Probably our most important and actionable guide. Because most VCs won’t tell you what they want. We’ve detailed the complicated laundry list of must-haves, nice-to-haves, and secret unknowable expectations thrust upon founders. We can’t tell you exactly what to physically do, but the knowledge here will help you speak like a venture-backable founder.
In the writing room (/Google Doc draft), we originally called this chapter “How to secure VC”.
But that implied anyone who reads a how-to on the internet could do it.
So we renamed it to “What VC takes”, because VC takes a lot.
The truth is: the VC “package” - capital and support - is suitable only for a small percentage of exceptional founders. Consider this a (kind of wordy) checklist to see if you could be in it.
{{1}}
For a world built on metrics and business models, there’s a lot of romance on the startup scene. Entrepreneurs dream of the garage-to-glory pipeline where world-changing success is built on 20 hour days and huge wads of venture capital.
In reality, very few startups fit the exacting requirements of the VC mould. Nor do they need to work ‘til midnight, “hustle”, “scale-blaze”, or use obnoxious buzzwords to make a comfortable living. You might just want to build a business that impacts people, pays for a house and an annual holiday or two, and keeps you in a job for years to come.
To secure VC you must be at the intersection of VC-backability, personal readiness, product readiness, market readiness, and lots of other annoyingly intangible things we’ve tried to round up in a not-annoying way.
Then there’s the catch-22 nature of the thing. You need venture capital to get traction, but you need traction to get venture capital.
It’s a cruel mistress.
It is possible to circle this square, but your efforts now need to have a singular goal: de-risking your opportunity on behalf of your VC investors.
You do this by:
And that’s to get a shot - not a guaranteed cheque.
VCs look for “unfair advantages” in founding teams.
Things like unique IP, inimitable skill, or niche industry knowledge. The stuff that’s hard to teach.
Some founders are highly technical, or with highly differentiating expertise. Some are non-technical, but have a “gift” for soft skills like sales, marketing, or strategy.
An ideal founding team mixes both (e.g. a builder and a marketer).
But that’s not quite enough.
{{2}}
VCs are looking for experience-led founders who come from specific niches, who have lived and breathed the problem, and struck upon the solution from a unique perspective.
Necessity has been the mother of their invention. They have the right mind and were in the right place to conceive of the idea. And they massively care about sharing it with everyone else.
A brilliant developer looking for a problem to solve isn’t a good candidate, because they don’t have the emotional fuel that comes from lived experience (pain). They have no emotional connection to any customer. They have no incentive to understand the customer and potentially rewrite every line of code to cater to their needs.
This is what founder-market fit means. A near-perfect cross section of skill, provenance, insight, a desire to fix something, and equal desire in the market to have it fixed.
You’ve gotta want it - but wanting it isn’t enough.
You might not have perfected the product yet, but you want to do it, you’ll move mountains to do it, and you are the person to do it.
We also want people with a point of view. Ideally a total obsession with that point of view.
This is who founders need to be - not people who are looking to exploit a trend or have generic “whys” (AI’s taking our jobs. One day we’ll all live in the Metaverse. We’re democratising X. Since the pandemic. Because of the WFH revolution. Etc etc).
{{3}}
Your early team needs to reflect and embody the nature of invention.
It should be a group of fast executors, fast failers, quick recover-ers, outside-the-box-ers. Almost all of this entrepreneurial personality profile conflicts with the corporate type, where you are (essentially) given a playbook and told to play the game.
You can be (or hire) ex-corporate, but you will be coming in with blindspots and you will have to ditch lots of habits. VCs may wonder if you’re capable of this.
Fundraising shouldn’t be new to you. We want to see how you’ve secured and deployed resource, whether that’s through bootstrapping, FFF rounds, or grants.
{{4}}
You’ll have to learn a lot of things when you start up, but your market shouldn’t be one of them.
On top of that in-industry knowhow, you should have all the answers to:
We know the ‘I’ word is done to death but we need to see innovation, in whatever form you can show it. (There are exactly 10 forms to choose from - who knew?)
You don't need to completely disrupt an industry or "define a new category" (almost never happens), but you do need to make a meaningful change.
Does your product overhaul traditional UX? Does it serve an emotional need? Is the market big enough to scale in? Does it have a long lifetime horizon?
{{5}}
Back to that very unique secret in-industry insight: is it going to be worth money one day? Is that day soon?
Is the problem you’re solving big and annoying enough to make people part with their cash? In this economy? Will they still need it (and be able to afford it/justify it to their bosses) 12 months from now?
Valuable insight comes in many forms. It might be business model based (like an innovative marketing automation system) or timing based (acting on tidal changes like the remote working shift, GDPR, cloud systems, 5G, or AI).
It could be product based (a whole new concept). But if it’s the latter, be prepared for the battle of convincing investors why something that doesn’t yet exist should exist.
There are risks to investors in 100% of VC deals. The key is to mitigate it for them as much as possible.
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VCs determine whether or not they believe a company could be worth hundreds of millions, if not billions, of dollars by assessing the market opportunity.
A lack of market need is probably the biggest risk a VC can face.
