Milestone 1
Get Commercial Ready
In order to raise capital, you must have a strong story to tell. Key elements including:
A capable and credible team that possesses sufficient prior experience to convince investors that it can overcome challenges and deliver results. The team includes not only the founders, but also committed advisors, board members, and well-known supporters of the firm that can provide validation.
A clearly defined, large and growing market for the firm’s products and services.
Differentiated key factors for successful market penetration possessed by the firm that have been validated by significant industry segment participants.
Realistic financial goals along with recent history of meeting and/or exceeding prior expectations. (Milestone 2)
A great presentation cannot overcome deficiencies in any of these key areas. If need be, therefore, put off your fundraising efforts until your story becomes much more attractive to investors. 3 steps to get commercial-ready:
Step 1: Analyze your business’s commercial viability.
Commercial-Ready Scorecard: Here is what we have consistently found attracts the interest of investors. Each category can be scored on a scale of 1 to 5, and the overall score provides a quick snapshot of a startup's strengths and areas for improvement.
1. Management Team
Management team's past achievements, industry experience, and their ability to navigate challenges. A strong track record instills confidence in investors, it can be:
Years of operational experience in a similar industry, or
Startup experience with a similar business model that led to a successful exit
Your Score: [ ]
1 - Limited or no track record
2 - Some relevant experience
3 - Demonstrated success in related roles
4 - Proven track record in relevant industries
5 - Established industry leaders leading the team
2. Customer Validation
Evaluate the level of market acceptance through strong customer validation. It is virtually impossible to be funded unless you can include at least some level of customer validation.
Your Score: [ ]
1 - Limited or no customer validation
2 - Some positive feedback
3 - Growing customer base
4 - High customer satisfaction and retention
5 - Exceptional customer endorsements and referrals
3. Market Size
A big market for your firm's products/services.
Total available market (TAM), also called the total addressable market, is a term that is typically used to reference the total market opportunity available in your target geographic region. (eg. Malaysia)
A subset of the TAM is the served available market or SAM. This is a segment of the total available market that you will target via your marketing efforts (given your focus and resources) over the next 3 to 5 years. (eg. KL)
Your anticipated share of market or SOM is the portion of the SAM that you actually plan to capture and derive revenue from in your projections. (eg. If you only have 5 employees, what % of the SAM can you realistically reach in 3 to 5 years? The answer is the SOM.
Your Score: [ ]
1 - Limited market potential
2 - Niche market
3 - Growing market
4 - Significant market size
5 - Large and expanding market ($1 billion or more)
4. Business Model
A defensible business model that leads to profit. (eg. intellectual property, algorithms, data, customer experience, security, etc.)
Your Score: [ ]
1 - Weak or unclear business model, lacks defensibility
2 - Some elements of defensibility, but weak overall
3 - Unique value proposition and moderate defensibility
4 - Strong competitive advantage, including identifiable defenses
5 - Clear and defensible business model with robust protections
5. Growth Metrics
CAC vs CLV, Revenue vs COGS, Customer Retention Rate vs Customer Churn Rate, and whatever unit economics is relevant to your business, very important because it demonstrates clearly your business ventures are in good shape and on the road to profitability.
Recurring Revenue (RR):
From repeat purchases, customer loyalty programs, subscription etc.
Your Score: [ ]
Score 1: The startup shows unstable or declining recurring revenue, indicating potential issues in customer retention or market demand.
Score 5: The startup demonstrates consistent and strong growth in recurring revenue, suggesting a stable customer base and increasing demand for its offerings.
Active Users:
The number of unique users (not total registered users) during a specific measurement period. (per day or per month).
Your Score: [ ]
Score 1: The number of active users is low and shows little to no growth, indicating limited market interest or challenges in user engagement.
Score 5: The startup has a high and increasing number of active users, suggesting a growing user base and strong market appeal.
Month-on-Month Growth (MoM):
Your Score: [ ]
Score 1: The startup experiences negative or minimal month-on-month growth, indicating potential challenges in scaling the business.
Score 5: The startup demonstrates rapid and substantial month-on-month growth, signaling a strong upward trajectory.
Customer Acquisition Cost (CAC):
Costs incurred acquiring a customer or user = Sales, marketing, advertising, sales team salaries / # of customers acquired
Your Score: [ ]
Score 1: CAC is high and unsustainable, potentially straining financial resources.
Score 5: CAC is low and scalable, indicating efficient customer acquisition and cost-effectiveness.
