A tactical guide for founders navigating the early-stages of venture capital

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A tactical guide for founders navigating the early-stage of venture capital

I have so many conversations with early-stage founders. It’s my job, and I love it. But I’ve started noticing something in many of these conversations. I’ve found myself consistently referencing this fantastic article by Martin Tobias (a pre-seed investor, who also happens to be one of Day One’s investors).

The two seconds on this article is that Martin lays out definitions and milestones (as of 2023) for the early-stage VC fundraising stages - from angles to pre-seed, seed, and series-A.

I reference this article and the early-stage funding rounds milestones even when founders aren’t asking about fundraising. They’re usually asking about what to do next, or if their plans or strategies feel right. Or they just feel a bit lost or don’t have conviction in what they’re doing or should do next. And when that happens, you start to second guess your actions and move slowly. You start overthinking. You don’t move with pace, you shy away from hard or uncomfortable tasks, and you don’t make the investments you should.

Feel familiar?

This is a bad place to be for a founder.

The reason this article is so hugely helpful for guiding a founder is that by laying out these milestones, I can work with a founder to identify which one is coming up next for them (caveat, they have to be on the venture raising path), and we can get aligned immediately about what milestones they’re driving toward next. Then it becomes so much easier to drill down into the “right things” a founder should be doing to hit those milestones.

Of course, those “right things” are indeed different for every founder - business models are different, progress is different, resources available are difference. So what happens with each founder is we align on the milestones, then we go deeper, eventually laying out a simple plan to practically and tactically hit those milestones.

So that’s what we’re going to unpack today. I’m going to go stage by stage, and outline the specific tactics and actions that I’m often advising founders to do in each stage, along with some wisdom and lessons learned from helping over 500 founders through these stages inside of Day One.

So let’s dive in.

Angel Funding

The first stepping stone for a founder raising venture capital is often to raise capital from non-institutional investors, i.e. angels (or an accelerator or a select few truly first check investors). Founder who skip this step and raise directly from funds are often repeat founders with track records and existing investor relationships. Or founders skip this step and bootstrap (which is a great way to go).

The milestones to reach to raise this “round” are the least quantitative. As Martin puts it, a founder at this stage has themselves, an idea (in the form of a pitch deck), and possibly a mock up of the product.

Let’s dive into this and outline specific actions and ways you as a founder can position your “team and dream” startup to reach this funding milestone.

1. Know where you have founder-market - and make sure you’re building in an area where your founder-market fit is deep. At Day One, we have a whole methodology to help founders analyze and articulate their founder-market fit. If you’re just starting out, this is the exercise to do to guide where you explore and eventually build. The simple approach is to ask yourself “where do I have deep experience and expertise, and what kind of business do I want to build”. If you’re building within this zone, all else being equal, you will have a much better shot at crafting an idea that is viable and fundable. You’ll also have a deeper network that you can raise from (not suggesting everyone has rich friends, but if you’re solving a problem in real estate, I would expect you to be able to bring on board a few RE professionals as angels - and if you don’t have the network to do so, you’re probably pushing a boulder uphill).

2. Turn your idea into a pitch - this is not your 12 slide pitch deck. What I mean is to craft your 3-4 minute story. Articulating your startup idea in this format forces you as a founder to get really clear on the key things that matter: namely, the problem you’re solving, the customer you’re targeting, and why you’re a fit to build this startup. The idea itself is way less important - it will change a hundred times. Just the act of putting your idea into a structured pitch will help you to refine the idea. But even more importantly, you will use the pitch a thousand times to share your idea. Which leads us to the next tactic…

3. Have 100 conversations - the first version of your idea is almost certainly not quite right. If the idea eventually becomes good and your business starts to work, you probably do have the kernel of an insight that sets everything in motion. But almost everything around that - your actual customer, the details of their problem, what you’ll actually do to solve it - those all need to be discovered and validated. There is no shortcut here. The first 15 to 25 convos are easy - those are probably friendlies. The next 25 are hard, and leave you with some hard won insights. DO NOT STOP HERE. The second 50 is where you refine those insights, work through the tire kickers to find real customers, and validate the core features of your product or service. 100 is the magic number.

4. If you’ve done all 3 of these, you should be able to pull together everything else angel investors need to see. With a compelling pitch and insights from 100 conversations, you should be able to recruit the people you need around you (cofounders or a team). With those same insights, you should be able to outline what your first MVP will be and why you think customers will want it. And if you’re building in an area where your skillset is a natural fit, you should be able to start putting the pieces of that MVP together. Do all this, and you’ll have the pieces and momentum to raise money from angels.

Pre-Seed Funding

Pre-seed funding is where things get real, because it’s the first funding stage where institutional investors play in a concerted way. This is also a round that will feel in some ways like a proper round, although it’s often less formal than a seed or series A (you can do a pre-seed without a lead, and using standard SAFE or convertible note documents).

Martin lays out what he sees as the requirements for a pre-seed, and for most of the founders I talk to, laying these out is enlightening:

1. 3 months of real customer engagement with a working MVP

2. $5k-$10k in monthly revenue

If you raise money from angels (or even if you don’t), these are your targets before you should plan on raising from institutional investors.

Don’t read these as “hit these milestones, get funded.” These are thresholds to put you in the game. Your underlying business still needs to be sound, the opportunity needs to be large enough to be venture scale, and things you alluded to as you raised from angels - like recruiting a killer team - need to be true.

So now, let’s go one step deeper and look at the tactics most founders should execute as they drive toward pre-seed:

1. Those first 100 conversations should yield your first batch of customers - if not, then you probably need to have another 100 conversations. In this stage of your business, it’s normal for your first customers to come in a very unscalable way. You can’t stay here forever, but it’s important that the insights that are driving your business and product direction are coming from people who are eventually customers (and ideally super users). Another corollary to this is that you should expect to sell before you build and have your first customers lined up before you really even have a product to put into their hands.