It’s also the scariest, because founders and VCs are both susceptible to falling in love with a cool AF product that everyone loves and goes viral on Product Hunt… but nobody pays for.
You only have to look at the reality show that is the global tech startup scene - founders churning through hundreds of millions of dollars to drive a hype train to nowhere. Team blow ups, lay-offs, number-fudging, massive promises of massive returns fuelled by investor FOMO.
Millions of venture dollars are worthless if there are no customers to buy them back. An excellent product is worthless if no one wants it. An excellent team is wasted if they can’t convince people they need it.
In the words of probably the most famous VC to walk Sand Hill Road, Marc Andreessen, “the market pulls the product out of the startup”. What he means is that the market is the single most important predicator of success.
Devs will tell you it’s the product. Ops will tell you it’s the systems. But the market is the only thing that matters.
Although things nobody needs (like bored ape NFTs) may have their moments, neither a product or a team can create demand all by themselves. Not sustainably.
Demand is only found in the market. That market will give you the space to drive a better product and a better team to build it. That’s what product market fit really means.
A VC’s best friend is a solution based around ease. Think: plug and play and freemium SaaS.
For the best chance at giving your startup life (bear with us on that one) think LIFE:
Your business model dictates how suited you are to VC. And some models just won’t be able to deliver the scale or returns a VC is looking for - ever.
Put bluntly, if your business model can’t generate scalable, repeatable revenue, your chances of securing funding is significantly reduced.
Scalable is where you have the ability to significantly increase revenue with little cost (e.g. selling software that’s a similar price to roll out to 1,000 people as it is 100,000).
Repeatable is where you know exactly how much and at what frequency revenue is coming in (i.e. monthly or yearly subscriptions).
Repeatable revenue is not revenue from services or things that require a lot of human capital (e.g. consulting), have one-off set-up/installation costs, or rely on advertising/affiliate revenue etc.
It’s okay in the early days for revenue to be a bit lumpy (see traction below), or in some cases not (yet) recurring, but you do need a pathway to getting there.
First, let’s dismantle the acronyms:
We won’t sugarcoat it: if you’re in B2C, you’re gonna have a harder time raising VC money.
You might think the consumer-facing Facebooks and Amazons of the world generate by far the most value for investors. And you’d be correct. But B2B unicorns deliver more returns per dollar invested.
There’s a brutality to B2B in that it’s not about joy, and it’s not about comfort. It’s always about the ROI.
Project management software like Asana and Monday - for all their friendly email comms and cute collab tools - exist purely to save companies money in the form of time.
Accounting software can have all the fancy UX in the world, but it still has a single purpose: to save companies from costly miscalculations.
Unlike in B2C, you can’t seduce B2B customers with shiny features if it doesn’t save them time or money. B2B customers don’t impulse-buy (and wouldn’t be able to if they wanted to, thanks to the seven circles of stakeholder approval they need to go through).
In the mind of a VC, there are pitfalls to B2C prospects:
Customer acquisition and retention
B2B tends to respond to demand. Proving that demand - and therefore customers - exists before you build equals lower risk for an investor.
B2C tends to create demand and request behavioural change (e.g. switch from your 20 year old habit of buying things in stores when you need them, and commit to getting them delivered once a month).
It also relies on consumers paying out of their own pockets - a tough ask.
Unlike selling to businesses who often have budgets to play with, you’re competing with literally everything else an individual may otherwise choose to spend money on (how's “everything” for an indirect competitor?).
How many apps have you actually paid for out of your own pocket? How many have you downloaded and never used?
Unlike products integrated into the frameworks and workflows of companies (often with 100s or 1000s of employees) that create high switching barriers, it’s very easy for a consumer to simply cancel their engagement with the product ($ or otherwise) with minimal impact to them.
Cost of acquisition
It’s easier than ever to build and launch a company. So there’s increasing competition for eyeballs and increasing costs of attracting them.
As B2C often relies heavily on paid marketing (think Facebook and Google ads), bidding wars make the cost of acquiring a customer (CAC) unfeasible in many cases.
Scaling difficulty
If you are selling directly to individuals at a rough price of $10/month ($120 p/year), you’d need to acquire 833,333 users to generate $100M in revenue (8.3M users to generate $1B).
Conversely, if you’re selling to companies at $500/month, you’d only need 2% of that market - 16,666 businesses.
Still challenging, but less intimidating.
Reported decline
VCs are sitting comfy in their B2B era as the value of B2C companies keeps dropping.
There are exceptions, and plenty of B2C success stories to point to (¡Hola! Duolingo). But the other factor to consider is time. Many point to Aesop as an example of a B2C unicorn success story, but fail to acknowledge it took the brand over 30 years to achieve this. 30 years to realise returns = less than happy LPs.
Like many VCs, we love hardware.
But it’s typically a lot more capital intensive, a lot less scalable, and comes with lower margins and longer lead times.
Not ideal for a VC looking for capital efficiency (you can make a little go a long way), high margins (for little cost), and fast delivery times (you can get your product in the hands of users quickly to test and iterate).
If an investor has a certain amount of shots they can take, they need to be considerate about each of them.
Much more likely they'll take a shot on a software product - which might be buggy upon launch but can be fixed quickly and remotely - than a hardware product that could go majorly wrong after costing a customer $1M.
