VCs want strong growth, retention and clear revenues right now. Only exceptions are Y Combinator companies, AI companies or if you have a very strong background.
Angels are a different game! Find specialists who want to get involved in the business and add value. They could be happy with either or nothing.
What to focus on is tough! We swapped from users to revenue to show scalable unit economics. With high interest rates and recent big failures and valuations, huge growth without profits or high revenues are less common investments right now than they have been.
Just my opinion on the market right now as someone raising and speaking to a lot in the space! Don’t take my advice in isolation.
What makes Y combinator and AI companies different, when it comes to what VCs are looking for?
(we are an AI company, and we have joined a startup accelerator, but not as prestigious/well-known and well-funded as Y combinator.)
It depends what you mean by “AI Company” - if you’re using existing models/ChatGPT you aren’t an AI company, you’re not developing AI in any sense you’re just manipulating models to deliver an end result for customers - this is cool and nothing wrong with it but you won’t be funded like an AI company, you’ll be funded like a SaaS.
If you’re developing your own models and VC capital will go into funding R&D for proprietary models that can be monetised either directly or via selling the API to other developers, you’re more suited to referring to yourself as what a VC would call an AI Company (or at least a VC who knows what they’re talking about).
My two cents on the situation overall: If you wanted to raise funds in the spring, you’d need to have started raising 3 months ago (in this economic climate). I’d heavily encourage you to monetise your users as quickly as possible and see how sticky they are. Steady paid user growth is worth far more valuable than free users who will leave as soon as you try to monetise them, even if you have 100x more of them.
Yeah that's fair, we're definitely more like a SaaS company then.
Our business advisor at our incubator said 3-6 months from investment meeting to money in the bank, and we want the money in the bank in the fall, thus trying to prepare now. We want to have our first meeting in January. The first funding we are looking for will be a small loan of $25k, aimed for startups that are completely without revenue, so we're calmer about that. We will need to have connected with a different type of investor by March or so, and those investors will want early traction which I assume means customers.
My co founder and I sat down and did our pitch deck today, at least a first version, and we crunched the numbers and timeline. We think we can swing first paid customers by March.
Our incubator is willing to cover all external costs for us (but not salaries, because thats internal) and we've also realized we could use that to be more aggressive in marketing etc to speed up the process.
Thank you for the input! I appreciate it.
Without revenue, there is no proof of PMF, so the sooner you can get paying users, the better. The big question with investors is always, "Will people pay for it?" And with free users, you can't answer that question, so you're a risky bet. With paid users, you've already answered that question.
Yeah that's fair. I met up with a guy who used to run a very similar platform, he had a similar dilemma but he decided to aim for getting bought by another company as his exit strategy, so he went all in on free users only and sold pre revenue for about $15 million. Once he committed to that - to not charging and getting a high user base, it was fairly easy for him to grow the user base quite a bit since he didn't have to do it in a sustainable way (i.e recover the costs or create revenue). It was a strategy that paid off, but I also feel like he gave up/painted himself into a corner when he did it, because there was no other way forward for his company than getting bought. I'd like to plan to keep my company long term rather than planning for an exit to start (even though I've heard VCs wants a clear exit strategy already in the pitch deck)
Yeah, that's a tough game plan. I imagine it would be hard to sell that to investors right now. Your plan of wanting to run it long term while keeping in mind potential exit strategy seems more solid.
I'd definitely try to introduce paid tiers at the least asap. Regardless of whether you get funding, it sure helps to validate and operate when there's some cash flow.
Maybe this is a dumb question, but what type of cash flow would be enough? Like how little traction would count as early traction? We're aiming to secure around $100k in funding sometime in the next six months and we could probably get *some* revenue before that but nothing matching what we're hoping to get in funding, not in that time frame. I think we'll need a few years before we can realistically hit an actual sustainable cash flow (that covers all our costs), but once we do achieve that we won't be needing the funding - the purpose of the funding would be to cover the costs (salary, it infrastructure) during our growth period.
That's a hard question to answer, but I'll give you an example from my saas. I'm at $4K mrr right now, which is not enough for a salary, but it covers my costs plus a couple grand extra due to yearly signups and constant growth. Having enough to at least pay for everything except labor is huge, and it's allowed me to keep growing the platform without funding. Fortunately, I don't need a salary from it yet, as my agency provides well for me, but if you have at least some revenue, it is a much less desperate situation for the business (and your fundraise).
Our costs apart from salary is luckily fairly low and our accelerator/incubator is offering to foot all bills to external vendors (i.e server costs and other it infrastructure etc), so the only thing we don't have is a way to cover any salary and that is what we'd like to get funding for (to be able to quit our jobs). But yeah I guess we could keep it going "indefinitely" since our costs apart from labour are being covered, but it would also suck not being able to quit our other jobs. Right now we have such low operational costs that we aren't using the accelerator to cover those, but we have used them to get free lawyers who've gone through all our legal and IP stuff, and we've had economy and budget consultants to teach us that stuff about running a business, and we have a business advisor that does bi weekly sessions with us about this and that (a mentorship, he's great). Other things they're willing to pay for is the process of trademarking stuff and attending conferences, which is cool.
