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MenuHow can I go about raising money for my startup when the growth model is based on users and not revenue?
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There's no set-in-stone formula. The answer depends on the degree to which implementing a revenue model would potentially cause a mass user exodus.
A) If implementing a revenue model would obviously cause no problems, then investors might be ok with Camp 2.
B) If a reasomable person might think that implementing a revenue model could cause a mass exodus of users from your service, then investors would not be ok with Camp 2.
Having said that, each investor is different, and there has been a steady decrease in the popularity of investing in Camp 2 startups. The popularity of Camp 2 startups fluctuates with the current strength of the economy (weaker economy = less investors willing to go with Camp 2).
I usually recommend a hybrid approach, which involves initially implementing a revenue model on at least a small scale to start testing the waters. You want to deploy this as quickly and cheaply as possible, and then scale it up, just like an MVP. You start off by exposing a potentially unrefined revenue model to just a small % (e.g. 1%) of your users to test the waters, and then slowly scale up its deployment as you improve it (based on data feedback from that first pool of users). Even if you only have time to test the 1% implementation before approaching investors, it will be better than nothing. You can use the data from that experiment to show investors that (hopefully) it didn't cause a mass exodus of that 1% of users, and you can use it to have a ballpark estimate of the revenue you could get if it was fully deployed and better implemented.
For certain unique situations, it may be important to remember that for this initial testing, the deployment of your revenue model doesn't actually have to generate revenue for yourself, it just has to have the appearance to those 1% (or whatever %) of users as your revenue model would. The most important part of this initial testing is just testing whether your revenue model will interfere with your user base. For instance, you can start by creating fake ads that don't actually generate any revenue. That may sound weird, but it was relevant to a unique situation I helped someone else with. It allowed them to save time and money to deploy their initial test. Once you have data showing that it doesn't scare users away, then you can make convincing estimates of future revenue based on your growing user base.
If you'd like more tailored advice to your specific situation let me know,
best,
Lee
An exit strategy is the greatest value driver for a startup. A strategic exit is the greatest value creator for entrepreneurs. Seek an investor that's interested in your exit strategy from "Day 1". Eg.: https://e27.co/googles-former-ma-man-asia-just-launched-new-vc-firm-20160929/
The sole purpose of a business is to make money. If that is not the case for you, then you are not building for-profit business. Days of acquiring users and raising funds solely based on the millions of eyeballs visiting the web site has passed. With SW&HW being commodity, marketing is emerging as the most expensive cost center for B2C high growth startups. Consumers are willing to pay for the service that they value, so I would focus on pricing strategy, looking for price-value equilibrium that your customer is willing to pay. Hopefully, the price point and the volume of paying customers would be financially attractive not only for you, but for an investor too. There's no way knowing where that equilibrium is until you try, refine, iterate...
Eyal Policar-DBA Agri-Business
The days of not having a reliable revenue model in place are fast dwindling. A few big VC companies are shutting down, angel investments are rare people are just not that keen. In many countries, people are looking for govt aids and grants.
Therefore the challenge is to define your ROI clearly.
Ask yourself if I had 1/2 a million $ to spare where would i put it. In real estate, a new start-up, an existing company stocks, govt bonds. Your answer should help you decide
Good luck- If you need more input drop a line
Related Questions
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What happens to a convertible note if the company fails?
