At SineWave, we invest in transformative technologies that have the potential to either disrupt existing markets or create entirely new categories. So – especially when we invest at the earliest of stages – we look to partner with companies that can capitalize on the emergence of a future market trend. Businesses addressing a future market trend can struggle with initial sales, since their tech is rooted in insights that may take 5+ years to fully emerge, but they’re selling against modern budgets. As such, we’ll oftentimes evaluate businesses that are yet to demonstrate significant revenue velocity.
Much has been written about how VCs underwrite investments in pre or early-stage revenue companies. But there isn’t as much content geared towards helping early-stage founders in telling a compelling fundraising story without financial metrics to back them up. This brief blog hopes to serve as a resource for technical founders looking to raise funds with little or no revenue.
Here are a few datapoints founders can demonstrate to investors when revenue isn’t a piece of their story (yet).
Overcoming Barriers and a “Trojan Horse” Story
When something truly novel and revolutionary is being built, revenue lags. It’s usually because the market isn’t ready to adopt the technology quite yet.
Founders should acknowledge the underpinning reasons that the market isn’t ready. Are there regulatory, cultural, or technical barriers in the way of the company succeeding? Founders should call out these potential barriers, and explain how they plan to overcome said barriers, bolstered by the capital they’re seeking to raise.
To address market lag, what are the “Trojan Horse products” that a founder can build today? Trojan Horse products are those that can score founders quick wins with customers and solve an immediate need, but still represent a bridge to a future-state product set that capitalizes on a future market insight. A good example of this trend from SineWave’s portfolio is SentinelOne, who initially sold an anti-ransomware product to score early customers. Ultimately, this product was simply a “Trojan Horse” for their creation of an endpoint security platform.
Trojan Horse products are powerful, since they capitalize on existing customer needs without sacrificing the long-tail potential of a company should their “future market thesis” become commonplace.
Differentiation Represented by Customers
Differentiation within early-stage venture is hard to find. Especially within frothy categories like AI, founders are flocking to overlapping areas of opportunity. This is both because of AI’s massive potential and because, as things stand today, there are only so many use cases that’ve shown viability within AI.
Being able to demonstrate that a solution is patently and sustainably differentiated amongst the competition – and that said differentiation is valuable to a customer – is extremely valuable. Although this seems trite, it’s something that many founders lose sight of on their journey to build something great.
Capital (and Resource) Efficiency
VCs place a premium on a founder’s ability to ‘do a lot with a little.’ After all, investors will be funding a company’s growth with the expectation that every dollar will be spent prudently and will contribute to their evolution into a multi-billion-dollar business.
It’s important to demonstrate what major milestones a founder has been able to execute against across engineering, product, and sales, and how much capital / effort was required to hit these milestones.
For example, in a fundraising deck, a CEO can include a KPI like “100 meetings booked with ICP decision makers in 30 days,” and include context on how many employees were staffed against various initiatives that helped them achieve this KPI. Were the meetings booked without any outbound outreach? Founder-led sales? What sales tools (if any) were used to set meetings? How much capital and time was expended to build a killer demo? So on, and so on…
The more granularity a founder can provide around the capital needed to accomplish said KPIs, the better. This sort of analysis will demonstrate a high level of thoughtfulness and KPI-driven thinking.
“Passive Wins” that Demonstrate early PMF
If a startup is generating inbound leads due to the novelty of their product, this is an early sign of potential product-market fit. Founders should tell the story of why inbound customers are clamoring to get their hands on the product – is this repeatable and will more capital pour gas on the fire?
Early product market fit can also be shown via hiring – are top engineers excited to hitch their wagon to the startup? Quality of team and how founders obtained their top employees can tell a very powerful story, too – especially if they’re “passive” hires.
All too often, founders implicitly argue that they need to raise more capital because they’re running out of money. A much more enticing story is that they’re on the precipice of building something great, and that additional capital will get them to greatness.
Revenue is one way to demonstrate initial signs of greatness. But, delving into long-term tech strategy, explaining substantive, validated differentiation, depicting an ability to ‘do a lot with a little’, and demonstrating a massive, imminent market opportunity that’s addressable with more capital will make investors energized to join founders on their company building journey.