Logistically, digital products are also much easier to get into the hands of a million customers.
It depends on the VC.
If they’re writing multi-million dollar cheques, hardware is a lot more feasible for them than for a fund whose much smaller cheques might be used up entirely by a single production run.
Again, there have been huge hardware success stories (you’re probably reading this on one), but they are, generally speaking, less suited to the typical venture model.
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The best time to go for seed investment is when you’ve already put some roots down: MVP, traction, feedback, some form of momentum in your metrics to start 2, 5, or 10x-ing growth.
VCs are not there to prove concepts, but to grow and monetise proven(ish) concepts.
There are literally hundreds of metrics you can use to show that proof in the form of traction. Regularly paying customers are the simplest. Low churn (customers who pay and then stay) is good too.
You’d be far from the first to approach a VC without traction. And you’d be far from the first to be told: “come back when you’ve got some traction”.
It IS possible to secure investment without it, but we’re talking >10% of VC deals in which this happens. So take the below with a heavy caveat: without cold hard numbers, you will need to have most if not all of the following to pull this off.
Hot areas of interest
Nothing without proof of earning potential is getting past a VC unless the industry is absolutely clamouring for it.
When it comes to tidal trends like AI, FOMO rears its head and you might find a bigger appetite for risk and the excuse that “it’s all unproven because no one’s done it yet!” gets you through the door.
This will definitely need to be accompanied by a level of:
Founder “prestige”
Sounds a bit icky, but this is a little bit about the uni you went to or consulting firm you interned at, and a lot about being a known quantity to investors.
I.e. have you founded/fundraised before, been part of a (successful) founding team, been a senior executive with a lot of industry experience?
As ex-Google/ex-Facebook/Silicon Valley veterans, Asana’s founders ticked this prestige box and they were riding the consumerisation of enterprise hype cycle. Their massive SV network didn’t hurt either, and they raised USD $1.2 million from angels (including Andreessen Horowitz) before going straight into a $9 million Series A round the same year - when the product was a single HTML page.
It’s the exception, not the rule.
Leading indicators
If you don’t have paid usage, show unpaid usage along with leading indicators (KPIs that are getting you to paid usage).
Example:
(Lots of) customer insight
How many exploratory conversations have you had to deeply understand your customer? Dozens? Hundreds?
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How have they addressed this (and what did they spend) in the past?
A rule of thumb is to spend ~80% of your time talking to customers and 20% building your product.
Present as much of this human testimonial as humanly possible - user research, letters of intent, email snippets, praise, letting us speak to customers if it’s appropriate.
Condense their direct quotes into a slide in your pitch.
In B2B, letters of intent (LOIs) from big pipeline customers can help make a case for readiness. They’re non-binding agreements that confirm an intent to purchase or make a deal.
You might get them from clients (e.g. you’re in beta testing or on a paid pilot, and they’ll agree to buy if it’s successful), referral partners, or other investors. They need quantifiable dates, prices, and a signature from an important decision maker.
Think about the model. If you’re in B2C, a letter of intent from a customer spending $20 may not carry much sway. If you’re in B2B and you’ve got an LOI from a big corporate, that’s saying something.
Investors might consider quantifiable commitments (deposits, pre-orders, waitlists).
Survey results and press articles are generally not submissible. Anyone can have a mate in PR, and surveys are notoriously unreliable (and they only reflect hypotheticals, opinions, and how the responder felt on that day - not real intention to buy).
Demonstrate resourcefulness
If your product isn’t built, investors still need to “see” it. With the low barrier to entry of wireframing (Miro, Figma) and prototyping (Webflow, Bubble, Figma, Zapier) tools, there’s no excuse for no show and tell.
The most committed founders tackle problems with unwavering resolve. They’re usually the ones who can convince people to come along the journey with them (cofounders, early employees, advisors).
In the time it takes another founder to ask a dozen people “where I can find a lead developer?”, the resourceful founder has already hit up the top ten coding schools in the area, sniffed out their local tech meetup organisers, and cold emailed a few dozen devs on LinkedIn.
If you can’t prove product market fit yet, prove founder-market fit.
Demonstrate momentum
Ultimately, both with and without metrics, investors are looking for momentum.
Unlike a third-year scaleup where investors can ask “how fast has it grown?”, pre-seed investors have to ask “how fast is it growing?”. If you're moving through milestones - from whiteboard to MVP to first customer to traction - at pace, a VC will know you’re driven, committed, and on an upwards trajectory that will only get steeper with investment.
No one expects you to have an encyclopaedic playbook at seed stage. That’s what the seed stage (and the VC cash) is for - learning. More specifically, experimenting, iterating, and pivoting. “Hacking” if you must. And writing the playbook as you go.
But you need to show that you’re consistently setting up and proving or disproving hypotheses.
Both are very valuable, the catch is they need to be showing you where the commercial value is.
You need to relay those experiments and results clearly at every investor check-in. Why did you run that A/B test, and how will the result lead to growth and profitability? What test do you need to do next?
Going back to traction, VCs are only going to be interested in rampant traction - not trickling.
