You Need Paying Customers, Not Free POCs, to Survive Your Fundraise

First-time entrepreneurs that are building an enterprise SaaS company and trying to raise money without having paying customers will typically find it difficult to raise capital. As an Alchemist Accelerator CEO mentor, I help founders understand this point as early as possible. If you want to survive, meaning close your Angel or Series A round to live another day, you must prove that customers will pay for a solution to the problem you are solving. That is table stakes in Silicon Valley.

Early Stage, SaaS, Enterprise Sales is Really, Really Difficult.

You don’t have brand recognition, customer references, case studies, engaging slides, or a fully functional product. And most technical co-founders do not have sales experience and would prefer to spend their time coding versus updating salesforce or talking to people.

Capital comes in two primary forms: paying customers and venture term sheets. Non-paying “proofs of concept” (POCs) are not customers. The Valley VC deal flow is massive so POCs with no path to revenue from small logos (companies with under 400 employees) will get a response that sounds like “come back in six months.” That is a major problem when you have only 90 days of cash and no salespeople.

Founders need to clearly understand their prospects’ buying and decision-making processes. Everyone knows your product is in beta, but you shouldn’t be giving it away for free. Founders need to know their worth and show the value of their products. It’s important to explain to early prospects that free trials equate to no funding to hire engineers to scale the product. Even worse, they lead away from a path to raise money.

Be honest with your first 10 potential customers. Let them know that you need a financial commitment from them and that they need to be a reference for potential investors. Listen carefully to their feedback when you make that ask. Do they have a budget to pilot new technologies? What are the barriers to your deal getting signed in the current quarter? Are they in the midst of a reorganization? Did a new boss just arrive? The signal will be high on your first call as to whether or not this lead has real potential. If a prospect tells you his or her company’s security assessment will take six months and the purchasing process another three months, believe that person and say thank you, don’t forecast them and then move to the next deal.

Your First 10 Logos Matter

Many founders sell into small businesses (20 – 400 employees) because they think the process will be easier. Logos matter and the first customers you attract are important. VCs call these lighthouse customers. They represent early market validation and big budgets. If investors have never heard of the logos on your traction slide, there’s little excitement to listen to your pitch. Similarly, if your first four customers are due to your friends or family network, investors will be

skeptical of your ability to cold call and introduce your new product/service in a compelling way outside of your immediate contacts. Remember VCs backchannel before they cut checks. They call their networks of lighthouse executives to get a sense of market needs.

Have A Path to Scale Early Customers

Investors will be interested in your traction. They know that your first few deals will be priced below market to get the relationship started. But you need to show them a path—how you are going to grow early customers from five-figure deals to six-figure deals. (In effect, showing now that you won your first deal to prove your value with one business line, how you will get the rest of the business.) Great founders set this path to scale at the earliest stage of deal. They do this by value setting at the beginning of the relationship.

So take the time to build a solid pipeline of customers not POCs. It’s easier to raise money when you have paying customers. Founders selling early-stage enterprise SaaS solutions should think in these terms: every $50K SaaS sales order should equal $300K in funding. If what you are selling has value, people will pay for it.

About Darren Kaplan

Darren Kaplan is the co-founder and founding CEO of hiQ Labs (, a data science company, informed by public data sources, applied to human capital to make work better. Mr. Kaplan is an Alchemist Accelerator mentor, working with Augmented Reality, Cyber Security, and HR enterprise SaaS startups.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley—including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

Funding Basics: Fundraising 101

If you’re unfamiliar with how venture capital funding works, it can seem akin to playing the lottery. Anyone can try, but only a few lucky entrepreneurs actually win. Fortunately, fundraising isn’t as random as a Powerball drawing and founders can improve their odds of success by engaging with right-size partners, recognizing what investors find intriguing, and understanding the technical aspects of term sheets.

How do I know?

I was a VC.

Establish a Strategy

As an Associate at Draper Fisher Jurvetson and now as Founder of the Alchemist Accelerator, I’ve met hundreds of people with good ideas and great demos, but far fewer with a strategic plan for fundraising. Founding teams can save time (and alleviate stress) by researching fund sizes and prioritizing meetings based on the outcome they expect. Founders and the venture capitalists they choose will need to make the economics work. Investors will need to pay back their funds. A rule of thumb is that one out of every 10 investments in a VC portfolio will drive outsized returns. And a typical fund has 30 investments. So 3 companies in a given VC fund portfolio will likely be responsible for the fund’s performance. Given this, most investors want to see a path to paying back at least ⅓ of their fund size with an individual investment.

