This content is for educational purposes only and should not be considered tax, financial, or legal advice.
Does “You’re too early” sound familiar?
A key component of a successful capital raise is a well-researched investor pipeline. That requires an understanding of the criteria investors use to evaluate a company and, more importantly, understanding “investor qualifiers,” which are characteristics that indicate an investor is a potential fit for your company.
Here are some of the most common investor qualifiers that founders overlook:
Pre-Revenue vs. Post-Revenue
You may be one of countless early-stage founders who have received investor feedback of “You’re too early.”
Such feedback is correct if you’re focused on the wrong investors. You need to speak with the right ones, and that means those that have a demonstrated history of investing in companies at your revenue stage.
Some rough guidelines on revenue stages:
Pre-Revenue: $0 to $10,000 monthly revenue;
Early Revenue: $10,000 to $84,000 monthly revenue;
Post-Revenue: more than $84,000 monthly revenue ($1M ARR).
Investors generally write checks (“check size”) in specific ranges: i.e. $50,000 to $150,000, $1 million to $3 million, etc.
An investor’s check size directly correlates to the size round in which they participate. For example:
Investors who write checks of $100,000 most likely will participate in rounds as small as $300,000 (as a lead) or as large as $500,000 to $1.5 million;
Investors who write checks of $1 million may participate in rounds as small as $3 million (as a lead) or as large as $5 million+.
You can find this information by researching an investor’s most recent investment activity. If they participate in rounds that are in the ballpark of what you’re raising, include them in your pipeline.
Customer Segment: Enterprise vs. Consumer
Many investors stick to either consumer or enterprise. It comes down to sales and marketing strategy, and therefore revenue model.
The ability to develop repeatable sales and marketing operations is key to executing growth-funding rounds and eventual exits. So understandably, this is a major risk factor for investors.
To mitigate this risk, investors often focus on either enterprise or consumer.
Challenges for Makers of Hardware and Hardware-Enabled Products
Some investors avoid hardware product companies. Hardware models pose key risks relating to inventory. For example, if you plan to ship 1,000 units in Q1, you need to have those units stocked before the customers order. If each unit costs $20 to produce, you have $20,000 locked up in inventory until you sell them.
Or maybe you produce 100 units at the start of Q1 and produce the rest incrementally. You then have to control for your supply chain (which may be long or short), internal production/assembly, labor, and a whole host of other inputs. In addition to the pressures of executing sales.
You may have planned for this. You may even have done it before. But investors know that most founders stumble hard at this stage, so they focus on the risks.
As a hardware company, you’ll be evaluated you with the assumption that you can’t succeed. Now you must convince investors that you can.
Greenprint Growth Partners LLC is a boutique consulting firm specializing in corporate development for early-stage companies and investors.