Customer Lifetime Value (CLV):
The lifetime value of your customers is the revenue from each customer each month (or year), minus variable costs associated with servicing that customer, multiplied by the expected lifetime of that customer. E.g.
Average price of your product = $100
# of purchases per year = 10
Duration of customer retention = 20 years
Profit margin = 30%
CLV = $100x10x20x30% = $6000
Your Score: [ ]
Score 1: CLV is low and unsustainable, suggesting challenges in monetizing acquired customers.
Score 5: CLV is high and profitable, indicating the ability to generate significant value from customers over their lifetime.
Burn Rate:
Bank balance at the beginning of the month less bank balance at the end of the month. The result is the amount of negative cash flow, or your burn rate, for that month.
Your Score: [ ]
Score 1: The startup has an unsustainable and high burn rate, potentially leading to financial instability.
Score 5: The burn rate is controlled and manageable, ensuring prudent use of capital resources.
Runway:
The number of months of cash you have left on hand at any given time.
Your Score: [ ]
Score 1: The remaining runway is short (< 3 months), indicating a higher risk of running out of funds.
Score 5: The startup has a long and sustainable runway (>12 months), providing confidence in its financial stability and ability to weather challenges.
Time to Breakeven:
When your monthly negative cash flow will turn into positive cash flow, a profit.
Your Score: [ ]
Score 1: The projected time to breakeven is distant (> 3 years) and uncertain, indicating challenges in achieving profitability.
Score 5: The time to breakeven is near and achievable (< 6 months), suggesting a more financially sound and sustainable business model.
Interpretation
For each criterion, the scoring system is designed to reflect the quality and strength of a business venture’s attributes in that specific area. A higher score indicates a more favorable condition, while a lower score suggests areas that may need improvement.
Total Score = 60
Step 2: Perform risk assessment and brainstorm 5 to 10 options to de-risk it.
Evaluate the 7 significant risks outlined below and deploy effective measures to mitigate them:
#1: Market Risks
Market risks encompass uncertainties about the demand and acceptance of your product or service. A lack of clear market demand or a failure to deliver a market-ready product can lead to slow growth or even business failure. To mitigate these risks, founders should conduct thorough market research, validate product-market fit before full-scale production, and maintain flexibility to adapt to changing market conditions.
#2: Competition Risks
Intense competition can pose a threat to a business, particularly if competitors have strong market presence and well-established brands. To mitigate competition risks, founders must identify and emphasize their unique value proposition, invest in building a strong brand, and continuously innovate to stay ahead. Collaborative partnerships or strategic alliances can also be explored to strengthen market position.
#3: Operational Risks
Lack of experience or relevant expertise, both at the founder level and within the team, can impede operational efficiency. Mitigation measures involve building a skilled and diverse team, leveraging mentorship or advisors, and continuously investing in learning and development. Developing a robust and adaptable business model, along with cultivating key relationships, adds an extra layer of protection against operational challenges.
#4: Financial Risks
Running out of cash is a common concern for startups. Founders should implement prudent financial management practices, closely monitor cash flow, and establish contingency plans. Avoiding unnecessary credit provision, hedging against foreign exchange risks where applicable, and implementing strong internal controls can help safeguard against financial uncertainties.
#5: Legal and Compliance Risks
Operating in a regulated industry without proper compliance can lead to legal issues. Founders must stay informed about industry regulations, obtain necessary licenses, and invest in legal counsel. Intellectual property protection measures, such as patents or trademarks, should be explored to safeguard the uniqueness of the business offering.
#6: People Risks
People's risks involve the credibility of the founder, the competency of the team, and commitment levels. Founders should prioritize building a trustworthy and skilled team. Conducting background checks, fostering a positive working environment, and ensuring personal commitment to the business can mitigate people-related risks.
#7: Systemic Risks
External factors like economic instability or political unrest can impact business operations. Diversifying operations across stable regions, staying informed about geopolitical factors, and having contingency plans for technological or environmental disruptions can help mitigate systemic risks.
This proactive risk management approach will not only reduce potential threats but also enhance the appeal of your investment opportunity by ensuring a well-protected and resilient business foundation.
Step 3: Strengthen your value propositions.
When a prospective investor is evaluating your company, they will want to know what makes it truly special.
Is it your team?
Your market opportunity?
Your product?
Have you gained unbelievable traction?
It answers the question on every investor's mind: “Why should I invest in you instead of others”.
You will still need to perform well on the other investment criteria, but it will be that exceptional characteristic that draws investors toward your company.
List Your key value propositions here:
Using the insights collected above, craft out a compelling 2-3 sentence investment highlights that will excite future investors.