What do you need to show that your startup is ‘venture scale’?
You’ve got to think big. No, bigger, still.
When a founder uses our little AI bot to assess the likely success of achieving VC funding for their startup, the feedback addresses the first question: 'Is your startup venture-scale?' This question underpins the entire quest to secure VC funding because if a startup isn't venture-scale, then it's a futile endeavor to pursue it. Hence, our decision to make it the first point we tackle.
Approximately 45% of the decks that go through the bot are judged to be venture-scale, with another 30% being awarded an amber light. This means they need some parts of the puzzle to show they are venture-scale. The remaining 25% are far from demonstrating they are venture-scale, so they are given a red flag.
Of course, a green light doesn't mean a startup will definitely raise funding, while a red flag isn't indicative of a business not being venture-scale; it is just that it needs to be demonstrated in the deck. That's why I found it so surprising that a founder chose to send me a snarky email recently, complaining that the bot had judged their startup not to be venture-scale.
The founder in question felt that the enormous market size they'd illustrated in the deck was sufficient to indicate being venture scale. As I alluded to earlier, one factor alone isn't suggestive of being venture scale. Instead, it's a puzzle of different pieces.
Is the market big enough?
The disgruntled founder of the snarky email wasn't wrong to say that addressing a vast market is critical to showing that you're a venture-scale company.
When you're establishing your market size, you need to consider three elements to it:
Total addressable market (TAM) - the size of the entire market. How many dogs are there in the USA or Europe if you're a dog food company?
Serviceable available market (SAM) - the size of the overall market that your specific product will appeal to. For example, your dog food might be aimed at owners who are especially conscious about what their dogs eat.
Serviceable obtainable market (SOM) - or how much of the overall market your company can reasonably expect to capture. You likely won't be able to capture every single one of those conscientious consumer dog owners. How many can you reasonably expect to appeal to?
You have to demonstrate that there's a sizeable total market for your product or service and that your target market is reasonably sized. But that's not the only piece of the puzzle.
Is the market growing?
Once you've established the market size, you need to illustrate the market trajectory or show that it's growing. With an expanding market, your startup can sustain growth that can lead to huge returns for a VC.
How do you demonstrate that a market is growing? First, look to historical patterns and research by recognized organizations that indicate expansion in your sector. You can also point to shifts in demographics, regulatory changes, technological or medical advances, and measurable seachanges that will contribute to potential growth. Examples of these might include an aging population, environmental directives, such as phasing out gas boilers or petrol and diesel-engined cars, increased smartphone adoption, and younger people consuming less alcohol.
Does your startup solve a real problem?
A startup needs to be solving a real problem that causes people pain. Furthermore, the pain needs to be sufficient, and the alternatives are inconvenient enough that people are prepared to pay your startup money to alleviate it.
You might have developed a $150 solution to a problem that people are solving, albeit imperfectly or inconveniently, with a $10 alternative. Is the scale of their problem enough to warrant spending $140 more on your solution? If people will shrug their shoulders and tell you that they're fine as they are, your solution is a non-starter.
Can your go-to-market strategy capture the market?
It's all very good to spot the market and develop a workable solution to a pressing problem, but you also need to get your product or service in front of your target market. You need a go-to-market plan that can effectively speak to your ideal customers without costing you the earth.
'If we build it, they will come' isn't a plan. Influencer marketing isn't a stand-alone option; it's part of a package.
You need to plot out who your beachhead customers are and how and where they spend their time and money. Then, build a cost-effective strategy to put your product or service in front of them and convince them it's exactly what they need. From your beachhead market, you need to spread out, addressing other potential customers and their need for your solution.
Will your startup be able to sustain extraordinary growth and provide a significant return on investment?
This isn't the last point because it's the least important. It's the last point because it's predicated on the four coming before it and ties them together in a neat venture-scale bow. It recognizes how you need to solve a real problem for a significant and growing number of people and that you plan to get your product in front of them with a sustainable business model.
The sort of growth that a VC will be looking for is above and beyond what would be considered healthy growth for any other type of business. Y Combinator suggests that a startup should exhibit 15% week-on-week growth in its early stages. That's phenomenally tough to sustain.
At the earliest stages of your company, in return, you should provide investors with at least the possibility of a payday equivalent to the entire venture fund they have at their disposal. If a fund provides you with $2 million out of a total of $70 million, they'll want to see a 35× return on their investment.
Tying everything together
When it comes to showing all of this on your deck, it won't be just one slide that screams 'We are venture scale!' but rather a narrative thread tightly woven through all the slides.
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