The Perfect Time to Raise: Product, Revenue and Scale with Dawn Capital (Video + Transcript)

Evgenia Plotnikova, Principal at Dawn Capital, goes through the perfect time you should ask for funding both when you are building and scaling your product. She debunks 3 common myths about funding.

Myth 1: You always need a VC. She says she spends half of her time speaking to startups who don’t even need funding right now.

Myth 2: VC funding is non-cyclical. You actually can get more funding in September and December.

Myth 3: You should fundraise every 12-18 months. Usually, this is true, but it shouldn’t be your go-to timeline. She suggests raising even when you don’t need to.

Evegnia shares some other great tips on funding in her session at SaaStr Europa. Read the transcript below (or watch the video) for more knowledge on funding.

Also, if you didn’t attend SaaStr Europa, we’re having it again in 2019. Don’t miss out on the chance to get your tickets. 🙂

Transcript

Principal @ Dawn Capital | Evgenia Plotnikova

My name is of Evgenia Plotnikova. I work at Dawn Capital which is an early stage B2B software and fintech fund. I’ll tell you a little bit more about us later but my topic today is the perfect time to raise product, revenue and scale. So if you first start with the simple statement that Europe today is clearly the hotbed of technology and innovation. SaaStr being here for the first time is probably one of the best indicators for that. But equally I think a lot more American investors are coming here to to invest their 17 percent of American money that poured into European businesses in 2017 and that’s bound to increase. So if Europe is is hot so should you raise now while the party last and go as quickly as you can to get that that exciting round? So perhaps. But before we talk about the best time to do that let’s demystify a few things first. So I think myth number one about fundraising is every startup needs a VC backing. Now I spend about a quarter of my time talking to people who don’t need to raise basic capital and that’s not necessarily a bad thing. Raising the seed money means a few things…you need to get alignment on control of your startup you need to be comfortable giving up a portion of your control to have a backer in the corner who will support you but who will also protect their capital and push you further.

You need to get alignment on your ambition. Having a life nice lifestyle business that generates 5 million in revenue is fantastic achievement but the V.C. will push you higher to get there five times return. And you also needs to get alignment and speed. Whatever you hear about horizon of a venture capital most of us will have funds who have a life of 10 years right. So you kind of have to keep that that in mind. So not every startup needs needs a VC. So if you want to come and talk to me but it’s OK not to get a VC backer. Oh yeah, humble brag that’s us there in the corner. Myth number two VC funding is non cyclical. Well, it is unfortunately we also take holidays. You think that might be a joke but actually if you look at the data that Thompson goes recently published with 90 percent of confidence interval which is a lot there is a 15 percent increase in your round siz if you happen to close in August or December. Why is that? Well typically three months fundraising time so you probably started in September or in May hence before summer holidays and before Thanksgiving. So there is sort of an optimal period to pick when you actually going into the market. And of course there’s also the six general cycles of the macro to take into account.

Myth number three you should raise money every 12 to 18 months.

Yes but not always true. If you are running out of cash there’s probably an inverse correlation between the money that you have left and visa interest. We can smell desperation from very very far away. So you need to be raising when you don’t need to raise frankly. And this is probably when you create the best scenario for yourself where you can create a little bit of FOMO, a little bit of competition between the VCs and that’s ideally probably not 12 or 18 months in the road. So with this myth in mind when is a good time for you to raise a Series A? I figured I’ll focus on series A because that’s where I invest so this is what I know about. Obviously it’s different for seed funding or old growth funding. So knowing that it’s kind of end of the day I figured we’ll go through a case study so please meet Brian.

Brian is the CEO of a software business. Brian did math and Stanford. He then worked at Google and at Facebook. He then dropped out of his Harvard MBA to create a very exciting software startup so Brian is perfect. He’s your ideal software CEO. So when Brian was interning with Brian Wasser at Stanford he was interning at independent coffee shop that closed down and was replaced by Starbucks. The reason that that happened is because they the costs were too high. So Brian comes up with an idea. How can a self save all the independent coffee shops from going bust. So he creates a SAS product to enable coffee bean buyers to negotiate prices based on the bean variety on the global supply and demand historical prices consumer preferences but also the margin of each end product.

