For founders raising their next round, one of the hardest things about the “black box” of venture capital is understanding what investors are looking for. When I started my consumer networking app Forget-Me-Not in 2016, I was so confused about what I needed to accomplish before I was ready to pitch institutional investors. I knew I had to bootstrap my way to some traction, but had no idea what “traction” really meant. I knew I wasn’t there yet, but wondered how I would get there when I didn’t even know where the goal posts were. You always hear stories of people successfully pitching an idea on the back of a napkin, but in what circumstances did that really apply? Even more confusing, every investor’s website lists the same generic, vague qualities that they seek in investments they make — “incredible team” + “innovative solution to a hard problem” + “market opportunity.” Many investors claim that “no idea is too early,” but startups are often turned down when they don’t have enough proof points.
Now as an investor myself, and learning from consumer investors like Unusual partner Andy Johns, I have a much clearer sense of the goal posts. To help make this clearer for others, I’ve outlined below the goal posts I wish someone had told me back when I was preparing to pitch. The truth is that ultimately, the answer is often “it depends,” but a good place to start is the business model and four key considerations: team, product, traction, and market. How much investors weigh each of those four aspects can vary between firms and individuals, but there are some ballpark figures that might help you prepare to pitch.
It’s worth restating that, of course, there are no hard and fast rules, so please take these guidelines with a grain of salt. In our experience at Unusual, we’ve seen consumer companies raise $25M+ Series A rounds with $500K in ARR, and on the flip side, companies struggle to raise a $5M Series A, with $3–5M ARR. Another exception might be if you have remarkable founder-market fit or have previously demonstrated that you are an exceptional builder. Of course, every investor is looking for the “perfect” deal that hits on all four key dimensions.
In reality, there is no such thing as a “perfect” startup or deal — even if the company hits all squarely on all four dimensions, the deal dynamics may be complicated or less than ideal (i.e. super high valuations and competition). There isn’t a “correct” answer when it comes to investing, especially at the early stages — it’s subjective judgement. So as a founder, reading investor’s minds is pretty much impossible, BUT there can certainly be elements that are more important than others to an individual investor or a firm. For example, some firms and individual investors look for an amazing market first and foremost (often “theme” and “thesis” driven firms) and are willing to bet on a great market even if they aren’t blown away by the founder(s), the traction is good but not great, or the product is lacking a bit.
Meanwhile, another firm or investor may skew more heavily towards the qualifications of the team under the belief that it may be impossible to accurately predict future exciting markets (i.e. trying to evaluate Uber based on the size of the taxi industry), and that great people can make magic happen and pivot to find unexpected new markets. Case in point would be the Slack’s pivot from a game into an enterprise messaging app.
All that being said, we think there should be more transparency and less guesswork when it comes to what investors are generally looking for when founders pitch, so we’re sharing how we generally think about Consumer Social investment opportunities at Unusual, based on those four key areas:
Green means you should feel confident to pitch. Yellow is maybe, there’s some potential, but it’s not a slam dunk. Red is going to be a non-starter for most institutional investors. (In venture, institutional investors fundraise from limited partners to professionally invest on their behalf.)
Evaluating a Seed-Stage Consumer Social App:
Andy will now explain what each of those four aspects mean, expanding on the “ideal” scenario on what is most important to him as a consumer investor:
Consumer startups are hard. Consumer social startups are even more difficult. Not only do you have to figure out a method of communication that tens or hundreds of millions of people will want to use regularly, but you need to do so in a very short period of time (12–18 months max). From my experience, arriving at the “aha!” feature requires lots of iteration. That said, the pace of product development is often a great indicator of a startup’s higher likelihood of success (relative to all other peers).
Specifically within social, that means iterating on the product based on observations of user behavior within the early adopter base of a few thousand users. I was an early user and employee at Quora and observed firsthand how the product evolved during its first few years. Although the user base was not large by some standards (in the low tens of thousands by the time it was 2–3 years old), the pace of product improvement was world-class. The pace allowed Quora to dial-in on the set of features that led to people sharing high quality knowledge that can’t be found elsewhere, which drove the breakout moment for the company.
If the founding team hasn’t shown the ability to turn over new beta versions of the app at a fast pace, the probability of figuring out a unique insight is quite low.
For teams building Consumer Social, I look for what I call “communication philosophers,” which means that when they’re building a social product, they’re talking about the theory of human communication. There’s a depth of thought there, where they’ve observed in real life how people naturally want to share and communicate with each other. They have a nuanced and often philosophical perspective how software can accentuate the natural communication habits of people.