The learning has to be actionable, and the action has to be repeatable. Spikes here and there are no good, neither is pivoting endlessly trying to find a user base that doesn’t exist.
The other catch is these learnings need to be achieved in a relatively small period of time.
Beavering away for years only to score an average result is not a language VCs speak.
Getting to $1M ARR in 6 years is not the same as doing it in 6 months. VCs use past performance to predict future rate of growth.
Plus, time is literally money - the time they devote to supporting you has a resource cost - as do the potential losses that hit when you get pipped to the post by a competitor.
Are you moving fast enough to outpace other startups with a similar insight, racing to launch the same thing?
Just look at incumbents who get sluggish and die a slug’s death. They’re part of your story, and not necessarily as villains. Use their data to benchmark your position - why there is so much demand it’s drawn multiple players. What the potential of the market is, what you do differently, and how you do things better.)
The sprint to market can be hard on the team. You’ll need to get strategic about management, milestones, and goal setting.
If your motivations for starting up are to be your own boss, make a shitload of cash, or pursue growth at all costs, it's probably going to be a polite no.
Humility is key - founders able to look at themselves with a healthy dose of self-awareness have the broadest potential for learning.
This means the ability to take on feedback on the chin. It means being open to new strategies and taking external advice, even if it conflicts with your status quo. It involves relying on data rather than biases, intuition, or “I know best”.
Lastly, are you a burnout risk? Do you have what it takes as a person, and the support of a good cofounder/team? Are you comfortable working right at the cliff edge of your ability? Have you set realistic milestones to achieve your ambitious goals?
There are lots of people who start businesses and most of them are “lifestyle” businesses and that’s perfectly fine.
The point of a startup is to change how the world works.
You need unchecked ambition, a high risk tolerance, and a mission statement that includes ending something, eradicating something, or making the best something in the world.
We get that this kind of wild optimism can feel elusive.
After the dizzying heights of 2010s SaaS, the valuation bubble, the excitement/horror of the pandemic, real life quarantines, and the time we had the Tiger King, there’s a bit of a depressing sentiment hanging in the air.
Especially with our AI overlords (who we for one welcome) starting to loom over every industry and job imaginable.
Every inch of the physical world is mapped. The NFTs and Metaverses of the digital world were flops. We’re still dependent on s**t printers and tangled wires and fossil fuels and the Microsoft suite. Space(X) is old news. All that’s left to explore is the bottom of the ocean (and we know how that ended last time).
So it can sometimes feel like there’s not much left for new enterprise to “do”.
But - risking sounding like a bad movie trailer - we’ve got a world to save.
The founders who will secure VC can see past the Silicon Valley comedown, past the monopolistic Big Fives and Big Fours and FAANGs and FANGMANs and MAMAAs (who are not indestructible, as ambitious founders know).
They’re the ones who know what’s going on, understand that tech exists in a delicate ecosystem possibility, and can answer the question why now.
Entire industries need to be created to save humanity. Seriously. Entirely new jobs will arise as will new technologies we can’t even imagine yet.
We love lifestyle businesses, especially Aussie ones, but we don’t invest in them. We invest in people with this kind of mindset: wild ambition, and hope.
(Not just that kind)
With all that said... there is an illusion in VC that every single startup needs to go for s**t or bust. Full unicorn or fail. Explosive growth or go home. You get it.
Some of the best-intentioned founders can get sucked into the growth-or-die vortex.
In startup culture, there's an increasing pressure to keep up with the Joneses (or maybe Jobses). There’s an ego at play, a sense of winner-takes-all competition.
For every AFR article gushing over the multi-million dollar flavour of the month, there’s a founder who thinks they need to match that raise to be “someone”.
This vicious competition is cultivated in part by the scarcity of funding and the difficulty of meeting and connecting with the right investors. And there are still plenty of VCs who pile on crushing pressure to deliver returns.
So that’s all the high-level stuff. Finishing with the admin.
These are our regs, and most VCs require the same things to consider funding you:
We call it “admin”, but it’s a really serious, rigorous, and exacting part of the process where you’ll finally feel like you’re getting somewhere.
A successful Seed round and all the excitement that accompanies it is certainly an excuse to pop the champagne.
But as HubSpot cofounder Dharmesh Shah put it:
The SaaS darlings of the 2010s had VCs queuing up, using oversized valuations to push to the front. Then it was Web3 and the ill-fated metaverse. Now, it’s AI.
They get $XM and think they’re “in”, so validation and success are the next natural things.
But when there’s an obsessive focus on capital, a false sense of security descends once it’s secured. Sometimes all it takes is a praise-laden article in the AFR feeds into that sense of security and validation. It’s a self-perpetuating cycle where the media is quick to inflate egos, and quick to tear them down if it all goes wrong.
The biggest challenge for any startup often isn’t raising money – it’s focus.
Being the founder of a VC-backed company is a huge achievement. It’s one many high-potential founders never hit. But it’s not the achievement.
Raising VC money is certainly an achievement, but it doesn’t mean validation in itself. In reality, the journey has just begun.
You’ll often hear that exact phrase: “we know the journey has just begun…” from bright-eyed, cashed up founders in PR pieces. But do they actually know?
