General Guidance Statement
"VC Funding should be sought by only those Startups who can exponentially scale their business"
PSI has via this article, released its 100 Scoring Points self-assessment Scorecard for startups to qualify themselves for VC funding. This will provide extensive guidance to any startup on their journey so far, as well as the next 2 years ahead, and not just for funding.
Intended Audience
This article is not at all just about VC funding. VC Funding is regarded as the pinnacle of success for every startup. Hence even if you don’t want VC funding, wouldn’t it be nice to benchmark your Startup against extremely high VC performance metrics? It is for any Startup or business who wants to benchmark itself against key metrics for your business. If the subject interests you or if you are an intended audience, it will go in great depths to guide you. This article is extremely long. Please mark it if you want to refer to it later
PSI Scorecard for qualifying your Startup for VC Funding
General Guidance Statement (Elaborated)
VC Funding should be sought by only those startups who can exponentially scale their business & accordingly deliver exponential returns for their Investors. E.g. If a VC invests $1M in your startup, they expect a 10-15X Return on their Investment in your Startup. Generally speaking, startups who feel the urgent need to expand their business which already has great traction in term of revenue or number of users, should seek VC funding. This Scorecard would be most helpful to them. If your startup has not achieved traction, this is an excellent guide to take you there. You can self-score your startup every quarter. Even for those startups who do not want VC Funding: Great! Still the dynamics and success metrics of any business is covered in this Scorecard. Note that this excel has been built based on PSI's interactions with the VC community.
Assessment Model
Prior to scoring, the Startup needs to identify its Industry and Sub Industry. This itself is a key challenge. Are you an Internet Startup offering Healthcare? OR Are you a Healthcare startup that also uses the internet as one of its sales channels? B2B? B2C etc. And so on. Remember VCs invest industry wise
This Scoring sheet is divided into 5 Sections, with sub sections, with a score assigned for each section. The Max Score is given. You can self assess (answer) and score your startup against each parameter honestly. This enables you to effectively conclude how prepared is your business, and further is it fundable by a VC. Also note this is not an examination. This gives a crystal-clear SWOT analysis of your business. The scoring sections are pretty similar to a 5 Page Investor Brief Email (Which PSI uniquely follows rather than a Presentation), hence the points cover some of the slides of an Investor Brief PPT. But it does not follow the same. It is intended for you to self-think about your own startup from a VC point of view, or even a third-party point of view. Imagine yourself as you three co-founders hovering above your startup and assessing it. This is pretty much how VC’s will assess your startup. They don’t need a scoring sheet. They have experience. But it will certainly help you. We re-emphasize, this is built based on our discussions with VC’s on our network
There are 5 Sections with 16 questions for you to answer and self-score, for a potential max score of 100 points. Not all questions have an equal score. Hence this indicates to you the weightage of the question. The 5 Sections are:-
Startup Concept, Traction Potential to Scale Competitive, Differentiators Revenue Model
Hence go back to your investor brief PPT, and ensure you have at least these 5 slides. And typically, these are the 5 broad sections of a 15-16 slide presentation, or the 16 questions below
Section A: Startup Concept
This Section has 4 Questions: - Hence 4 questions, max 5 points per question (Section Max Score: 20 Points, 4 Questions)
1.Brief Idea: It begins with a brief about your Startup Idea especially why you started it. Hence there is a text box for you to enter your answer in the Scorecard, and another cell to self-score your answer, for a max score of 5 for this question (5 Points)
2. Elevator Pitch: In 3-4 sentences, describe how your startup can change the world or your country. In short, in 30 seconds, in an elevator with me, how can you describe your startup (5 Points)
3. Current Solutions: What are the current solutions in the market. What problems do they have, why are you better? (5 Points)
4. Industry: What is your understanding of your industry. What are the challenges its facing. How much research have you done about your industry prior to and after product launch? (5 Points)
Section B: Traction
This section also has 4 questions, but 30 Points, hence it is more important than section A. Again, this is not an examination, but it indicates that to get an overall high score in your examinations, you have to score well in each subject, or each section.
