The Basic Formula for Fundraising

An article we liked from Thought Leader Nnamdi Iregbulem of Lightspeed Venture Partners:

Series A Rounds Are a Math Test

Math

For your seed stage startup to graduate to the next level, it must pass a new test.

Suddenly, a PowerPoint deck isn't enough. Traction and monetization matter.

Your startup might have more of one than the other, and that's OK.

But less of one means you need more of the other. That's just math.

How much more? It turns out – more than you think.

Low monetization requires extraordinary traction, and vice versa.

2 + 2 = 4

In addition to factors like team quality and market size (which also matter at the pre-seed/seed stage), investors evaluate Series A startups on their traction and monetization.

By traction, I mean some rough mix of:

  • bottom-up adoption

  • free usage / free trials

  • organic, inbound interest in the product

  • proliferation of an open source project

  • downloads

  • a vibrant, growing community

  • product-led growth

By monetization, I'm loosely referring to:

  • revenue (duh!)

  • customers

  • top-down / direct sales

  • production deployments

  • pilots / POCs (proofs of concept)

  • qualified pipeline

Note: monetization is a catch-all for activities and metrics that tend to correlate with revenue, so a company with zero revenue can still have a decent monetization "score."

If traction and monetization are collectively high enough, you will successfully raise your Series A round.

You can even make a little equation out of this:

Fundraising Success = Traction + Monetization

There's a threshold, a sort of activation energy, required to successfully raise a round at the early-stage. Hit this bar and you're in the clear. Miss it, and you're not:

1

Let's make up some numbers.

Say the threshold is "4". You'd need some combination of traction and monetization to get to a sum of four:

  • A score of two on both traction and monetization would work. We could call that "moderate traction and moderate monetization", or (2, 2)

  • But a (3, 1) combo would also work – perhaps...

Read the rest of this article at whoisnnamdi.com...

Thanks for this article excerpt and its graphics to Nnamdi Iregbulem, Partner at Lightspeed Venture Partners.

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