How To De-Risk Your Startup And Become ‘Definitely Fundable’
CEO of Foundersuite.com, which makes software for raising venture capital and managing investors.
Immad Akhund has invested in 100+ startups and was a Y Combinator Partner. Here are his tips for raising capital.
Serial founder Immad Akhund has a unique perspective when it comes to fundraising.
The four-time founder has a significant exit
under his belt. He’s a Y Combinator alum and now a partner at the accelerator. Plus, he’s a prolific investor in his own right — he’s put money into about 120 different companies over the last three years.
These days, he’s working on Mercury
, a banking solution to better address the needs of early-stage companies.
“Banking has always been this thing where — especially in the startup world — you're just using these archaic, awful things that charge you weird fees,” Immad says. “It seemed obvious that someone should innovate there.”
Here, he shares insights on how to build a company that investors simply can’t pass up and makes the case for why it’s essential to connect with other founders.
There’s still something about Silicon Valley
Immad has run fundraising processes
in London and Silicon Valley. He tried raising in London more than 10 years ago and ultimately wasn’t successful. Raising in San Francisco has been different.
While he acknowledges the Bay area has its problems, he’s convinced that “it’s the place to come if you’re raising money.”
Here’s why: If a company can show the right growth metrics, it will “definitely get funded” in Silicon Valley.
What makes for a “definitely fundable” business in San Francisco? Immad suggests the following:
+Something in a big market — “ideally it’s a high-growth market” like SaaS
+At least one of the founders is an engineer
+A company that has already reached $20k MRR
+Once a company has reached $20k MRR, it should show a “reasonable” month-over-month growth rate of at least 15 percent
“I think mostly if you've reached that level — especially if you're in a reasonable tech hub — you will almost certainly get seed funding of some sort unless you're being very unrealistic with your evaluation,” Immad says.
The growth rate is key for VC funding: “Flat or negative growth rate is almost completely unfundable,” he says.
But before entrepreneurs even go after growth strategies, Immad says the focus should be on retention. “A lot of growth doesn't have to do with adding new customers. If [current] customers keep buying more, that's where a lot of growth can come from,” he notes.
De-risking will help you get to ‘yes’
When a company is clearly VC-fundable, Immad says it’s all about de-risking your business to investors.
“Every company has slightly different risks,” he observes.
Using Mercury as an example, he illustrates how he de-risked it at the seed stage:
Is it likely that a successful product will be built? Since Mercury is Immad’s fourth company, of course, this was slightly de-risked. “But for someone who hasn't built a product before, it's a potential risk,” he notes.
Are there actual customers for this product? “This one was a little de-risked because I was my own customer,” Immad says. Even though he didn’t have letters of intent (LOIs) early on, it helped that some of the investors he was speaking with had also been founders. So they could relate to the market need for better banking.
Is the company possible from a regulation perspective? Early on, Immad spent a lot of time speaking to lawyers and bankers. He also approached bank sponsors and was able to secure term sheets from them, which helped show the viability of his idea even in a very regulated sector.
“You can't just go to an investor and say, I have this idea and it has a deck,” Immad says. You have to show that you’ve built the product and have reason to believe that enough people will become customers. But he acknowledges, “if it's a complicated enough product, you can't always de-risk [all aspects].”
Forget about investors — at least to start
Immad advises new founders to connect with other entrepreneurs — rather than exclusively meeting with investors.
“I don't like this word, ‘networking,’ but it helps to have a really good entrepreneur community,” he says. In fact, it’s a more organic way to get where you’re going.
“I think it’s useful not just for your personal psychology, but to help get introductions to investors,” Immad says of connecting with other entrepreneurs.
“I actually think it’s the best way to get to other investors, and not just any investors — but good investors. Because entrepreneurs aren’t going to recommend investors that perform badly for them, right?”
It’s also easier to create connections with founders because “you’re not selling to them,” Immad notes.
“Go talk to entrepreneurs first — these are hopefully your friends. That’s a hyper-low-pressure situation to improve your pitch. But it also helps (hopefully) get them excited about you, so that they introduce you to their investor friends.”
Nathan Beckord is the CEO of Foundersuite.com, a software platform that has helped entrepreneurs raise over $2 billion in seed and venture capital since 2016. This article is based on an episode of Foundersuite’s How I Raised It podcast, a behind-the-scenes look at how startup founders have raised capital.
Subscribe to get your daily round-up of top tech stories!