Step by step guide for funding your startup

Hey all,

I just wanted to post a guide for those founders who don't know where to start when it comes to finding investors, pitching them, demonstrating product-market fit, etc... I go very in depth into each step, so feel free to skip any part if you feel your startup has already any point sorted out.

1. Proof of concept - Every investor out there (specially the ones who invest in platforms) have their inbox full of people pitching ideas. It's definitely possible but really hard. Having 5-10 paying users or even an email list from interested people will increase your possibilities.

There's literally hundreds of ways of doing this, I'll dig into what I believe is applicable to most entrepreneurs building any sort of digital product. This approach is based on the validation framework from the “Testing Business Ideas” book by Strategyzer, with a combination of the experiments that show the highest intent from potential customers and hence prove product-market fit.

a) Traffic. I recommend Facebook lead ads because they're somewhat a cheap & straightforward gateway to get potential customer emails from which can be nurtured through email marketing.

You also need to understand where your ideal customer spends his time. If your prospect is a self-learner Youtube Ads make sense. If your product is targeted to B2B LinkedIn / cold email outreach makes sense. If your prospect falls in the Z-Gen demographic Tik Tok ads make sense.

Facebook Ads: https://www.youtube.com/watch?v=8I9jbS4_GxE
Tik Tok Ads: https://medium.com/re-verb/advertising-on-tiktok-f794eb2f7f73
Youtube Ads: https://www.udemy.com/course/youtube-ads-academy/
Google Ads: https://www.udemy.com/course/the-ultimate-google-adwords-training-course/
LinkedIn Outreach: https://chrisbits.gumroad.com/l/salesnavigatorplaybook

b) Email marketing. Why? Because 90% of leads don't convert in the first ad, you need to build trust, nurture them & add value. This can be done with retargeting but I believe you can achieve similar results for waaay cheaper with email flows.

Klaviyo has great templates on a variety of industries including SaaS, E-Commerce, mobile apps, etc... The main idea should be, showcase the value of your product through email sequences, with the objective of setting a Calendly call. Showing a quick overview of your software/service and offering a special discount to your lead for being one of your first 10 customers.

2. Finding investors - Most investors are looking to network, hence easy to find on LinkedIn. The trick to land a deal is not finding the investor but correctly targeting who you pitch to, because similar values matter, he/she/they should be interested in your industry, your growth vision should align to theirs, etc…

a) Understanding your investor: Checklist these questions:
i) What industry is your investor interested in?
ii) Which entrepreneurs does your investor follow? What’s the profile of the companies they founded?
iii) Which monetization model is your investor interested in?
iv) What kind of content or comments (if any) does your investor post on LinkedIn? What does he care about?
v) How risk averse is your investor? Has he invested in similar-risk ventures like yours?
vi) Which trends is your investor following? Does it match something you're doing?

a) Outreach tools. In terms of copywriting, my favorite course on B2B sales is “Cold Email Mastery”, it focuses on cold email but the idea is platform-agnostic, sending messages that cut to the chase, are relevant in a casual tone and personalized.

https://coldemailwizard.gumroad.com/l/peVsK

If you ask me whether to go with LinkedIn or cold email, I’d definitely say LinkedIn is better. You won’t struggle setting up a secondary email, finding verified addresses (not to mention looking them up) & warming up your email domain.

I recommend setting up an Expandi.io account for sending connections, intro messages & follow ups. There’s a bunch of similar softwares out there, the cool thing about Expandi.io is that it allows you to send custom pictures / GIFs & you can also target investors who comment/like specific LinkedIn posts relevant to your product’s offer.

The “Cold Email Mastery” course does cover the specifics of what copywriting is best to send in every phase of your outreach.

If you live in the same country as your investor, you could take it a step further by sending handwritten letters to your investor’s office with this service https://text-a-letter.com.
Or you can even send small gift cards / clever items. For example:

i) A brick in a box with a handwritten note: “Hey [Name], let’s build something together. ”
ii) A shoe in a box with a handwritten note: “Hey [Name], I just got my first shoe in your office, I’d like to get both of them next time & pitch what [Startup name] is all about.

b) Targeting. You should only contact investors who are interested / have invested in your niche before & match your target geography.

I believe European investors are at times easier to pitch than American ones.

Most VC/seed capital comes from Silicon Valley, various founders narrow their funding strategy to US investors from Sequoia or Y Combinator. The amount of unicorns from the US compared to any European country is vastly superior, IMO there’s a really high demand for innovation in wealthy countries having fewer startups. UK, Germany, France, Sweden are the countries that first come to mind.

c) Personalization. You should never send a completely blank message to an investor. Expandi.io allows you to send GIF-Images hyper personalization. You can also pay someone to write custom compliments about the investor’s profile (there’s a bunch of freelancers that offer these services on Upwork).