2. Build just enough to deliver the value your customers signed up - this is pretty generic advice, and figuring out what this means for you is a challenge all founders face. The reality is, what you build - even if its for customers who told you what to build and want what you’re offering - won’t be quite right. The only way to perfect your solution is to put the thing in the hands of customers. And if you build too much 1) you’re just slowing down your pace of learning and iteration, 2) you’ll make it harder to learn because you’ll be presenting a complex value proposition, and 3) you’ll just end up scrapping and pivoting away from these extra features anyway. So please, adopt the leanest mindset you can.

3. Begin to put marketing/sales channels into action to reach $5k MRR - it’s possible you’ve reached this threshold just from converting people you interview. It depends on the price of your offering. If you’re selling enterprise contracts for $2k per month, the likely path is that you do convert 2-3 customers from your high touch discovery. And that makes sense. The go-to-market for that kind of business is highly relationship driven and consultative selling - not so dissimilar from customer discovery. But if your solution is priced at $50 per month, you might have locked down your first $500-$1,000 in MRR, but to get to $5k, you’ll need to begin implementing your marketing or sales strategy. And if you’re selling a consumer service for $15 a pop, then that GTM is even more important. This also makes sense, because a pre-seed investor will want to know that what you’re building has the early signs of being marketable in whatever channel you’re focused on.

4. You’ve probably heard people mention that it’s sometimes easier to raise capital before you generate revenue. There’s truth to this. The angel funding stage has little concrete or quantitative data points to critique. Not so in the pre-seed stage. Your initial hypothesis and idea has not come into contact with the market… and it won’t be the same. But if you do reach these milestones, then you’re in a really strong position to raise capital.

Seed funding

Seed funding is perhaps the most ambiguous and difficult stage to hit. Martin does us a service by laying out the criteria he’s seeing in the markets:

1. $500k ARR

2. 1 or 2 proven acquisition channels

These are hugely useful milestones. And you can start to see how high the bar is - a startup needs to just about 10x from their pre-seed to their seed. The second point is almost a pre-requisite to hitting the bar of $500k ARR - if you don’t have a proven acquisition channel, there’s almost no way you’ll stumble or brute force your way to $500k ARR.

But the ambiguity comes into play when we bring up the notion of product-market fit. Is PMF a requirement of raising a seed round? Or can a startup still be pre-PMF (even if it hits these milestones)?

There’s no solid answer, primarily because there isn’t a single definition of PMF. I would start by recognizing that PMF isn’t quite a moment but a spectrum - and in many ways, Martin is laying out a middle of the road definition of what it means to have it. If you can 10x your business within 2 years, and have profitable acquisition channels (or something that’s trending toward profitable), I’d say you have enough PMF to raise a seed.

So, how does a startup go from $5k MRR to $500k ARR? Let’s dig underneath the surface (also, admitting that at this point, the real advice is highly startup specific):

1. Set up functions to iterate both your product and GTM - at this stage of the game the thing that will take you from $5k monthly to $500k annually is not one thing. The odds are, your product is a bit under-developed and will need some polish if it’s going to reach and work for 10x the number of customers. And depending on how much you refined your GTM as you approached pre-seed, you will need to invest in setting up these channels, and start ramping them up. This is where you need to lean on your core hypotheses that got you this far - if you have a strong understanding of your customer and the value to deliver, and you’ve validated the most critical assumptions, then hopefully your product roadmap is full of strong ideas to continue adding value. And if your growth hypothesis was initially validated, hopefully you can just widen your funnels and slowly grow - fixing things as they break - as you add revenue. But it won’t be one side, so prepare to pull both levers.

2. You as a founder cannot get too far from your business - there will be a massive temptation to hire out leads and build out product and GTM teams. FIGHT THIS URGE. What got you to your pre seed does not just need “more” - you will have to iterate, you will have to focus, you will have to make calls that only a founder can make. At the same time, you don’t know if this will be a steady walk toward $500k, or if it’ll be slow and messy, only to take off when you get something right. So to ensure you’re still around for that to happen, be judicious with your budget. Do not over-hire. Do not outsource core functions. Sorry to say, but your job as a founder just got busier (and you didn’t think that was possible).

3. There are no silver bullets, so don’t even try to find them - instead, you must do the hard work to build profitable, repeatable sales channels and a product people will love and come back to. That’s it. Without these things, it won’t matter if you hit the milestones, because you won’t hit your series-A metrics. The same is true of the pre-seed stage. If you got lucky and fell into enough customers that you could deliver $5k in MRR and customers who liked your product, but you don’t know why or how you got them or how to get more… then this phase is going to be painful. So don’t skip ahead, just do the hard work.

Wrap up

So I’m actually going to tie off this article - because I frankly don’t have any direct experience raising a series A. The advice I shared of not getting ahead of yourself, and fundamentally nailing your core product and GTM, should set you up to keep going those things while you start to scale. Eventually the work of a founder does transition from being a “founder” to being a CEO, and the success of the business hinges on how well you hire, set vision and goals, and keep a dynamic team on track.

That starts to happen as you reach series A, or maybe beyond. But we’ll save that for another post, and maybe for a guest writer.

But for now, to wrap up, if you don’t know what milestones you’re going after, and the timeline and runway you have to hit them, then you’re flying blind. Martin largely solves that for us.

From there, you have everything else to do. That’s where we at Day One come in, and what I hope we covered (at least just a bit) today. You will (I’m sure of it) need more of this kind of advice (and like I’ve written before, all advice is wrong until you have real context) - so if that’s you, please check us out at Day One!