Convertible notes are by no means "earned." They are often easier to raise for early-stage companies who don't want to or can't raise an equity round. Equity rounds almost always require a simultaneous close of either the whole round or a defined "first close" representing a significant share of the raised amount. Where there are many participants in the round comprised mostly of small seed funds and/or angel investors, shepherding everyone to a closing date can be very difficult. If a company raises money on a note and the company fails, the investors are creditors, getting money back prior to any shareholder and any creditor that doesn't have security or statutory preference. In almost every case, convertible note holders in these situations would be lucky to get pennies back on the dollar. It would be highly unusual of / unheard of for a convertible note to come with personal guarantees. Happy to talk to you about the particulars of your situation and explain more to you based on what you're wanting to know.TW
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We have used Fundable.com successfully for two rounds of financing both oversubscribed. Here is what I can tell you. Basic info: Fundable.com's platform connects accredited investors to startups seeking investment capital. Startups have a public facing profile that includes general information about the companies product, team, press accolade, etc. If you are raising funds claiming SEC Reg D 506(b) the public profile has no information about your securities offering. If an interested investor wants to view more information about your startup and or your offering, he/she would request access to your full profile. The investor must self accredit on the Fundable site before they are allowed to view your non-public profile. The startup is notified and you have the opportunity to conduct some due diligence on the investor (LinkedIn) and elect to invite them into your deal. Your private page includes the offering (terms). All communication from this point is done outside of the platform, meaning you have the investors email address ( a good thing to have). Fundable charges startups a flat monthly fee to post a profile on the site. In addition you can opt for additional services (help) with your campaign. For a flat fee, Fundable will assign resources to help build your profile, consult with you on your raise, and assist with PR or Marketing. This includes a blast to their investor base of over 40K if my memory serves me correctly. I am sure it is higher today. Our experience: For our first round on Fundable, we elected to use the premium service. Fundable did a great job in helping with our profile. We received 50+ views per day (quite often 100+) and on days we were included in their newsletter we received 200+ views. 10 - 20% of views requested access to our full profile. and 10-20% of those responded to my request for a call. Our close rate was very high. Both of our rounds were oversubscribed in less than 4 months taking averaging $50K per investor. These are high quality investors that have not created additional work (outside of normal investor updates). Many of our investors regularly share news and information about our industry. Several have re-invested in subsequent rounds. Disclaimer: Our startup is in the consumer hardware space which I believe tends to attract high net worth individuals. Obviously results may vary, thus I cannot speak to how well a SaaS play would do crowdfunding in general. Fundable.com's premium services offering may have changed since our campaign. I am not affiliated with Fundable.com. In fact we have been successful on other crowdfunding sites as well. In Closing: I am a proponent of crowdfunding in general. It is disrupting angel investing, providing investors with greater deal flow and exposing startups to an exponentially larger audience, increasing their chances to get in front of investors who understand and appreciate that company's solution and opportunity. Most importantly it is moving capital and driving innovation! Keep in mind, securities laws have changed and continue to change due to the Jobs act of 2012. Before you offer any securities to local investors or choose to try crowdfunding, you should consult with an attorney, and take the time to learn and understand what regulations apply to your circumstances.UB
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How much equity is typically taken by investors in a seed round?
From my experience I would not advise you to go with Venture Capital when you're a start-up as in the end they will most likely end up screwing you. A much better source for funding would be angel investors or friends/family. The question of how much equity should I give away differs for every start-up. I remember with my first company I gave away 30% because I wanted to get it off the ground. This was the best decision I ever made. Don't over valuate your company as having 70% of something is big is a whole lot better than having 100% of something small. You have to decide your companies value based on Assets/I.P(Intellectual Property)/Projections. I assume you have some follow up questions and I would love to help you so if you need any help feel free to call me. Kind Regards, GiulianoGS
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Pre-seed / seed funding for a community app... valuation and how much to take from investors?
To answer your questions: 1) Mobile companies at your stage usually raise angel funding at a valuation equivalent of $5,000,000 for US based companies and $4,000,000 to $4,500,000 for Canadian companies. 2) The valuation is a function of how much you raise against that valuation. For instance, selling $50,000 at $5,000,000 means you are selling debt that will convert into shares equal to roughly 1% of your company. 3) I would encourage you to check out my other answers that I've recently written that talk in detail about what to raise and when to raise. Given that you've now launched and your launch is "quiet", most seed investors are going to want to see substantial traction before investing. It's best for you to raise this money on a convertible note instead of actually selling equity, especially if you are intending on raising $50,000 - $100,000. Happy to schedule a call with you to provide more specifics and encourage you to read through the answers I've provided re fundraising advice to early-stage companies as well.TW
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