Evan Spiegel from Snap is a great example of a communication philosopher. Many people misunderstand and think disappearing messages are just for sending illicit pictures. Some users certainly do that, but it’s the edge case of user behavior that is being interpreted as the primary use case. However, when you talk to Evan you learn that the value of disappearing messages (ephemerality, as he often calls it) is in what the disappearing message does to the cognitive load of sharing. Specifically, ephemeral messaging removes cognitive load, leading to an accelerated rate of sharing. We can unpack this concept via a counter example.
Imagine you’re about to post something on Facebook. You create a draft and, just as you’re about to post a message, you pause and reconsider whether or not it is worth posting the message. That’s because you’ve become familiar with the downside of posting a message in a public-by-default setting. Remember the last time you posted on your account about the upcoming election and the waterfall of comments and notifications you received in return? And how irritating it is for you to read and respond to all of the comments? That’s called cognitive friction to sharing. You don’t want to share because you don’t want to deal with the backlash. The next time you go to post something publicly (which is the effective default on Facebook and Twitter), you hesitate and that slows down the pace of sharing, which consequently weakens the network effect of the product.
In real life, people communicate in a much more intimate, one-on-one basis. Because the vast majority of conversations are intimate, they are also ephemeral. When I’m talking with my brother or a good friend, no one is writing down our conversation or listening to it, which means it’s only remembered by us as the sender and the receiver. Furthermore, because the conversation is intimate it also tends to be more fun (hence the role of lenses to accentuate the “fun” part of it). Evan’s thesis on ephemeral communication makes its way through all the nuanced aspects of the product. For example, if you send a snap to 20 people, none of them know how many other people received it as well and there isn’t a public thread of responses. Those features (or the lack thereof) further reduces cognitive friction to sharing, leading to a very high rate of sharing amongst Snap users.
Hearing a founder talk about and observe how people interact in real life and then being able to communicate in a clear way how software can accentuate that, and translating that into their product is a series of events that is super rare. Often, we will see a consumer social pitch with the opposite approach where the founders are creating a new communication method that they want the world to adapt. That’s a dead end street in most cases.
In a Consumer Social product, I look for direct alignment between the product features and the founder’s communication philosophy. Using Snap as an example again, the product is designed around a non-traditional UI decision and opens up in camera-mode. That unconventional product design directly aligns with Evan’s theory of ephemeral messaging and one-on-one communication.
Whenever I dissect a product relative to the other products in the market, I ask what’s going to compel users to do more of a desired behavior, whether that’s write more or listen more on that particular app compared to other mediums. So first and foremost, there has to be simplicity of design and the app clearly pointing in a single direction. Similarly, this alignment continues through to the platform of choice — having all platforms (Apple, Android, Web, Watch, Tablet, etc.) isn’t necessary, but instead having a succinct vision as to which one or few are needed to best align the product with the founder’s big vision.
This obsession with a single feature is sometimes referenced as “come for the tool, stay for the network.” Users flocked to Instagram because of its filters and stayed for the newsfeed. Similar dynamics drove the adoption and retention with Twitter, YikYak, Snap, and several other social products. When you find an app that’s singularly focused on a single function that users find compelling, that’s usually a great starting point.
For traction in a Consumer Social startup, it’s all about the rate of growth and quality of engagement. Generally speaking, you’re going to want to start with a highly engaged base of 1,000–10,000, which isn’t very large, yet their level of engagement is exceptionally high. As a high-level benchmark, I look for around at least 30% of users using it weekly or daily to demonstrate some type of durable behavior.
If you don’t have a high level of engagement in the first one to 10,000 users, it’s highly unlikely you’re going to establish a high level of engagement after that. A common mistake that’s made amongst consumer social startups is to focus too much on top of funnel. You try and drive a million sign-ups or installs before establishing a white hot coal of high engagement within a small base of users. You must resist the urge to scale top of funnel first.
So in that small audience, if your app is not really resonating, don’t try to solve the problem by pouring more water into the top of a leaky bucket. Start by iterating quickly on the user experience to figure out if there is an “aha!” feature that users will find immensely compelling. Engagement is the ultimate sign of product market fit for a social product. For those first few thousand users, we ask, “What are the DAU and WAU ratios?” or if there is another form of engagement that can be observed that we can react to and determine if it is high or not.
Second to that is the rate of growth. Scaling to 5x — 10x as many users in a year organically is a positive sign of traction. The best-in-class Consumer Social apps often grow much faster than that.
