It was one of my least favorite aspects of raising money. Time and time again I would ask VCs to articulate what metrics would be required to close funding. Inevitably I’d be left unsatisfied and wonder, “why does it feel like the goal posts keep moving?”
The answer has come into focus now that I’m on the venture side and it’s unsatisfying and simple. They are moving.
No such thing as hard metrics
Some investors might say I’d need to see “x” pre-orders for a hardware start-up, “y” downloads for a mobile app, and “z” revenue for an e-commerce company. Yet, such a formula is misleading to entrepreneurs (and bad investing). There are no precise metrics for getting funding, given how many intangibles go into building start-ups. Much like applying for college, kids with lower SAT scores get accepted to better schools and vice versa.
The venture market is more like the stock market than you think
We often think of the venture market in very different terms than the stock market. It feels like a cottage industry, more like the local real estate market than the broad securities exchange. The reality is that investor behavior is more similar than different. Macroeconomic factors impact the venture market – increasing stock values, economic data and even political conflict has an impact on capital raising for start-ups. Like the stock market, the venture market ebbs and flows.
Investors are influenced by their portfolio & deal flow
Let’s say you’re an e-commerce company doing $25K in monthly sales when you first sit down with a VC. The investor seems enthusiastic about the company. You come back a few months later doing 4x the sales looking to close the funding. Instead, the VC seems much less enthusiastic than the first meeting. What happened? It was a 4X!
Perhaps one of the e-commerce companies in the portfolio hit hard times and that colors the investor’s view. Or, maybe a new opportunity surfaced in the meantime that makes your company appear less attractive on a relative basis. None of these reasons are rational, but nonetheless impact the investment decision.
So what’s an entrepreneur to do?
One of my trusted mentors, Jeff Bussgang, said to me “VCs are in the extrapolation business.” It’s sage advice. Rather than focus on individual data points, the entrepreneur must generate data that demonstrates an upward trajectory of the business. Unfortunately, the x and y coordinates of these points are not obvious.
I discourage entrepreneurs from asking VCs to articulate metrics that will trigger funding. Instead, think about the risks of the business and identify the metrics that best address those risks. Don’t look to VCs to lay out a path for funding. Instead, knock down the risks you see and frame those metrics as the ones the prospective investor should care about.