Traction, Risk Mitigation and Value Creation Events for Startups
This white paper is written to help startups better understand what investors are looking for at various stages of a company’s evolution and growth. There are many sources of capital for startups - even if your business doesn’t have any revenue; or it has revenue but is not yet profitable. Other measures of success for startups include how quickly you are making progress, how much risk you have taken off the table and what significant milestones you’ve achieved that will make the company more valuable as it grows. Below are my definitions of Traction, Risk Mitigation and Value Creation Events, with examples identified for each stage of your business.
Traction: Business traction refers to the progress made and the forward momentum a start-up has in achieving its various goals. Forward progress example: Identification of customer problem to be solved, customer pain points disclosed, use cases identified, customer interface story boarded, value propositions identified all leading up to a solid initial MVP and an MVP roadmap.
Risk Mitigation: Risk mitigation is a process where an organization take actions to increase opportunities, reduce uncertainties and threats to business objectives. Risk mitigation can take place in each functional area of the business: Product Development, (product released to the market) Sales, (paying customer and a robust sales funnel) Marketing, (Fully executed go-to-market launch plan) Operations, (Backend infrastructure and customer support in place) Engineering (Solid MVP Roadmap in place) and Administrations (Org chart with hiring plan to support growth in place).
Value Creation Events: How value to investors is created by achieving critical milestones - which helps provide a return on their investments. These can include: First product sales, B2B contracts signed, multiple investment rounds from Angel and VC investors.
SWOT Analysis: You might consider learning about SWOT analysis to help define your traction, risk mitigation and value creation events. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats and is a structured planning method that evaluates those four elements of a new business venture. A SWOT analysis is a simple, but powerful, framework for leveraging the organization's strengths, improving weaknesses, minimizing threats, and taking the greatest possible advantage of opportunities.
At each stage of your business there is an opportunity to identify and complete one or more of the measures of success that investors are looking for. I have also identified the typical investors who are interested in companies - based on what stage the business is currently in.
Please note: Regardless of what stage your business is in - making forward progress in customer engagement, market assessment, product development and financial model building in each stage indicates you have seasoned management team.
A. Pre-Seed Stage
Traction Goals:
a. Pull together a strong founding team, agree of founder’s share %
b. Participated in an Accelerator Program
c. Identify and talk to 50 early adopter customers about their problems and pain points
d. Complete the Business Model Canvas
e. Identify your Value Propositions and Use Cases
f. Complete a Pitch Deck defined below (as a minimum)
Initial investor pitch deck should include:
a. Founding Team Bios
b. Problem to be Solved
c. Value Proposition and Use Cases
d. Market Opportunity Assessment
e. Competitive Matrix highlighting your advantages
f. Preliminary high level 5-year Financial Projections
g. The Ask (how much money do you need and when?)
Typical Source of Funds:
a. Friends / Family / Founder’s capital (SAFE Note or Common Stock)
b. Pitch competitions
B. Seed Stage
Traction Goals:
a. Talk to 50 more potential customers about their problems and your solutions
b. Define your initial MVP based on:
Customer Inputs
Evidence Gathering
Experiments
Use Cases
Value Propositions
c. Develop working prototypes / user interface story boards
d. Expand on your financial model with initial sales and base cost assumptions
Update Investor Pitch Deck to add:
a. MVP bullet points
b. Prototype Results / UI Renderings
c. Go-To-Market Strategy based on:
Total Available Market - the total market demand for your product or service.
Serviceable Available Market - the segment of the TAM targeted by your products and services which is within your geographic reach.
Serviceable Obtainable Market - the portion of SAM that you can capture.
d. Flush out your MVP Roadmap and Recurring Revenue Plan and tie it into your 5-year sales growth assumptions
e. Updated 5 Year Financial Projection
f. The Updated Ask
Typical Source of Funds:
a. More Founder’s Capital
b. SBIR, STTR Grants and KY Match
1. Note, if you are going to pursue grants you have to submit a detailed application that is well thought out - addressing key initiatives the government want in invest in. It is a huge amount of work, and expect 9 to 12 months before you hear back from them.
c. Angel Investors – it is helpful to have a well thought out roadmap by founders who have a previous track record in startups.