Someone said we’re defined by two things: our patience when we have nothing and our humility when we have everything.
A successful funding round does not a successful startup make. The secret is in how you spend it.
In the writing room (/Google Doc draft), we originally called this chapter “How to secure VC”.
But that implied anyone who reads a how-to on the internet could do it.
So we renamed it to “What VC takes”, because VC takes a lot.
The truth is: the VC “package” - capital and support - is suitable only for a small percentage of exceptional founders. Consider this a (kind of wordy) checklist to see if you could be in it.
{{1}}
For a world built on metrics and business models, there’s a lot of romance on the startup scene. Entrepreneurs dream of the garage-to-glory pipeline where world-changing success is built on 20 hour days and huge wads of venture capital.
In reality, very few startups fit the exacting requirements of the VC mould. Nor do they need to work ‘til midnight, “hustle”, “scale-blaze”, or use obnoxious buzzwords to make a comfortable living. You might just want to build a business that impacts people, pays for a house and an annual holiday or two, and keeps you in a job for years to come.
To secure VC you must be at the intersection of VC-backability, personal readiness, product readiness, market readiness, and lots of other annoyingly intangible things we’ve tried to round up in a not-annoying way.
Then there’s the catch-22 nature of the thing. You need venture capital to get traction, but you need traction to get venture capital.
It’s a cruel mistress.
It is possible to circle this square, but your efforts now need to have a singular goal: de-risking your opportunity on behalf of your VC investors.
You do this by:
And that’s to get a shot - not a guaranteed cheque.
VCs look for “unfair advantages” in founding teams.
Things like unique IP, inimitable skill, or niche industry knowledge. The stuff that’s hard to teach.
Some founders are highly technical, or with highly differentiating expertise. Some are non-technical, but have a “gift” for soft skills like sales, marketing, or strategy.
An ideal founding team mixes both (e.g. a builder and a marketer).
But that’s not quite enough.
{{2}}
VCs are looking for experience-led founders who come from specific niches, who have lived and breathed the problem, and struck upon the solution from a unique perspective.
Necessity has been the mother of their invention. They have the right mind and were in the right place to conceive of the idea. And they massively care about sharing it with everyone else.
A brilliant developer looking for a problem to solve isn’t a good candidate, because they don’t have the emotional fuel that comes from lived experience (pain). They have no emotional connection to any customer. They have no incentive to understand the customer and potentially rewrite every line of code to cater to their needs.
This is what founder-market fit means. A near-perfect cross section of skill, provenance, insight, a desire to fix something, and equal desire in the market to have it fixed.
You’ve gotta want it - but wanting it isn’t enough.
You might not have perfected the product yet, but you want to do it, you’ll move mountains to do it, and you are the person to do it.
We also want people with a point of view. Ideally a total obsession with that point of view.
This is who founders need to be - not people who are looking to exploit a trend or have generic “whys” (AI’s taking our jobs. One day we’ll all live in the Metaverse. We’re democratising X. Since the pandemic. Because of the WFH revolution. Etc etc).
{{3}}
Your early team needs to reflect and embody the nature of invention.
It should be a group of fast executors, fast failers, quick recover-ers, outside-the-box-ers. Almost all of this entrepreneurial personality profile conflicts with the corporate type, where you are (essentially) given a playbook and told to play the game.
You can be (or hire) ex-corporate, but you will be coming in with blindspots and you will have to ditch lots of habits. VCs may wonder if you’re capable of this.
Fundraising shouldn’t be new to you. We want to see how you’ve secured and deployed resource, whether that’s through bootstrapping, FFF rounds, or grants.
{{4}}
You’ll have to learn a lot of things when you start up, but your market shouldn’t be one of them.
On top of that in-industry knowhow, you should have all the answers to:
We know the ‘I’ word is done to death but we need to see innovation, in whatever form you can show it. (There are exactly 10 forms to choose from - who knew?)
You don't need to completely disrupt an industry or "define a new category" (almost never happens), but you do need to make a meaningful change.
Does your product overhaul traditional UX? Does it serve an emotional need? Is the market big enough to scale in? Does it have a long lifetime horizon?
{{5}}
Back to that very unique secret in-industry insight: is it going to be worth money one day? Is that day soon?
Is the problem you’re solving big and annoying enough to make people part with their cash? In this economy? Will they still need it (and be able to afford it/justify it to their bosses) 12 months from now?
Valuable insight comes in many forms. It might be business model based (like an innovative marketing automation system) or timing based (acting on tidal changes like the remote working shift, GDPR, cloud systems, 5G, or AI).
It could be product based (a whole new concept). But if it’s the latter, be prepared for the battle of convincing investors why something that doesn’t yet exist should exist.
There are risks to investors in 100% of VC deals. The key is to mitigate it for them as much as possible.
{{6}}
VCs determine whether or not they believe a company could be worth hundreds of millions, if not billions, of dollars by assessing the market opportunity.
A lack of market need is probably the biggest risk a VC can face.
It’s also the scariest, because founders and VCs are both susceptible to falling in love with a cool AF product that everyone loves and goes viral on Product Hunt… but nobody pays for.
