide that Made the Difference Between Getting Funding/Not Getting Funding
Riffing off the theme from above, my co-founder and I gradually got better at focusing on the actual numbers during our pitch. It was the moment we put together the below slide that things started taking a turn for the better with our pitches:
If you can convey to VCs that you have a repeatable business model, and understand the microeconomics of your business, then you are golden.
[image via flickr/epSos.de]