5. Customers/ Users: How many customers do you have at present. How much monthly revenue. Monthly GMV. How much is Revenue as % of GMV if applicable. If you are pre revenue, how many monthly website visitors. Or how many app downloads. If you have not yet launched what kind of numbers you see for next 18 months if we the VC invests in your startup (5 Points)
6. Startup’s own financial commitment: Of keen interest is the second question, how much money have you the founder committed to your startup, before now asking the VC for funding (5 Points)
7. Investor Interest: This question is even more difficult: how many investors have actually shown an interest in funding your startup. Hence usually this is where the startup can talk about the Angel investors already committed or willing to commit, other VC’s who have shown interest etc. Investor Interest has high weightage: 10 Points. If you can tell a VC that you have other VC’s interested, that is an irresistible pitch for the new VC, to compete with other VC’s for funding you. Also many VC’s invest in a syndicated round. If your raise is USD 5M, and earlier a VC is committed to USD 2.5M, but wants other investors to put up the balance, then this helps. Also, this is where PSI’s 1500 VC network immensely helps, where one VC tells us to get other VC commitments for the round (10 Points)
For those who sign up with PSI for our 60-90 Day Fund Raising Project: We would require the VC/ Angel name. It helps in PSI Fund Raise itself. Note that almost every VC in the market is on PSI's 1500 Investor Network
8.Industry Leaders & Mentors Support: How many industry leaders have you impressed so far? How many mentors are actively supporting you? How many key marque customers or at least POC’s? Are they generally advising or are they getting equity or are you paying them? Is there 2-way commitment? No one will give you long term commitment without getting anything in return. We strongly recommend startups to commit financially to a professional mentor. Remember if the input is zero, the output is zero. Stop asking for free help, you are running a business. Even Amazon charges you for hosting. And a mentor is far more critical to your business than your website hosting provider (10 Points)
By now, you would be seeing the essential differences from your Pitch Deck and what investors are looking for. If you have covered the above well so far, then superb
Section C: Potential to Scale
Section Score: 20 Points. The section gets only 20 points despite its importance, as we simply could not re-allocate points from other sections
VC is looking for a 10-15X return on Investment in 5 years. Hence your growth forecasts have to be 50-100-200% for the next few years. If you have delivered such awesome numbers the last 2 years or the last 3 quarters, then it is excellent. Hence this section is of the highest importance from a VC point of view. Most VC’s reject pitches because they simply don’t see a potential to scale, or if they do, they see others who are already big in your space. Hence the first question of scalability is how repeatable is your customer revenue
9. Repeatability of Business: What is the current Subscriber renewal %? Eg if 100 people sign up for your service and pay for it this month… how many will do so next month… or next year (5 Points)
10. Ability to Scale – Do you “practically” think big: We do not want you to say that "Sir we will get X % of Y Market share = we will be Billion Dollar Unicorn in 5 Years" Wrong Answer. What is your vision for the industry? We the VC will fund you if we get 7X to 10X to 15X return on our investment in 5-6 years, hence think and answer. The key word here is do you “practically” think big. Yes you can say we have a variation of Ola e.g. there is a Startup which provided inter city rides far before Ola and got VC Funding (10 Points)
11. High Level Projections: What are your high-level projections for the next 5 years. How specifically your startup will change the industry (5 Points)
Section D: Competitive Differentiators
This Section has 10 Points. Competitive Differentiator is a massive flaw for most startups. They need to compare themselves to startups worldwide. Recently an Ed Tech Startup doing early revenues which approached us provides a fantastic app to connect Parents to Teachers. They have a US competitor who has got $30M funding which they covered. They highlighted their differentiators well to such a large competitor. And also, they can simply tell the VC that this US Startup will not come to India as that would require much more funding. Another example: Uber came late to India, first mistake, but Uber still doesn’t have an understanding of India comparable to Ola
12. Competitive Analysis: Who are your competitors? No competitors is the wrong answer. Who are your direct competitors & indirect competitors? Is your startup fixing something not working at present. Are you bringing a new business model to an existing market e.g. Ola Cab. (5 Points)
13. Competitive Moat Analysis: Specifically highlight examples of product features / functionality that you have now or you will develop in future post our funding… which the competitor can copy over next 1 year, but by then you would have developed 10 new features to always stay ahead of the competition. Give point wise 1, 2, 3, 4, 5 differentiators (5 Points)
Section E: Revenue Model
This is the last section, as a Startup is all about revenue. Also, what is also critical here is product roadmap. Section Score: 20 Points
14. Basics of Model: What is your revenue model. We expect high margins on a per transaction basis OR Low margins with very high transaction volumes. It is ok if your capital expenditure is high for now and in future. But if you can show high profits per transaction / low profit high volume, then initial investment can be covered (5 Points)
15. Scalability: What is your present funding ask for 18 months? How you will grow 30% Quarter on Quarter for next 5 years. What is your Customer Lifetime Value? What is the Subscription Renewal Ratio E.g. Customer pays you for a service per month/ per year but how many will stay? 50% 80%? (5 Points)
16. Co-Founder Team: How many Co-Founders? What are the skills of each Co-Founder related to the Startup? You may have 1-20-year experience. What is relevant is how does your experience benefit your startup. Do you cover 3 key roles e.g. Internet Startup: CEO, CTO & CMO… Do you plan to onboard more Co-Founders or plan to hire along with giving the hired top team equity as well? (10 Points)
The above completes the 100 Point PSI Scorecard, the total score of 16 questions is max. 100 Points
Conclusion & Final Self-Assessment
Hence startups can self-assess themselves this way to see how they score out of a maximum score of 100 Points. If you score 80 and above, it should qualify you for VC funding. There is NO such rule though. It is just an indicator. General guidelines: -
Besides self-scoring, you get a fair idea also of how VCs would score you. Startups who have had discussions with multiple VCs will immediately recall most of these questions VC’s use similar scoring criteria. Hence keep this self-scoring sheet handy, prior to your next call with a VC. If a VC also gives you detailed feedback on why they are not funding you, you can estimate their score v/s your own self-Assessment Score. It will definitely make your next VC call better; your Scorecard will improve as you progress through more VC calls. This Scorecard is prepared based on PSI's conversations with various VCs from our 1500 Investor Network. Hence the purpose is to prepare your Startup before approaching VC’s
And we re-emphasize, if you are not prepared, do not approach VC’s. It’s a one time single window opportunity per VC for your Startup.
If they “heavily” rejected you today, they will not even read your email next time. However, if you scored well today and they find only a few shortcomings, it keeps you in good reputation with the VC. You can approach them in future once you have more revenue or traction
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This scorecard is PSI Intellectual Property only for explicit guidance to Startups, who need all possible free resources. Thank You!
© 2019 Perspective Startup Incubators. All rights reserved.
As always, PSI wishes your Startup our best wishes for your journey ahead!
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VC Funding v/s Industry Sectors:-
Every Investor Firm on our Network is mapped against industry sectors they invest or do not invest in, including #internet #saas #heathcare #education #logistics #fintech #consumer #agriculture #social #manufacturing #realestate #pharma #energy #cleantech #engineering #travel #hitech #electricvehicles