Investors are also constrained by the number of investments they can make. Because they have to limit the number of board seats they take on, they often can only make 2 or 3 new investments per year. And each investment has to deploy enough capital for them to deploy the cash in the fund. For these reasons, investors at large funds (e.g. funds that are $300m or larger in size) will care much more about whether they have enough ownership in your company to create an exit to pay back their fund than the check size of your investment. In fact, if you are asking for too little money (e.g. less than $3m) it can be more difficult for that investor to justify the investment given the size of their fund and the limited number of new investments they can make each year.

Ideally, founders approach a mix of VCs during the fundraising process, recognizing that there will be more traction with those that are a good fit. Don’t get too excited about meetings because every firm will want to meet for fear of missing the next big thing—think Google! That’s why it’s important for startup teams to have a plan.

Choose to make scarcity of supply an asset. Optimize for a short, yet intense fundraising process. Establish a list of three dozen firms, then agree to pursue 12 active discussions at a time—segmenting top-tier / second-tier VC firms, angels / high-value investors, and corporates / strategic investors into separate thirds. This will enable the rapid replacement of non-responsive firms, and help ensure the arrival of term sheets at the same time.  

Share Your Story

VCs meet (and subsequently) invest in startups for a variety of reasons. The startup meets all of the criteria of previously proven successful companies in their portfolio; the startup is somehow connected to the VCs personal network that she trusts; or the firm likes to make contrarian bets. Whatever the reason, the dance between startup and VC always begins with a presentation.

During a seed or series A round, fundraising meetings focus on the idea and its potential. In series C and later rounds, VCs spend time evaluating the idea, the market, and results. How has the company executed to date?

Early round fundraising presentations are expected to be lean, including a brief overview of the team and the market potential. A dozen or fewer core slides is ideal, coupled with a large appendix of slides that goes deeper into specifics. An overview of capabilities and a product demo will also be expected. Sequoia Capital has a good template for creating solid fundraising presentations.

But wait... Before presenting, stop, summarize how and why you are there (don’t forget to mention explicit connections). The goal of this is to try to address from the top the two fundamental questions wrestles with: “Are you any good?” and “If you are so good, why are you talking to me?”. At the beginning -- from the top -- you want to signal strength (that you are in fact a company the investor should want to chase), and that you are talking to them because of some privileged access that investor has. For example, “Before I begin, let me just set some context. As you may know, we have been heads down with customers and will be beginning our official raise next quarter. Our attorney XXX spoke very highly of you and recommended we get your guidance in advance of that”.

You then want to unearth any biases upfront the investor may have before you go into your pitch. VCs often provide the best feedback before you speak. This time is also the best chance you have of understanding any bias or concerns VCs may have about differentiation, distribution, market factors, or some other issue you’re going to cover.

You can simply ask “Did you have a chance to review the information I sent over?” They may not have, but if they have, you can invite them to share what’s important to them upfront so you can cater your talk better to them.

At the end of the day, VCs want founders to like them and VCs want to like the founding team’s energy and passion. After all, funding is a long-term commitment (typically 3—7 years). Additionally, potential investors want to be sure the market opportunity is large enough and that a startup’s entry point is specific enough to ensure a big return.

About Ravi Belani

Ravi Belani is Fenwick & West Lecturer of Entrepreneurship at Stanford University, and Managing Director of the Alchemist Accelerator. Ravi formerly spent six years as part of the investment team at Draper Fisher Jurvetson's Menlo Park global headquarters, where he led investments and served on the boards as the first institutional investor in companies such as Justin.TV & Twitch (acquired by Amazon for $970m), Pubmatic, Vizu (acq’d by Nielsen), and Yield Software (acq'd by Autonomy). Ravi formerly worked in product management at two Kleiner Perkins enterprise startups, and as a consultant in McKinsey and Company's San Francisco office. Ravi is a Phi Beta Kappa and Tau Beta Pi graduate of Stanford University, holding a BS with Distinction and MS in Industrial Engineering. Ravi also holds an MBA from Harvard Business School.

About the Alchemist Accelerator

Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley -- including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.

This blog is the third in a financing series with topics designed to help entrepreneurs be better prepared for venture capital conversations.