You only have to look at the reality show that is the global tech startup scene - founders churning through hundreds of millions of dollars to drive a hype train to nowhere. Team blow ups, lay-offs, number-fudging, massive promises of massive returns fuelled by investor FOMO.
Millions of venture dollars are worthless if there are no customers to buy them back. An excellent product is worthless if no one wants it. An excellent team is wasted if they can’t convince people they need it.
In the words of probably the most famous VC to walk Sand Hill Road, Marc Andreessen, “the market pulls the product out of the startup”. What he means is that the market is the single most important predicator of success.
Devs will tell you it’s the product. Ops will tell you it’s the systems. But the market is the only thing that matters.
Although things nobody needs (like bored ape NFTs) may have their moments, neither a product or a team can create demand all by themselves. Not sustainably.
Demand is only found in the market. That market will give you the space to drive a better product and a better team to build it. That’s what product market fit really means.
A VC’s best friend is a solution based around ease. Think: plug and play and freemium SaaS.
For the best chance at giving your startup life (bear with us on that one) think LIFE:
Your business model dictates how suited you are to VC. And some models just won’t be able to deliver the scale or returns a VC is looking for - ever.
Put bluntly, if your business model can’t generate scalable, repeatable revenue, your chances of securing funding is significantly reduced.
Scalable is where you have the ability to significantly increase revenue with little cost (e.g. selling software that’s a similar price to roll out to 1,000 people as it is 100,000).
Repeatable is where you know exactly how much and at what frequency revenue is coming in (i.e. monthly or yearly subscriptions).
Repeatable revenue is not revenue from services or things that require a lot of human capital (e.g. consulting), have one-off set-up/installation costs, or rely on advertising/affiliate revenue etc.
It’s okay in the early days for revenue to be a bit lumpy (see traction below), or in some cases not (yet) recurring, but you do need a pathway to getting there.
First, let’s dismantle the acronyms:
We won’t sugarcoat it: if you’re in B2C, you’re gonna have a harder time raising VC money.
You might think the consumer-facing Facebooks and Amazons of the world generate by far the most value for investors. And you’d be correct. But B2B unicorns deliver more returns per dollar invested.
There’s a brutality to B2B in that it’s not about joy, and it’s not about comfort. It’s always about the ROI.
Project management software like Asana and Monday - for all their friendly email comms and cute collab tools - exist purely to save companies money in the form of time.
Accounting software can have all the fancy UX in the world, but it still has a single purpose: to save companies from costly miscalculations.
Unlike in B2C, you can’t seduce B2B customers with shiny features if it doesn’t save them time or money. B2B customers don’t impulse-buy (and wouldn’t be able to if they wanted to, thanks to the seven circles of stakeholder approval they need to go through).
In the mind of a VC, there are pitfalls to B2C prospects:
Customer acquisition and retention
B2B tends to respond to demand. Proving that demand - and therefore customers - exists before you build equals lower risk for an investor.
B2C tends to create demand and request behavioural change (e.g. switch from your 20 year old habit of buying things in stores when you need them, and commit to getting them delivered once a month).
It also relies on consumers paying out of their own pockets - a tough ask.
Unlike selling to businesses who often have budgets to play with, you’re competing with literally everything else an individual may otherwise choose to spend money on (how's “everything” for an indirect competitor?).
How many apps have you actually paid for out of your own pocket? How many have you downloaded and never used?
Unlike products integrated into the frameworks and workflows of companies (often with 100s or 1000s of employees) that create high switching barriers, it’s very easy for a consumer to simply cancel their engagement with the product ($ or otherwise) with minimal impact to them.
Cost of acquisition
It’s easier than ever to build and launch a company. So there’s increasing competition for eyeballs and increasing costs of attracting them.
As B2C often relies heavily on paid marketing (think Facebook and Google ads), bidding wars make the cost of acquiring a customer (CAC) unfeasible in many cases.
Scaling difficulty
If you are selling directly to individuals at a rough price of $10/month ($120 p/year), you’d need to acquire 833,333 users to generate $100M in revenue (8.3M users to generate $1B).
Conversely, if you’re selling to companies at $500/month, you’d only need 2% of that market - 16,666 businesses.
Still challenging, but less intimidating.
Reported decline
VCs are sitting comfy in their B2B era as the value of B2C companies keeps dropping.
There are exceptions, and plenty of B2C success stories to point to (¡Hola! Duolingo). But the other factor to consider is time. Many point to Aesop as an example of a B2C unicorn success story, but fail to acknowledge it took the brand over 30 years to achieve this. 30 years to realise returns = less than happy LPs.
Like many VCs, we love hardware.
But it’s typically a lot more capital intensive, a lot less scalable, and comes with lower margins and longer lead times.
Not ideal for a VC looking for capital efficiency (you can make a little go a long way), high margins (for little cost), and fast delivery times (you can get your product in the hands of users quickly to test and iterate).
If an investor has a certain amount of shots they can take, they need to be considerate about each of them.
Much more likely they'll take a shot on a software product - which might be buggy upon launch but can be fixed quickly and remotely - than a hardware product that could go majorly wrong after costing a customer $1M.
Logistically, digital products are also much easier to get into the hands of a million customers.