Social products are designed for humanity-scale adoption (i.e. hundreds of millions of users) so the market size questions are typically answered by default. Rather, the key question to ask is “what is the beachhead?” For example, at Quora, our first 10,000 users were almost exclusively in tech and Quora became known early on as the best place to find information about the tech industry, by a wide margin. People were predicting that Quora would die because it would never become anything other than Silicon Valley Q&A. But the team had a playbook and knew they had a plan for vertical expansion into questions and answers within other topics (finance, sports, etc). Quora focused on expanding into more topics, without lowering the quality bar on content, and then moved onto geographic expansion more than 5 years after launch.
However, sometimes that expansion happens entirely on its own. You see a spark of organic engagement on a specific topic or specific geography and then the product spontaneously expands into that open space. This happened with Quora in a few countries that had a strong English-speaking + technology-centric population, such as certain parts of India.
For us at Unusual, market is really about how a team can carve out some small wedge with those first 10,000 users. Are they being very intentional around that and do they have reasonable hypothesis how they are going to open it up from here? For instance, the team of one of our Consumer Social companies has hand-picked every single one of the early adopter beta users. The company plans on maintaining its hand curation of new users even after public launch to ensure that quality engagement isn’t sacrificed with strong top of funnel growth.
Creating that wedge and the ability to expand often means having a conscious focus on preserving a bar for quality of experience. Especially now that social media is a known industry, you have no chance of creating a successful product if there’s poor behavior on the platform. People have been conditioned to not use those platforms, and that’s why so many apps fail. So Consumer Social teams have to be more conscious of these learned behaviors and model that expected behavior through the product features and how moderation is applied on the platform. If you get the first 10,000 demonstrating what the right behaviors are, then the next person can come in, see what the expected behavior is, and conform to it to maintain healthy behavior on the platform. Or, at a minimum, slow down the rate at which poor behavior creeps in.
Andy laid out above the guidelines of how Unusual thinks about Consumer Social. To illustrate what those guidelines mean in practice, I’ll now give an example using my past startup, Forget-Me-Not and how it would have stacked up if I were pitching Andy:
One last thing to note that I wasn’t aware of when I was starting Forget-Me-Not is the importance of alignment in desired exit outcomes. With Forget-Me-Not, the outcome I was aiming for when we started (I was a CPA in Austin, new to the world of startups) was for LinkedIn to acquire us for a few million dollars. It almost seems silly to say, given what I know now, but it’s important to remember that this knowledge isn’t widespread. Practically, it made sense for me to think that someone would want to invest $100K in us and maybe get $5M in return — that’s a 50x deal. In reality, most institutional firms’ business models depend on the ability to see a $1B+ outcome, or “imagining the S-1 filing” in every single investment. Being upfront about goals surrounding an exit outcome is hugely important for both sides to be aligned.
Raising money from institutional VCs shouldn’t be an opaque activity where only insiders know the unspoken rules of the game. We hope the guide above helps dispel some of the mystery surrounding fundraising and gives a better idea of what investors might be looking for when founders come to pitch us.
When it comes to evaluating startups, there are four main areas that investors tend to look at: Team, Product, Traction, and Market, with different considerations depending on the business model. At Unusual, for consumer social companies, we gravitate toward teams with “communication philosophers” and demonstrated builders, products that point users in a certain direction that’s aligned with the founders’ theory of communication, 10,000 highly engaged first users, and a wedge into a humanity-scale market.
While that’s how we think about Consumer Social pitches at Unusual, there are several ways different firms and investors weigh those four aspects. The tricky part is understanding how important each qualification is to the investors you pitch. While some investment firms might consider the attributes of the founding team as the most important factor because of the ability to create optionality or recruit, there are some firms that are heavier on product, such as really unique tech advantages. Still others might weigh traction and market more heavily. It all depends on their investing philosophy and where they are willing to take on more risk.
All that being said, just because your startup isn’t green across the board doesn’t mean that you’re not ready to fundraise at all. It just might mean that you may be better suited seeking angels, micro VCs, accelerator programs, or others who believe in your vision and team and can help you get to those metrics and milestones.
Fundraising is an essential part of a founder's journey. Managing Partner John Vrionis and Unusual Founders break down the complicated process of raising venture capital and insights on what it takes to fundraise from top-tier investors.
The purpose of this case study is to provide an example of a successful seed financing for founders to learn from. Raising seed financing for a new venture is an exciting and nerve-wracking process. While no two founder’s journeys are exactly alike, at Unusual Ventures we believe that there is much that can be learned from distilling the lessons learned from those who have accomplished the same task. Vivun is an example of a team of first-time co-founders with a product vision to build a new enterprise software company.