It sounds like a lot of work (and it is) but trust me, people respond 10X more when you demonstrate you’re authentic, mindful & take your time to even look at their profile before reaching out.

3. Pitch deck - Contrary to common opinion, pitch decks are about showcasing a winning differentiated business model, winning team and profitability; not showing the right infographics or the most appealing design. Here are 15+ pitch deck templates from companies such as Airbnb, Facebook, Airbnb, Netflix which you can edit & adapt to your liking (look at Pitch Deck in templates section) :

https://www.beautiful.ai/presentations

a) Business model: Based on Peter’s Thiel “Zero To One” framework, the most important thing for a startup's success is being a monopoly. In our day and age pure monopolies don’t exist but you can still be the only one who offers a combination of things. This can be:

i) A super-specific niche to target
ii) An unique monetization model where growth happens frictionlessly
iii) A combination of problems that are tackled in a single solution

It cannot be: A cheaper product than the competitor’s

b) Proof of concept - Pretty much showing investors you have paying customers & they are interested in buying your MVP. (see “Proof of Concept” in the first section from this guide)

c) Team - As Naval Srikant says: “Learn to sell, learn to build. Learn both and you will be unstoppable”. Investors love to hear about teams with experienced members who’ve had success in any measurable way. Example: CMO achieved 10X growth in former role, CTO successfully scaled under X constraints & tight deadline of Y months…

Pro-tip: You don’t need to actually have these members working full-time on your project, you can always hire half-time employees, cheap talent from emerging economies, freelancers, interns, paid consultants, anything that allows you to prove you have the right mix of talent for growth & operations.

d) Industry stats: This section will include 4 important metrics: Total addressable market (TAM), serviceable addressable market (SAM), and the share of market (SOM), CAGR (compounded average growth rate).

For the TAM, you show the industry’s estimated size today. This is the sum of every direct / indirect competitor’s revenue. There's a bunch of different estimations if you search up in Google, just go with an average of the data points you gather in your research.

For the SAM, you show the sum of revenue from the players you plan to compete with. Only include the players that you realistically have chances of competing with, you can always compete with the stronger players in the future, but investors will always want to hear the conservative scenarios because they will always look for a margin of safety in high-risk investments.

For the SOM, you show your target on which portion of the total SAM you plan to acquire in this year and the future. You show realistically (with the advertisement & general growth budget you’re raising for), how much revenue you expect to make in the first years of operating.

For the CAGR, you do something really similar to the TAM. Google different estimations on how much growth is expected for the industry in the next 5-10 years and make an assumption based on various data points. CAGR is way smaller than the expected growth for your startup because industry growth is the sum of every competitor’s growth & not every player grows. When you estimate your startup’s growth, you’re assuming you’ll gain market share either from the declining players or the untapped market

4. Valuation: There are various metrics investors care about, here’s a spreadsheet template that includes NPV, IRR and the commonly used ones:

Also added a quick cheat sheet on what these metrics mean & why do they matter when investors review your financial projection.

1. CAGR: How much will your startup revenue grow on average during the next 5-10 years.
2. Gross margin: What percentage of the revenue is kept after paying for the costs related to your product?
3. Operating margin: Similar to gross margin but also adding costs of labor, product development, marketing & anything your startup needs to operate.
   Net margin: Similar to operating margin but also adding depreciation & amortization (if you have any) and taxes.
4. Discount rate: Investors consider $1 generated today is more valuable than $1 generated 10 years forward. When summing the cash flow you make in the future, they make every dollar less valuable the longer time it takes to generate it.
   If your startup has a lower probability of success, they will also expect a higher discount rate because they know that there’s a lot of uncertainty behind your startup making X in the future.
5. Net present value: The startup’s valuation. It is often calculated with the Free Cash Flow model & is the sum of every year's net profit (projected into the future) and discounted with a reasonable rate considering how risky the investment is.
   Internal rate of return: What’s the average startup’s ROI considering exponential growth.
6. Reinvestment rate: After you generate profit, how much will be paid to the investor and how much will be reinvested into the project itself.
7. Probability of failure: This number is often used as a stress test to show

Golden rules:

1. Growth assumptions should be based on real world data. You can find the average cost per conversion on platforms such as Facebook Ads, Google Ads, etc.. and project into your spreadsheet how many users you will be able to acquire over time as you optimize your ads and word of mouth starts to become stronger. You can also base your growth on public companies that offer a similar product to yours.
2. Profitability should be assumed on real world data. For example: If you’re using AWS for your app, how much will it cost? If you use Shopify for your E-Commerce, what are the costs associated with the third-party apps & commission.
3. Your startup’s value should make sense based on the industry size of growth. You can use the following equation to make sure your valuation makes sense in the investor’s eye:

Market size x your market share x expected CAGR next 5-10 years x profit margin.

That’s it, if you made it this far I really appreciate the read & hope it helps, let me know if there’s anything you’d like me to add in the guide.