It depends on the VC.
If they’re writing multi-million dollar cheques, hardware is a lot more feasible for them than for a fund whose much smaller cheques might be used up entirely by a single production run.
Again, there have been huge hardware success stories (you’re probably reading this on one), but they are, generally speaking, less suited to the typical venture model.
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The best time to go for seed investment is when you’ve already put some roots down: MVP, traction, feedback, some form of momentum in your metrics to start 2, 5, or 10x-ing growth.
VCs are not there to prove concepts, but to grow and monetise proven(ish) concepts.
There are literally hundreds of metrics you can use to show that proof in the form of traction. Regularly paying customers are the simplest. Low churn (customers who pay and then stay) is good too.
You’d be far from the first to approach a VC without traction. And you’d be far from the first to be told: “come back when you’ve got some traction”.
It IS possible to secure investment without it, but we’re talking >10% of VC deals in which this happens. So take the below with a heavy caveat: without cold hard numbers, you will need to have most if not all of the following to pull this off.
Hot areas of interest
Nothing without proof of earning potential is getting past a VC unless the industry is absolutely clamouring for it.
When it comes to tidal trends like AI, FOMO rears its head and you might find a bigger appetite for risk and the excuse that “it’s all unproven because no one’s done it yet!” gets you through the door.
This will definitely need to be accompanied by a level of:
Founder “prestige”
Sounds a bit icky, but this is a little bit about the uni you went to or consulting firm you interned at, and a lot about being a known quantity to investors.
I.e. have you founded/fundraised before, been part of a (successful) founding team, been a senior executive with a lot of industry experience?
As ex-Google/ex-Facebook/Silicon Valley veterans, Asana’s founders ticked this prestige box and they were riding the consumerisation of enterprise hype cycle. Their massive SV network didn’t hurt either, and they raised USD $1.2 million from angels (including Andreessen Horowitz) before going straight into a $9 million Series A round the same year - when the product was a single HTML page.
It’s the exception, not the rule.
Leading indicators
If you don’t have paid usage, show unpaid usage along with leading indicators (KPIs that are getting you to paid usage).
Example:
(Lots of) customer insight
How many exploratory conversations have you had to deeply understand your customer? Dozens? Hundreds?
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How have they addressed this (and what did they spend) in the past?
A rule of thumb is to spend ~80% of your time talking to customers and 20% building your product.
Present as much of this human testimonial as humanly possible - user research, letters of intent, email snippets, praise, letting us speak to customers if it’s appropriate.
Condense their direct quotes into a slide in your pitch.
In B2B, letters of intent (LOIs) from big pipeline customers can help make a case for readiness. They’re non-binding agreements that confirm an intent to purchase or make a deal.
You might get them from clients (e.g. you’re in beta testing or on a paid pilot, and they’ll agree to buy if it’s successful), referral partners, or other investors. They need quantifiable dates, prices, and a signature from an important decision maker.
Think about the model. If you’re in B2C, a letter of intent from a customer spending $20 may not carry much sway. If you’re in B2B and you’ve got an LOI from a big corporate, that’s saying something.
Investors might consider quantifiable commitments (deposits, pre-orders, waitlists).
Survey results and press articles are generally not submissible. Anyone can have a mate in PR, and surveys are notoriously unreliable (and they only reflect hypotheticals, opinions, and how the responder felt on that day - not real intention to buy).
Demonstrate resourcefulness
If your product isn’t built, investors still need to “see” it. With the low barrier to entry of wireframing (Miro, Figma) and prototyping (Webflow, Bubble, Figma, Zapier) tools, there’s no excuse for no show and tell.
The most committed founders tackle problems with unwavering resolve. They’re usually the ones who can convince people to come along the journey with them (cofounders, early employees, advisors).
In the time it takes another founder to ask a dozen people “where I can find a lead developer?”, the resourceful founder has already hit up the top ten coding schools in the area, sniffed out their local tech meetup organisers, and cold emailed a few dozen devs on LinkedIn.
If you can’t prove product market fit yet, prove founder-market fit.
Demonstrate momentum
Ultimately, both with and without metrics, investors are looking for momentum.
Unlike a third-year scaleup where investors can ask “how fast has it grown?”, pre-seed investors have to ask “how fast is it growing?”. If you're moving through milestones - from whiteboard to MVP to first customer to traction - at pace, a VC will know you’re driven, committed, and on an upwards trajectory that will only get steeper with investment.
No one expects you to have an encyclopaedic playbook at seed stage. That’s what the seed stage (and the VC cash) is for - learning. More specifically, experimenting, iterating, and pivoting. “Hacking” if you must. And writing the playbook as you go.
But you need to show that you’re consistently setting up and proving or disproving hypotheses.
Both are very valuable, the catch is they need to be showing you where the commercial value is.
You need to relay those experiments and results clearly at every investor check-in. Why did you run that A/B test, and how will the result lead to growth and profitability? What test do you need to do next?
Going back to traction, VCs are only going to be interested in rampant traction - not trickling.
The learning has to be actionable, and the action has to be repeatable. Spikes here and there are no good, neither is pivoting endlessly trying to find a user base that doesn’t exist.