In this document you will find:
1) A description of the Vivun founders and the insight that led to starting the company
2) The process the founders followed to successfully raise seed financing
3) A detailed description of the fundraising pitch and its contents
4) How Vivun’s co-founders evaluated the terms of the seed financing and ultimately chose their investor.
In 2018, Matt and Dominique Darrow quit their respective jobs at Zuora (the company had just IPO’d in April that year) and Google and set off to travel and recharge. It was while they were camping in New Zealand that Matt brainstormed an idea for a new company based on his experience as a presales engineer. During their travels, he designed and coded an initial prototype, and by the time they returned from abroad, Matt and Dominique had decided to incorporate a new company and recruit their founding team.
They approached their longtime friend John Bruce, who was at SignalFx at the time, to be their first alpha customer and design partner. John was very familiar with the problem Vivun was solving and soon decided to leave SignalFX and join as a co-founder. Each co-founder brought a unique skillset to the team. Dominique added post-sale expertise (i.e. implementation, support, and customer adoption), while Matt had extensive presales domain expertise and a strong product background. John was a presales expert and a phenomenal engineer (one of the first five engineers at Pandora). They recruited their fourth and final co-founder, Claire Bruce, a gifted lawyer who had previously run legal for a billion dollar business to manage all corporate operations. They knew that building a business would take more than just tech, and felt confident they had put the right founding team together to ensure their success.
With the founding team in place, the group went full speed into their customer validation process. They experimented with cold outreach messages and tapped their network with the goal of obtaining conversations with 30 presales and product leaders. The goal of each interaction was to pitch the idea and receive input on the pain of existing solutions as well as collect reactions to the product. The Vivun team wanted to make sure they were getting objective feedback, so they took the extra steps to get in front of people who didn’t know them personally to see if they shared the same belief in the need for a new presales product.
For three months, the team conducted "briefing" sessions with presales thought leaders and consultants to test and validate their idea. At the beginning of their customer outreach process, the Vivun team was unsure of who exactly their ideal customer was in terms of company size and industry. Their initial conversations were with presales leaders at publicly traded companies to startups, and spanned several industries. As they continued outreach and moved toward confirming design partners, they narrowed in on their ideal use case of software-driven companies going through inflection points of growth. Satisfied they were at a point where they could take the next step with several prospects, the Vivun team then spent the subsequent three months (from January to March 2019) engaging closely with their top 10, carefully selected design partners. In April 2019, bolstered by the positive reactions from design partners, the Vivun team decided they were ready to raise seed financing.
Vivun’s founders had a strong desire to be the first to market with a category-creating product. Matt admits that at the time, the Vivun team knew very little about fundraising. They started by tapping into their personal network, including prior CEOs they worked for and friends with positions at venture capital funds. Based on these conversations, the Vivun team started to get an idea of how the fundraising process worked, but everyone had different, and often conflicting advice. As Matt describes,
In the end, nothing happened as anticipated. We heard the story about SignalFX skipping its seed round and going straight to a $8.5M Series A. That was the lore of Silicon Valley. You show up with a deck and there’s a frenzy of interest. In actuality, there was way more rigor than anyone had let on.
From April to July, the Vivun team continued iterating on the product based on customer feedback and achieving several key product development milestones such as launching integrations to platforms like Jira and GitHub, rolling out their native mobile apps, and investing in ease of setup and administration to let customers get started immediately. They worked out how much money they wanted to target for their raise based on the goals they wanted to achieve in the seed stage. They worked backward from that number to create an operating plan and calculated financial projections that showed how the company would drive toward the $1M ARR mark they had heard investors would be looking for.
The Vivun team made sure they did their homework and scoured online databases like Signal, Pitchbook, and Crunchbase to research investors, filtering by factors, including:
Based on this research, the team came up with a shortlist of potential investors. Part of the advice they received was to go through warm introductions where possible, so they focused on tapping their network to see who could provide a warm introduction to the target investors on their list. At first, they mistakenly engaged with a few firms through the 'front door' (i.e. through a request to meet from a junior member of the investment team). In hindsight, Matt notes that more often than not, those meetings and cycles were wasted effort vs. getting directly connected to Partners at the firms.
By July 2019, Vivun had a strong founding team, working product, and traction with an early set of impressive customers like Flexera, Xactly, and Harness. They felt ready to begin the fundraising process and began arranging intro meetings with their first investors.
