by Geektime | e27.com
Trying to figure out how much you should raise, how high your projections should be, and what is going to appeal to investors in general can be totally perplexing for a founder. Geektime has created an algorythm to help you figure out this critical puzzle piece. This is a must read…
Using this algorithm for your fundraising plan will ensure that you seed your round the way investors will view it, without wasting time.
As a software engineer, I try to approach problems algorithmically. That is, given some kind of input, what kind of procedure can I reliably run to generate the desired output? For example, given a bunch of numbers (input), what’s the best process (algorithm) to quickly and efficiently arrange those numbers in increasing order (desired output)?
In my opinion, seed stage fundraising can be approached very similarly. For a specific company, given some amount of seed money (the input), what kind of procedure (product/marketing roadmap) can be run to reliably generate a good output (higher valuation Series A round/profitability/etc.)
Founders think a lot about the inputs: How much can I raise? How little dilution can I take to raise that much? They also put a lot of thought into the algorithm: Who would I hire if I could raise my ideal round? What features would I roll out? When would I ramp up sales?
The area that doesn’t get enough attention is figuring out the right output. That is, if you raise your ideal amount and execute your 18-month plan, where will that get your company in preparation for the next round?
Geektime’s Fundraising Roadmap Algorthym
1. Plan out a few potential scenarios such as, “If I take a US$W dollar investment at valuation US$X, I think there’s a Y per cent chance I could hit the right milestones to raise at valuation US$Z before my cash runs out.”
2. Calculate the risk-adjusted ROI (return of investment) to investors for various scenarios.
3. Pick the scenario that appeals most to you while also offering a strong risk-adjusted ROI to investors.
4. Pitch that scenario to investors. Explicitly mention the risk/reward ratio to create greed plus a fear of missing out. “If you don’t invest now, the next time we raise will be at six times to 10 times this valuation,” should be your line.