CANDID CONVOS: Angel Fundraising with Ahryun Moon, CEO at


 Ahryun Moon is CEO and Co-founder at, a recruiting enablement platform that automates interview scheduling for companies like Airbnb, Stripe, Yelp, Thumbtack and more. She is a financial professional turned engineer! She taught herself how to code while building her first enterprise software at Freescale Semiconductor, Inc., at which time she was a financial analyst. The software got adopted company wide.

Some interesting things about her:

1. She caught a thief using Twitter (check out - gone viral on Hacker News, Reddit, Facebook, Twitter and Youtube

2. Her team at won 3 hackathons - Salesforce $1M, Toyota and Launch hackathons

3. Her team built Etch Keyboard which was featured on the App Store for 3 weeks.

4. She still has a CPA license in good standing

The Convo

Interviewer (ZP): What was the size of your first check?

Ahryun Moon (AM): $100 was the first check. What happened was right before Alchemist, I was down and depressed and going to a bunch of people asking for advice and feedback and money. I then went to Edith and she, after hearing me out, said, “Hey I'll be your first investor, here's your hundred dollar check. You can put me on Angel list.” With investors the very first check is important so you can put someone's name on your angellist. That’s hard to get. The very first person that wants to be on your investor roster is always challenging. She said to just use her name she’d give us the one hundred dollars. I have kept our hundred dollars even today. So that $100 is still on my cap table, as I really love the fact that she believed in me when no one did. So my first check was $100, and then the second check was 10k.

ZP: What about the first check over 25k or more?

AM: Oh 25k or more. The first time that a check was larger than 25K was 50k.

ZP: And when was the closing date you received it.

AM: We closed the check on the day of the demo day.

ZP: And it was just that simple?.

AM: He came up to me and said he was just ready to write the check.

ZP: What industry is your company in.

AM: HR and Recruiting.

ZP: Tell me about the process of closing that check and from start to finish. How you were introduced all the way through to actually having a check in hand or money in the bank.

AM: For the 50k check, he was in the audience at the demo day. He loved it. He came up to us and he was literally ready to write the check. I think we got the check within a few days or a week or so. He didn't have any other references. He just saw us at demo day and liked us. Sometimes you can really run into someone that just believes in you and gives you unconditional love for the product that you're making. So I am lucky with that. But I think you just get lucky sometimes.

ZP: So what was it like doing that to the first 10k check.

AM: The 10k check was when we were going negative, negative, negative, and we were about to break our 401k. It was one of the Alchemist Mentors and he liked our product from the beginning. We were so afraid of asking for money at the time.

ZP: How did you meet him?

AM: He was one of the mentors that we paired up with at one of the events, the CEO mentor event. We did speed dating, he was one of the three people there we met. He liked the idea and we never asked for money. We didn't know to ask for money at the time. We invited him over to our office and we talked for another hour or so after the event. That was after a month or two after we met for the first time. And then we mentioned, “Hey we are looking for investors”. And he simply said “How much”. We told him we were looking for 10k. And he's said, “OK. I don't have a check with me. I'll wire you the money as soon as I get back to my office.” He wired it within a few days.

ZP: Wow. Was there any back and forth between you or was it pretty straightforward?

AM: It was really straightforward. People who argue with you and nitpick on this or that and say “I want to see more proof”, they never work out. Investors that ended up giving us money, you can tell from the first meeting that they believe in you and will give you support. So I'll say my advice is this: it's the ones that give you bullshit excuses and say you’re too early, you're too late in the stage, you're pre-revenue you or your team is too small, move on to the next person. They will not give you money. They never gave me any money. People who said those things never gave me money.

ZP: Those things were just an afterthought when they just believe you.

AM: Yes. I think I took them extremely personally in the beginning and that made me really, really depressed. Whenever I get that kind of excuse next time I wouldn't too depressed. I will just say, “Ok fine. Next person.”

ZP: Is there anything else you'd like to share? Maybe something that stuck out with a new kind of angel fundraising process in general or specifically with all the checks that you're trying to close.

AM: Yeah. Everyone told me not to cold email. Everyone told me not to cold call investors. But I did. I closed our last 100k check with a cold call. So I wouldn't say cold calling is the worst thing you can do. Once you run out of referrals you have to cold call and sometimes you really meet the right person while doing that. So I would not advise against cold calling.

ZP: That's good advice. cold call. OK. Well that's really good thank you.