VC startup idea - PE or VC interest? Are these numbers viable?
Seeking ~14mm in VC capital for a startup
(in multiple funding rounds...starting with a 2mm Seed round)
Can you guys give me a list of 10-20 VC firms that I should approach for my seed round?
(lots of background info below....but all just in an effort to help those with industry knowledge to provide a list of VC firms that are actively making Seed investments in the FinTech space)
I have an idea for a startup in the financial markets exchange realm, but it will require significantly more capital and developer-hours than I can put in myself. I think its a candidate for a VC firm, but I've never pitched to a VC firm, so maybe some people on this board can point me in the right direction.
My background: BB IT Developer (programmer) --> Market Maker --> Prop Trader
The startup is a new type of trading exchange that takes advantage of the current regulatory and BB fixed income brokerage model (BBs have been pulling back and cutting costs on certain industries). There are a few other startups in this arena, but they all specialize in certain niches, and lack multiple aspects of what would create the "ideal" exchange platform for these products/securities, and most of these other startups have not generated enough scale/market saturation to reach exit potential (i think because of their business model - can be done much better than current operators).
The TAM (total addressable market) is about 20 billion/year.
By my estimate, my company (when grown to scale) should be able to capture in the range of 1-5% of that market. More TAM% would, of course, be great...and its "possible" to achieve 10%, but in seeking to be reasonable, I don't want to be caught as overly optimistic.
Doing the math on 1% of the total addressable market, this company should generate ~200mm revenue when fully operational within ~5 years...and about 80mm/year of profit on that 200mm (so an 800mm target exit valuation, depending on what kind of multiple these companies sell for...i'm just assuming 10x profit). These numbers are assuming average market penetration. The potential is for more, but I'm not going to say "if I get 10% of the market, we'll make 2bln/year" because I don't think 10% market saturation is reasonable to expect (tho would be nice).
IEX is a good comparison....they are about 6 years old, and made about 50mm last year (or so i read)
BondPoint sold for 400mm in 2018
TMC sold for 685mm in 2018
TruMid raised 37mm in 2017 and is valued at 100mm+
Nasdaq bought eSpeed for 750mm
And there are others...but there is still room in the exchange business for untapped/inefficient business models
I have a tech/programming and trading background, so i know exactly what the platform should look like, and I have a basic idea of the programming work involved. I'm estimating that it will cost all in about 10-15mm to get this exchange self-funding and profitable (that 10-15mm includes basic rent, IT developers, a sales force, and all the other admin stuff that comes along...but the bulk of the expense is developers that will cost 150-250k/year + stock options).
Ok, so anyway...who do I pitch my idea to? Is there a list of VC firms and ways to contact them? What kind of equity valuation should I be seeking at this point from a Seed VC? (Right now, this startup is just an idea in my head)
Other thoughts?
Sounds like you have a solid idea and a half-baked business plan. Off to a good start, already further than most people who say they want to build a business.
From my experience pitching VCs I'd say that you're going to need solid traction with users/customers to raise the kind of money you're talking about. To ask for a $15mm valuation pre-prototype/MVP and without a founding team will generally get you laughed out of a room.
My advice - if you decide to raise pre-MVP, find angel investors through your network of co-workers or industry professionals. Since you've been at a BB and this is a FinTech play, this will be your best route as the people in your professional network should quickly see the value proposition (if any) of your product, and will have connections to institutional decision makers and other people with ca$h staxxxx ready to be deployed.
Also, I HIGHLY recommend bringing on a co-founder that has strengths where you're weakest. It sounds like you have the technical chops to understand the development/technical side, but can you sell? Can you spend time vetting potential angel investors and build rapport? Can you create pitch books that sell the vision and articulate that vision to prospective investors during presentations? Do you have a fundraising track record? Do you have a defined go-to-market strategy?
One thing I've learned from founding companies is that you can't do everything on your own. Find someone that brings complimentary skills to the table, compensate them with a sizable chunk of equity and re-invest your time, effort, energy, and disposable capital into the biz.
Not impossible to raise a $1m+ seed round pre-product but it's definitely challenging. It depends on where you're raising the money and the general risk tolerance of the geography. If you're in a tech or finance hub your odds of successfully pulling it off are higher but there are still tons of post-launch, rev generating startups competing for the same funding.
I can 100% relate to where you're coming from on the dev side. It's a "chicken and egg", can't launch a good product without funding, can't get funding without users, can't get users without product. The early days are full of torture like this.
The best route is to build a Prototype/Demo that does 1 thing better than all the alternatives and go get sales as early as possible. If you go to a VC and tell them you have $500k in pre-sales from x amount of clients, they'll be interested.
If you' do get a $2mm pre-product and pre-sales investment offer be ready to get BENT over on equity, liquidation preferences, and other deal terms. If you have sales you have leverage.