That’s really shitty formatting. Excuse me for that. So he calls it beans as a service and it’s a piece of cake. You know onboarding is fairly easy. It’s fully self served. The pricing is very simple. It’s based on the number of analysts using the data and you don’t need to be a data scientist to use his tool. So he is thinking bingo I’ve got what I need for my product is Brian ready to raise? Well, probably not. If you start analyzing that market then you realize well actually the cost off of the bean is marginal. If you look at an average cup of coffee will cost you two bucks it’s actually 4 percent. So 8 cents is the price of the coffee. But then on top of it the coffee prices for Arabica have been in decline. So when you think about it actually that’s probably not a good problem to solve. So if you take a step back your conclusion number one for you series A you need to build a product that someone actually wants and they want it today. Size matters in B.C.. So you do need to pick a big enough market to go after and you need to make sure that the problem that you are solving is relevant and non-trivial and that’s the case of our case study Brian now Brian realizes maybe it’s time to pivot. He created a tool that can run large data analysis and that can easily be used to barista while bingo gold mine data is hot. Maybe it’s time to pick a different product. Luckily his intern’s dad is a big shot at a big Wall Street bank. So Brian gets an introduction and secures his first juicy contract with the bank ABC.

Bank ABC will pay him 120K to develop a data analysis product is Brian ready to raise cash money from bank ABC? Yes.

Now he’s got a product he’s tackling a big enough issue and there’s early traction. However, banks saw 102K investment as you know a one-off thing, not a recurring contract. It also gonna take twenty four months to get through the very hard procurement process of the bank. It’s probably not quite yet. So lesson number to show growth beyond friends family and fools. Pay attention to your metrics early so it’s perfectly normal for a startup found out particularly before Series A. To use the network to get that initial contract to get that initial client and that’s absolutely fine. But ideally your product is good enough to go a little bit further than that. There’s either enough reference ability in your sector and if it’s a bank ABC perhaps you’ll get bank X Y Z or perhaps as a content driven one where you’re going top down and you’re getting developers adopting your product right. There is there’s got to be traction beyond that first client. Paying attention to metrics early is equally important and thinking about your ECD versus your sale cycles. This will not only drive your metrics and funds like mine will look at two metrics when you fundraise but it will also determine how you sell a hire ACV long sales cycles you’re going to wine and dine lower LCA ACV you will be content driven, marketing driven, inbound driven company. So Brian has thought about that now. So luckily as I mentioned bank ABC shows of their new data tool to bank X Y Z bank X Y Z gets very excited the word on the wall street spreads very quickly Brian science and head full of banks for recurrent contracts and proof of concepts he now has five clients and 50 k MRR. Growth is triple digit. Things are looking up for him. It’s now time to raise.

One thing that you really have to take into consideration as a founder is the famous leaky bucket. He’s got five clients but he also lost five clients early in the quarter and that with analysts live the bank. They don’t really sign up any new seats. And so he’s losing his users and all of his fancy new features are being used and that’s lesson number three scalability is beyond just up to the right. Growth is good but you have to look a little deeper. That means looking at the churn. Looking at the customer retention and looking at your cohorts with a lot of attention. So this is the best time then to race. I have a product that solves the current pain point. There is a solid initial traction proof of concepts for my license of flying off like hot pies. Looks like this could scale efficiently. My biggest customer is buying more seats and no one has yet shortened and this is our sweet spot at Don capital. So we come in this awkward position between the seed round and you expansion when you have got your product it is scaling you got good customers and we’re there to help you scale people and processes to grow to another level of growth. Now if you keep that graph in mind this is what we hope you do is go a little bit faster. Some of our investments like mine cost and I settle which you’ve already exited for billion and 2 billion point to one is an IPO and the other one is a PayPal acquisition. How would you prove that. But we’ve got other exciting companies that caliber show pod oatmeal and many others in our portfolio to help them do just that.

Few parting thoughts.

In terms of the strategy of the actual fundraise now that we know what we’re looking for Series A. I probably shouldn’t say this but some V.C. FOMO is healthy. We do message each other and there’s a lot of gossip in this industry. So raise when you don’t need to raise and create that momentum create that fear of missing out – it’s real. Low dilution managers high valuation does not absolutely understand the sensitivity around 10 percentage points 15 percentage points whatever it is. As a founder, this is your baby and I know how you feel. Giving away that control. So yes, watch out for the dilution valuation. Don’t go with the ego. It doesn’t really matter if you are hundreds pretty money or 120 if you are building a billion dollar business you will get there and that extra 20 percentage points is not going to matter at you series a this is a marriage. Pick your partner wisely. Unfortunately controversial pieces they will sit on your board that will give you advise that you want or you don’t want. So it is very important to take references and seek that partnership very carefully. And finally insights. Always be closing but also always be raising. Coming back to the timing point. What really matters is that you create those relationships with people who matter early on and who keep their relationship going. So when the time comes you can pick the right partner for yourself.

Come and talk to me if you have a softer business.

Published on December 6, 2018

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