One initial mistake the Vivun team made was thinking they could engage with investors who were looking for Series A milestones. Matt found that while many investors claimed to be “early stage”, what that often meant in practice was that they wanted to see clear evidence of product-market-fit, most easily demonstrated by at least $1M in ARR (annual recurring revenue). This was a milestone the Vivun team had not yet reached. They knew they didn't have the $1M in ARR, but thought that early customers, product traction, and a detailed plan for getting there would suffice. As Matt recalls:
"We would have 2-3 meetings with each investor. They would call our customers for references and push us on our revenue and operating plans. There was very little transparency throughout the process. No one would ever say no. They just said, ‘It’s not the right time for us,’ or ‘The conviction isn’t there yet.’ We burned 4-6 weeks talking to the wrong investors. It was probably one of the most frustrating moments of my professional life."
This “false start” cost multiple weeks in wasted effort. Looking back now, Matt stresses the importance of knowing where to start and engaging with the right investors during the seed stage. They had introductions to great investors, but it was the “wrong place and the wrong time”, resulting in several wasted cycles on meetings that ultimately went nowhere.
After July’s false start, the Vivun team regrouped in August and adjusted their strategy. It was clear from those early meetings that investors were having a difficult time understanding their vision as a category-creating company building something completely new. The Vivun team quickly realized they would need to do a better job targeting investors that were true company builders and comfortable with investing at the earliest stage. With that goal in mind, the Vivun team arranged meetings with multiple angel investors based on recommendations and relevant industry experience. They moved forward with three of those angels who then lined up 20 meetings for Vivun and helped introduce them to more stage-appropriate seed funds. Around the same time, Vivun received an introduction to Unusual Ventures through Harness, one of their existing customers.
The Vivun team was transparent with all investors about their timeline and wanting to timebox their fundraise into a four-week window. They didn’t want to stagger the meetings in multiple waves, knowing this could drag out the process and give investors the upper hand by letting the market price the round. Instead, they focused on meeting with everyone quickly and working the round to a close.
Throughout their fundraising process, the Vivun team started to get a better idea of their ideal investor. After struggling through several meetings with investors who didn’t understand their product or market, they knew they wanted an investor who had domain expertise in the Enterprise B2B space, who was familiar with the role of presales. They started to accelerate the process with investors who fit that criteria and crossed off investors who didn’t.
As for the pitch itself, they started with 20 slides. 40 revisions later, they whittled that down to a handful of slides. As Matt recommends, “Don’t over rotate or over complicate all the slide work.” According to Matt, investors were interested in the origin story, their backgrounds, and why they had a unique insight that others didn’t. When they told that story really well, they had great meetings every time.
Pro-tip: Having a product in the market already can extend your process because people want to talk to your customers. If you’ve made those customers happy, it can collapse the process. You know those are the references they’re going to lean on the most so you can short circuit that. Matt notes that if he could go back, he would’ve tried selling to portfolio companies of the firms he wanted to pitch.
By September 2019, their pitch deck and ability to tell the story were top notch and several high quality investors made offers to lead the seed financing. They had narrowed those offers down to three firms, including Unusual Ventures. The Vivun team had 1:1 conversations with the Partners at each of the potential firms and discussed the key terms with their attorney before they made a decision.
For Vivun, there were several factors they took into consideration when making their choice of which VC to partner with. One big concern for Vivun was the level of engagement. Some firms were intriguing to the Vivun team, but too structured in their approach: the Partners at these firms wanted weekly meetings, action items, retros, etc. The Vivun team was put off by the amount of structure and overhead. On the flip side, other firms had too little structure where they offered a check and network, but not much else. Matt and the team felt like they couldn’t really trust that these firms would be there when they needed help. They also wanted a firm that was set up to help them with the goals they had for the next 18-24 months and would be fully committed to their success.
Matt’s advice is to find an investor with the level of engagement that is a good fit for you—there is no one size fits all when it comes to a VC partner. Check with a couple of founders who have experienced that investor at the same stage so you get a sense of how much oversight there is. Talk to founders to understand where things weren’t always rosy, and how VCs reacted. Unfortunately, sometimes oversight tends to go way up when things go wrong.
Financing terms matter and the Vivun co-founders made a list of the things that were important them, including:
As illustrated above, there are multiple factors that might impact a founder’s decision of which investor to partner with. It’s not as simple as taking the biggest check handed to you. For Vivun, the ultimate selling point was Unusual’s Get Ahead Platform (GAP), which offered hands-on help without excessive oversight—the right level of engagement for their team.