Not really. I’m in late stage tech investing, think more growth equity than VC. I still meet with people like you regularly (those that survive past the seed round and grow up are my bread and butter). What you are wanting seems to be someone with motivation outside of return. Perhaps you can find some seed fund founded by a technical founder that got lucky and made it big. These guys tend to flame out quickly. So what you need to focus on is finding VC’s that sell themselves as such. They likely will be new and relatively unknown. The rest are professional investors and do not back pure ideas. There must also be a sound business plan and some decent market validation. Also, like he said, these guys are going to bend you over a table on structure. I’ve seen as bad as 4.0x liq pref participating in an early stage tech only founder company. From my perspective, it sounds like you need someone with more business/financial acumen as a partner. Preferably someone with experience in early stage capital raising. Unfortunately there are a lot of charlatans. You’ll have to thoroughly vet them and hopefully they are someone you know and trust. I’ve seen someone like you raise a $10MM from KP in their first ever round (largely unheard of) and evaporate in 18 months. Find yourself a strong partner who’s skill sets compliment your own and your likelihood of success increases ten fold.
anybody have a list of Seed VC firms from crunchbase for me to contact? Google gives me hundreds...but i'd rather stand on the shoulders of giants and just reach out to 10-20 if that's possible? (and not waste the fee $$ if i can avoid it)
Mephistopheles, StrapYourBoots and m_1 already provided great points (and in a lot of detail). But it just feels like they are trying to provide you good advice and you’re ignoring them / talking through them...
I’m not going to rehash everything, but I would agree with what was said about you having a difficult time getting people to buy into an idea without some form of traction or basic solution in place. And that it will be an extreme uphill battle with a lot of VCs. Also, your thought on people love providing free advice and good karma and all that - sure, that’s something occasionally done to be good players in the startup and VC ecosystem. But we don’t have time to meet with every single entrepreneur to provide advice and mentorship (the days are already extremely packed with meeting founders that actually have startups that are actually within our respective strike zone in terms of stage and maturity). We are heavily consumed with reading/research, thesis development, meetings with upcoming startups, working with our existing portco’s, networking, ecosystem events.
If you do a bit of reading, you’ll find that some VCs don’t even meet with startups (or in your case, a founder to be) unless they have a warm intro (or at least a reasonable “I know a guy / girl, who’s working through something...”). The last time I met with someone without a MVP was a recommendation from a fellow VC. And this person was a pretty well connected guy who was already planning to join a team to build something out. (It was way too early, but interesting to keep tabs on - and primarily driven on a reco).
What you may want to look for is “pre-seed” funding (as the already vague definitions of seed and series A, and their average raise, range of valuations, and firm’s maturity have shifted over the years). There are some super early stage funds out there. Consider looking at angel investors / family & friends. Also consider talking to some accelerators (to get a sense of whether they would be interested in you). Accelerators usually take some equity (say 4-6%) for you to be part of their program. They then provide you with their network of mentors and investors, a coworking space, marketing, and startup founder training 101. They don’t actually provide you funding (though I suppose the ones that have active funds could put some money in), but it’s something to consider if you’re trying to get access to a network and ecosystem. In your case, I think others’ thoughts on finding cofounder(s) to round out your skill set, finding angels, focus on building something out, should be your focus.
If you want to better understand VC land, read Venture Deals. Also, talk to some startup founders that have successfully raised money. Don’t target VCs that aren’t looking for what you’re selling (stage and sector wise).
Lastly, just an observation, it has been difficult for capital markets oriented fintechs to have raised capital. The reason is due to high regulatory barriers, and also the higher level of sophistication required (both from the founders, and also their clients). Because of that, it’s harder to sell into / disrupt / carve a niche out, and because it’s harder on avg, it means there’s far less capital chasing such opportunities.
I don't get it. If you're a programmer with the business background, you should just quit your job/work on an MVP product in your spare time. Have a working demo, show it to potential customers, get them to sign an LOI, then go to a seed investor. It is HIGHLY unlikely that a VC/angel would fund you pre-product with significant capital (unless you/your daddy has a lot of rich friends). The best financing you should expect pre-product is a small amount of capital (VC to throw you $2m for an idea that you may not even be qualified to execute.
I know about IEX. I cannot corroborate your claim that they raised their seed round solely on an idea...they easily could have locked down some customers (LOIs etc.)/had mock ups and were able to present those to their potential investors. It is SUPER rare to raise capital pre-product/pre-anything without some sort of prior relationship with the investor (whether that be friend/family, past co-worker, prior entrepreneurial experience). Your best bet would be to create a short deck outlining exactly what your new exchange will do, what value it adds to both sides of the exchange, and TALK to potential customers and get their feedback/preliminary buy-in to sign on to your exchange. At that point, you should be able to raise some seed capital. It seems like you have this belief that a VC/angel is just going to gamble and give a part time entrepreneur money to you at a high valuation to build out a "vision" that has zero proof that it will work. While VCs do invest in risky startups, they don't throw money at any idea off the street because an idea is a dime a dozen.
There are many many startups out there that are pursuing larger opportunities than you are, working full-time unpaid for years on end, and still struggling to raise money.
FYI, I would not recommend reaching out to VCs, you're way too early for a venture fund. I'd recommend reaching out to rich people that you know who strongly believe in your abilities to be your first investors.