C. Early Stage – Pre-Revenue
Traction Goals:
a. Code, test, build and ship / release Beta site MVP
b. Watch users use your product and gather feedback
c. Get your product tested, qualified and ready for release
d. Create a detailed Financial Model including:
P & L, Balance Sheet and Cash Flow Statement
Sales and COGS (cost of goods sold) projections
Base Cost projections by department (Sales and Marketing, Operations, Engineering, Admin)
e. Launch your website
f. Secure your trademark
g. Establish a Delaware C Corp
2. Update Investor Pitch Deck to add:
a. Beta Site Customer Testimonials
b. MVP Product Roadmap defined for out-year product releases
c. Recurring Revenue Roadmap
d. I.P. / Patent Strategy
e. Updated 5 Year Financial Projection
f. The Updated Ask
3. Typical Source of Funds:
a. SBIR, STTR Grants and KY Match
b. Angel Investor Convertible Debt or Preferred Equity
D. Growth Stage – Post Revenue up to Achieving Breakeven
Risk Mitigation and Value Creation Events:
a. MVP Product now selling
b. Marketing campaign has launched
c. Paying customers are buying your product or services (and are happy they did!)
d. You have a credible Sales Funnel (specific customers you talked to who are interested in buying) that support your near-term revenue projections.
e. You have a solid MVP Roadmap with periodic releases tied into your financial model
f. Key Metrics Established:
Sales Growth
Recurring Revenue Growth
New Customer Acquisition and Retention
Net Sales
Gross Margins
Base Cost (sales and marketing, operations, engineering and admin)
Net Income
g. You have an organization and recruitment plan in place that can grow your business.
2. Update Investor Pitch Deck to add:
a. Key Metrics
b. Sales Funnel
c. 5 Year Financial Projection with actuals to-date
d. Key Customer Testimonials
e. Org Chart showing a mix of salaried & contract employees - present & future
f. The Updated Ask
3. Typical Source of Funds:
a. SBA Loans (requiring personal guarantees)
b. Angel Investor 2nd round or warrant conversion
c. Government Economic Development Investments (KTSC, CSC)
d. Series A Round(s) from Syndicated Investment Groups (BGA and QCA)
e. Series A Round(s) from Venture Capitalists (those focused on a return of capital)
f. Crowd Funding
E. Expansion phase: Post-Breakeven, Top and bottom-line growth
Value Creation Events:
a. Steady growth (20%+) in trailing 24 months for:
Sales
Recurring revenue
Profitability
b. Implemented multiple MVPs based on “Customer Driven Innovation”
c. Provide a list of positive customer referrals for investors to call
2. Update Investor Pitch Deck to add:
a. Customer Driven Innovations Slide
b. Market Expansion Slide (geographic and or new market segments you can pivot into)
c. Updated Key Metrics
d. Trailing 24-month Sales and Profitability growth charts
e. P & L table with actuals-to-date and future 5-year projections
f. A Proposed Valuation and Ask
g. Supplemental Information: (include in the deck but do not cover unless asked)
Awards and Funding Events timeline
2. Cap Table
3. Typical Source of investment funds:
a. Syndicated Investment Group Series B rounds
b. Venture Capitalist Series B Rounds
c. Corporate Venture Capitalists (seeking both financial gain and strategic value)
d. Institutional Private Equity (who will want controlling interest)
e. Strategic Industry Partners
f. Banks and SBA loan extensions
F. Exit phase
Value Creation Events:
a. Proven track record in expanding your offering and your market penetration
b. 5 years steady growth (20%+) in sales, recurring revenue and profitability
c. Positive “large” customer referrals available to investors
Updated Investor Deck:
a. All slides
b. The Updated Ask including Valuation and preferred Exit / Liquidity Scenario
Typical Exit Scenarios:
a. Stock purchase by another company
b. Asset and I.P. only sale
c. Acquisition by another company
d. Initial Public Offering (IPO)
G. Post Revenue Pitch Deck Suggestions
Market Opportunities
Problem to be Solved
Value Proposition
Product / UI Examples
Competitive Matrix
Go-To-Market Strategy
Customer Testimonials
Recurring Revenue Plan
MVP Product Roadmap
I.P. / Patent Strategy
Competitive Landscape
Recurring Revenue Roadmap
Value Creation Events / Key Metrics
5-year Financial Projections PLUS prior year actuals
The Ask (including Suggested Valuation and Preferred Exit / Liquidity Scenario)
Supplemental Information (review only if asked but include in the deck you send out)
a. Founding Team Bios
b. Org Chart
c. Cap Table
d. Customer Driven Innovations Slide
e. Awards, Grants and Funding Events Timeline
By: Bob Farinelli
About the Author:
Bob Farinelli is a retired Management Consultant and Startup Advisor with 43 years of experience. Bob’s expertise includes executive leadership, business development and engineering operations management. Bob has previously served in various management and development roles, such as President and CTO of Smart Farms Systems LLC, President of Bob Carver LLC and President and CTO of ELAN Home Systems. Although Bob is now retired, he is keeping his entrepreneurial spirit alive by helping young entrepreneurs develop and grow their businesses.