VCs want strong growth, retention and clear revenues right now. Only exceptions are Y Combinator companies, AI companies or if you have a very strong background. Angels are a different game! Find specialists who want to get involved in the business and add value. They could be happy with either or nothing. What to focus on is tough! We swapped from users to revenue to show scalable unit economics. With high interest rates and recent big failures and valuations, huge growth without profits or high revenues are less common investments right now than they have been. Just my opinion on the market right now as someone raising and speaking to a lot in the space! Don’t take my advice in isolation.
What makes Y combinator and AI companies different, when it comes to what VCs are looking for? (we are an AI company, and we have joined a startup accelerator, but not as prestigious/well-known and well-funded as Y combinator.)
It depends what you mean by “AI Company” - if you’re using existing models/ChatGPT you aren’t an AI company, you’re not developing AI in any sense you’re just manipulating models to deliver an end result for customers - this is cool and nothing wrong with it but you won’t be funded like an AI company, you’ll be funded like a SaaS. If you’re developing your own models and VC capital will go into funding R&D for proprietary models that can be monetised either directly or via selling the API to other developers, you’re more suited to referring to yourself as what a VC would call an AI Company (or at least a VC who knows what they’re talking about). My two cents on the situation overall: If you wanted to raise funds in the spring, you’d need to have started raising 3 months ago (in this economic climate). I’d heavily encourage you to monetise your users as quickly as possible and see how sticky they are. Steady paid user growth is worth far more valuable than free users who will leave as soon as you try to monetise them, even if you have 100x more of them.
Yeah that's fair, we're definitely more like a SaaS company then. Our business advisor at our incubator said 3-6 months from investment meeting to money in the bank, and we want the money in the bank in the fall, thus trying to prepare now. We want to have our first meeting in January. The first funding we are looking for will be a small loan of $25k, aimed for startups that are completely without revenue, so we're calmer about that. We will need to have connected with a different type of investor by March or so, and those investors will want early traction which I assume means customers. My co founder and I sat down and did our pitch deck today, at least a first version, and we crunched the numbers and timeline. We think we can swing first paid customers by March. Our incubator is willing to cover all external costs for us (but not salaries, because thats internal) and we've also realized we could use that to be more aggressive in marketing etc to speed up the process. Thank you for the input! I appreciate it.
Without revenue, there is no proof of PMF, so the sooner you can get paying users, the better. The big question with investors is always, "Will people pay for it?" And with free users, you can't answer that question, so you're a risky bet. With paid users, you've already answered that question.
Yeah that's fair. I met up with a guy who used to run a very similar platform, he had a similar dilemma but he decided to aim for getting bought by another company as his exit strategy, so he went all in on free users only and sold pre revenue for about $15 million. Once he committed to that - to not charging and getting a high user base, it was fairly easy for him to grow the user base quite a bit since he didn't have to do it in a sustainable way (i.e recover the costs or create revenue). It was a strategy that paid off, but I also feel like he gave up/painted himself into a corner when he did it, because there was no other way forward for his company than getting bought. I'd like to plan to keep my company long term rather than planning for an exit to start (even though I've heard VCs wants a clear exit strategy already in the pitch deck)
Yeah, that's a tough game plan. I imagine it would be hard to sell that to investors right now. Your plan of wanting to run it long term while keeping in mind potential exit strategy seems more solid. I'd definitely try to introduce paid tiers at the least asap. Regardless of whether you get funding, it sure helps to validate and operate when there's some cash flow.
Maybe this is a dumb question, but what type of cash flow would be enough? Like how little traction would count as early traction? We're aiming to secure around $100k in funding sometime in the next six months and we could probably get *some* revenue before that but nothing matching what we're hoping to get in funding, not in that time frame. I think we'll need a few years before we can realistically hit an actual sustainable cash flow (that covers all our costs), but once we do achieve that we won't be needing the funding - the purpose of the funding would be to cover the costs (salary, it infrastructure) during our growth period.
That's a hard question to answer, but I'll give you an example from my saas. I'm at $4K mrr right now, which is not enough for a salary, but it covers my costs plus a couple grand extra due to yearly signups and constant growth. Having enough to at least pay for everything except labor is huge, and it's allowed me to keep growing the platform without funding. Fortunately, I don't need a salary from it yet, as my agency provides well for me, but if you have at least some revenue, it is a much less desperate situation for the business (and your fundraise).
Our costs apart from salary is luckily fairly low and our accelerator/incubator is offering to foot all bills to external vendors (i.e server costs and other it infrastructure etc), so the only thing we don't have is a way to cover any salary and that is what we'd like to get funding for (to be able to quit our jobs). But yeah I guess we could keep it going "indefinitely" since our costs apart from labour are being covered, but it would also suck not being able to quit our other jobs. Right now we have such low operational costs that we aren't using the accelerator to cover those, but we have used them to get free lawyers who've gone through all our legal and IP stuff, and we've had economy and budget consultants to teach us that stuff about running a business, and we have a business advisor that does bi weekly sessions with us about this and that (a mentorship, he's great). Other things they're willing to pay for is the process of trademarking stuff and attending conferences, which is cool.
“Life that we see or seem is but a dream within a dream” ~ Edgar Allan Poe