Acing Your Marketplace Fundraise: Pre-Seed
How to Ace your Marketplace Fundraise - Pre-Seed
At Speedinvest Marketplaces & Consumer, we see thousands of marketplace pitch decks each year from truly remarkable founders with fantastic and innovative business ideas. Over the years, we have noticed several key areas where founders could really make a difference in the quality and impact of their pitch.
We have collected those learnings in a series of three blog posts, one for each of the three stages Speedinvest invests in: pre-Seed, early-Seed and late-Seed/early Series A. We define those stages as follows:
- Pre-Seed: A marketplace that is still in development mode and pre-revenue
- Early Seed: A marketplace that has been live for less than twelve months and has started to monetize
- Late seed & early Series A: A marketplace that has been live for more than twelve months
The critical elements we will cover include:
- Market sizing
- Competitive analysis
- Sources & market research
- Customer and expert insights
- UX and product validation
- Network effects
- Measurable KPIs
So without further delay, here are our top tips for acing your pre-seed marketplace fundraise!
Be clear about your monetization potential (and show your math!)
While many founders focus on gross merchandise value (GMV), investors are even more interested in your monetization potential, which is derived from your take rate. Start here, at the percentage of GMV your startup can monetize to derive net revenue potential. To make the potential of your business even more comparable across marketplaces you can then make an estimate of your gross margin as a percentage and then derive the gross margin potential of your business
A healthy rule of thumb is that if the gross margin figure is above $1bn, the monetization potential will be sufficiently attractive from an early stage investor perspective.
Be thorough in your competitive analysis
We tend to see a lot of charts presenting how a startup differentiates itself along two axes or criteria. While this is a nice way to structure a competitive landscape, it is not a comprehensive competitive analysis. Ideally, founders create a DD document that compares their startup to others using multiple criteria, including number of users, geography, total funding and supply- and demand-side characteristics. Furthermore, it’s always great to include your key USPs, why your approach is superior and why you will beat the competition.
Provide sources & market research
In order to prove your startup is solving a problem, many founders quote facts, figures and study results in their pitches. However, what is commonly left out is a list of sources. Our recommendation is to provide investors with access to a data room. It should contain any relevant materials that will help them better understand the market and problem you are solving, such as studies, articles and research papers. You can even go one step beyond this and provide a short summary of the most important points.
Since we first and foremost want to understand the market dynamics and how a marketplace will increase efficiency, it is helpful to explain the market structure. For example, how fragmented is the market? How many buyers and suppliers exist? What is the role of any middlemen or brokers?
Gather customer and expert insights
Surprisingly few of the startups we speak to have conducted first-hand, in-depth market research by talking directly with customers or experts in the field. We highly recommend, when you start your business, that you conduct a significant double-digit number of interviews with experts and prospective customers and suppliers. This will provide insights and (hopefully) evidence that backs up your claims about customer/supplier pain points. One of the best ways we’ve seen this presented by a startup was through a data room containing interview highlights plus transcribed texts and audio files. A great tool you can use for audio transcription is otter.ai. If you have limited time or want to reach more respondents, you can also work with service providers that help you speed up the interview process.
Go beyond screenshots of your MVP
When talking about UX and product validation, it’s a common practice with consumer marketplaces at the pre-Seed stage to include some screenshots of the MVP in the pitch deck. That is fine. However, it’s even better if you can demonstrate how users actually interact with your product and how you approach product development and testing (ideally in a systematic, user-centric way!). There are some great tools and service providers that can help you test your UX - you can find a list of recommendations in this blog post from Neil Patel.
Don’t forget Network Effects
The magic of marketplaces is their ability to generate a high degree of defensibility through network effects. So, it’s interesting to see how many founders leave network effects out of their pitch. We recommend that you really underline how you have structured the business in order to develop strong network effects – from explaining your marketplace dynamics to describing the different network effects at play, for example, direct, two-sided and data network effects.
Create a detailed budget plan
When it comes to financial forecasts at the pre-Seed stage, we often see incredible hockey stick curves predicting phenomenal revenue growth. However, we all know that this is like reading from a crystal ball… While it’s great to be ambitious, it’s more useful to provide a detailed budget plan for the next 12 to 18 months. This demonstrates knowledge and understanding of the key drivers and levers of your business, such as the ramp-up of demand and supply, monetization and planned hires.
Include all your measurable KPIs
Though businesses at the pre-Seed stage are usually still in development mode and typically pre-revenue, there are usually a couple of KPIs that you can (and we encourage you to) report. For example:
- Number of sign-ups or wait-listed users
- Engagement metrics and repeat rates of beta users
- Any pilot agreements (if it’s a B2B marketplace)
- Pipeline of advanced customer conversations
- Number of supplier profiles created
Take the time to build excellent fundraising material. It’s worth it.
Having gone through all the recommendations above you might think: "That’s a lot of work - sounds like quite a spoiled investor who would be asking for all of this." I would like to address this concern as follows. First, nobody benefits more from going through those exercises than founders. They get to understand the market better and can make more informed plans. Second, investors often evaluate several startups in parallel and have certain time constraints. So the better information you provide, the more you can frame the investor's opinion, help the investor avoid looking at the wrong research, and steer them clear of the wrong experts and wrong conclusions.
We look forward to receiving your pitch at speedinvest.com/pitch!