The other catch is these learnings need to be achieved in a relatively small period of time.
Beavering away for years only to score an average result is not a language VCs speak.
Getting to $1M ARR in 6 years is not the same as doing it in 6 months. VCs use past performance to predict future rate of growth.
Plus, time is literally money - the time they devote to supporting you has a resource cost - as do the potential losses that hit when you get pipped to the post by a competitor.
Are you moving fast enough to outpace other startups with a similar insight, racing to launch the same thing?
Just look at incumbents who get sluggish and die a slug’s death. They’re part of your story, and not necessarily as villains. Use their data to benchmark your position - why there is so much demand it’s drawn multiple players. What the potential of the market is, what you do differently, and how you do things better.)
The sprint to market can be hard on the team. You’ll need to get strategic about management, milestones, and goal setting.
If your motivations for starting up are to be your own boss, make a shitload of cash, or pursue growth at all costs, it's probably going to be a polite no.
Humility is key - founders able to look at themselves with a healthy dose of self-awareness have the broadest potential for learning.
This means the ability to take on feedback on the chin. It means being open to new strategies and taking external advice, even if it conflicts with your status quo. It involves relying on data rather than biases, intuition, or “I know best”.
Lastly, are you a burnout risk? Do you have what it takes as a person, and the support of a good cofounder/team? Are you comfortable working right at the cliff edge of your ability? Have you set realistic milestones to achieve your ambitious goals?
There are lots of people who start businesses and most of them are “lifestyle” businesses and that’s perfectly fine.
The point of a startup is to change how the world works.
You need unchecked ambition, a high risk tolerance, and a mission statement that includes ending something, eradicating something, or making the best something in the world.
We get that this kind of wild optimism can feel elusive.
After the dizzying heights of 2010s SaaS, the valuation bubble, the excitement/horror of the pandemic, real life quarantines, and the time we had the Tiger King, there’s a bit of a depressing sentiment hanging in the air.
Especially with our AI overlords (who we for one welcome) starting to loom over every industry and job imaginable.
Every inch of the physical world is mapped. The NFTs and Metaverses of the digital world were flops. We’re still dependent on s**t printers and tangled wires and fossil fuels and the Microsoft suite. Space(X) is old news. All that’s left to explore is the bottom of the ocean (and we know how that ended last time).
So it can sometimes feel like there’s not much left for new enterprise to “do”.
But - risking sounding like a bad movie trailer - we’ve got a world to save.
The founders who will secure VC can see past the Silicon Valley comedown, past the monopolistic Big Fives and Big Fours and FAANGs and FANGMANs and MAMAAs (who are not indestructible, as ambitious founders know).
They’re the ones who know what’s going on, understand that tech exists in a delicate ecosystem possibility, and can answer the question why now.
Entire industries need to be created to save humanity. Seriously. Entirely new jobs will arise as will new technologies we can’t even imagine yet.
We love lifestyle businesses, especially Aussie ones, but we don’t invest in them. We invest in people with this kind of mindset: wild ambition, and hope.
(Not just that kind)
With all that said... there is an illusion in VC that every single startup needs to go for s**t or bust. Full unicorn or fail. Explosive growth or go home. You get it.
Some of the best-intentioned founders can get sucked into the growth-or-die vortex.
In startup culture, there's an increasing pressure to keep up with the Joneses (or maybe Jobses). There’s an ego at play, a sense of winner-takes-all competition.
For every AFR article gushing over the multi-million dollar flavour of the month, there’s a founder who thinks they need to match that raise to be “someone”.
This vicious competition is cultivated in part by the scarcity of funding and the difficulty of meeting and connecting with the right investors. And there are still plenty of VCs who pile on crushing pressure to deliver returns.
So that’s all the high-level stuff. Finishing with the admin.
These are our regs, and most VCs require the same things to consider funding you:
We call it “admin”, but it’s a really serious, rigorous, and exacting part of the process where you’ll finally feel like you’re getting somewhere.
A successful Seed round and all the excitement that accompanies it is certainly an excuse to pop the champagne.
But as HubSpot cofounder Dharmesh Shah put it:
The SaaS darlings of the 2010s had VCs queuing up, using oversized valuations to push to the front. Then it was Web3 and the ill-fated metaverse. Now, it’s AI.
They get $XM and think they’re “in”, so validation and success are the next natural things.
But when there’s an obsessive focus on capital, a false sense of security descends once it’s secured. Sometimes all it takes is a praise-laden article in the AFR feeds into that sense of security and validation. It’s a self-perpetuating cycle where the media is quick to inflate egos, and quick to tear them down if it all goes wrong.
The biggest challenge for any startup often isn’t raising money – it’s focus.
Being the founder of a VC-backed company is a huge achievement. It’s one many high-potential founders never hit. But it’s not the achievement.
Raising VC money is certainly an achievement, but it doesn’t mean validation in itself. In reality, the journey has just begun.
You’ll often hear that exact phrase: “we know the journey has just begun…” from bright-eyed, cashed up founders in PR pieces. But do they actually know?
Someone said we’re defined by two things: our patience when we have nothing and our humility when we have everything.
A successful funding round does not a successful startup make. The secret is in how you spend it.
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