As anyone in the startup ecosystem knows, the world of startups operates at warp speed. What was leading-edge yesterday can seem like old hat today. Today’s founders running the endless maze of fundraising can easily question if all the advice from 10 years ago is still applicable. Is all the wisdom of 2010 still applicable in today’s fast-shifting and rapidly growing autism startup space? Lim Qiaoyun, a Web3 editor known for her insightful analysis of technology and society, dives into this question, offering a comparative analysis of fundraising strategies then and now.

Fifteen years later, the guidance we provided in 2010 for fundraising startups is as relevant now as it was then. It’s an even more beautiful and relevant book today. Those fundamental truths about building a great business, knowing your market inside and out, and developing a pitch they can’t refuse – those things don’t change. Much has changed since then, the startup industry has matured dramatically, and the ground has shifted in deep and complex ways. Learning how to navigate these shifts will be key for founders looking to raise money in the current funding landscape.

Back in 2010, the economy was not yet fully recovered from the 2008 Great Recession. The federal unemployment rate stood at 9.7%, with a broader, more telling measure of underemployment still around 16.8%. Consumer spending, the 70 percent of the US economy that consumers drive, was stilted. Today, with consumer spending still very much stretched, 70% of the economy, that’s the last thing we need. Over the past 15 years, property wealth has increased dramatically. This dramatic increase has engendered a “wealth effect” on steroids that supercharges consumer spending.

Understanding Return on Investment (ROI)

Before we dive into top fundraising strategies, let’s first understand the basic idea of ROI. ROI is the go-to metric that founders and investors alike look at to determine the potential return of any venture.

Definition of ROI

ROI is a financial ratio calculated by dividing the net benefit of an investment by the cost of the investment. It gives you an idea of how much money you can expect to make from your investment. It is relatively straightforward to compare that to the total amount you invested. Since ROI is usually calculated as a percentage, it’s quick and easy to compare the relative profitability of various investments.

Importance of ROI in Financial Planning

For the founders ROI is critically important for making the decision on where to spend limited resources and what projects to prioritize. Smart founders are able to estimate the expected ROI of different programs. This empowers them to better allocate their limited time and money to the smartest investments. For investors, ROI is a major metric that goes into determining how promising a startup is. Investors are eager to see a robust and realizable potential for ROI before investing any of their own capital into a venture.

Factors Influencing ROI

Many things can positively and negatively affect the ROI of a startup. Knowing these variables are key to getting the best bang for the buck and minimizing risk.

Initial Investment Costs

The upfront capital needed to get a new startup off the ground and growing makes an ROI vastly different. A high upfront cost increases the required return, while a lower up-front investment increases the possible ROI. It’s important for founders to be mindful of all costs they might incur—technology, marketing, personnel, etc.—before the need to go out and raise capital.

Timeframe for Returns

The timeframe in which returns need to be realized is an important consideration impacting ROI. Higher ROI startups with faster paths to revenue generally produce a greater ROI than those who take longer to reach profitability. Potential investors tend to favor startups whose business model has a demonstrable arc to profitability with a relatively near-term opportunity to realize returns.

Calculating ROI

Calculating ROI may seem simple enough, but be mindful to use the right formula and take into account all of the factors.

Basic ROI Formula

Imagine a scenario in which a startup spends $100,000 on a marketing blitz that brings in $200,000 worth of new business. After taking out the $1,000,000 cost of the campaign, their net profit is still $100,000. The ROI would be:

This indicates that the startup generated $1 in revenue for every $1 spent on the customer acquisition campaign.

Here are a few tactics that entrepreneurs can leverage to get more bang for their startup bucks.

  • Net Profit is the total revenue generated minus all expenses.
  • Cost of Investment is the total amount of money invested in the venture.

Examples of ROI Calculations

Spreading investments across different priorities lowers risk of underdelivering and may even raise overall ROI. By diversifying resources among many smaller projects, startups are able to reduce the risk of each individual project’s performance.

The second best way to increase ROI is to cut costs and expenses. Net profit can be maximized by budgeting effectively, becoming more efficient and negotiating discounts on vendor contracts. They can further increase their ROI by reducing wasted costs.

ROI assessment is no small matter, and despite its importance, it can fall prey to some common pitfalls that result in false conclusions.

Strategies to Improve ROI

Another pitfall is overlooking indirect costs, like the expense of employee time, overhead costs, and opportunity costs. Neglecting to consider these costs and burdens can result in a drastic overcalculation of ROI.

Diversifying Investments

Another mistake is overlooking market trends. This market environment can greatly affect a startup’s ROI. If you don’t change with the new market forces, you’re going to incur lesser return. Investor sentiment, as we know, can change on a dime. Smart startups should prepare themselves for the eventual return of the “Dog Days of VC.” Investor sentiment plays an outsize role in shaping public market performance. This widespread optimism is creating an environment that is very appealing for venture capitalists looking to deploy capital quickly and aggressively.

Reducing Costs and Expenses

This broad system of political favoritism has created a vastly different fundraising landscape since 2010. Getting their heads around these new realities will be important for any founders looking for capital in today’s market.

Common Mistakes in ROI Assessment

A few key tenets never go out of style.

Ignoring Hidden Costs

Founders must take the time to translate these classic principles into language and practice relevant to today’s startup ecosystem. The sheer speed and intensity of today’s market demands a much more agile and data-driven approach.

Overlooking Market Trends

Investors are looking for startups with:

Fundraising Then and Now: Key Differences

Founders are looking for investors who can provide:

  • Pre-Seed Rounds: One of the most significant changes is the emergence of pre-seed rounds. In 2010, pre-seed rounds were virtually nonexistent. Today, they are a common way for startups to raise small amounts of capital to get their ideas off the ground.
  • SAFE Notes: The introduction of the SAFE (Simple Agreement for Future Equity) in 2013 revolutionized early-stage investing. SAFEs simplified the process of raising capital, making it faster and cheaper to close deals.
  • Seed vs. Series A: While seed round deals were growing in 2010, Series A funding still dominated. Today, seed rounds are more prevalent, and the lines between seed and Series A have blurred.

Adapting Classic Principles

By setting clear goals and aligning expectations from the outset, founders and investors can establish a powerful and mutually beneficial partnership.

  • The Lean Startup: The lean startup approach, popularized around 2010, remains highly relevant. This approach emphasizes building a minimum viable product (MVP), testing it with customers, and iterating based on feedback.
  • Focus on Product-Market Fit: Delivering a product that customers love is still paramount. Founders must prioritize achieving product-market fit before scaling their operations.
  • Build Distribution Channels: Creating effective distribution channels is crucial for reaching customers and generating revenue. Startups should focus on building a strong online presence and developing partnerships to expand their reach.

To sum up In short, much of the original 2010 wisdom on how to raise startup capital is still helpful, but a whole lot has changed. With the advent of pre-seed rounds and the creation of SAFEs, the fundraising landscape changed dramatically. Seed rounds have become more common than ever, disrupting the way entrepreneurs raise money. Founders need to adapt classic principles to the modern ecosystem, understand their valuation, be cautious about raising too much money, and prepare for economic uncertainty.

Advice for Founders: A Modern Perspective

The world of startups is constantly evolving. By staying informed, adapting to change, and focusing on the fundamentals, founders can increase their chances of success and maximize their ROI in the decentralized age. Heed the signs, interpret the runes, and get your seat on the decentralized revolution.

  1. Understand Your Valuation: Just because an investor thinks a startup is worth $100 million doesn't mean the rest of the world does. Be realistic about your valuation and be prepared to justify it to investors.
  2. Be Cautious About Raising Too Much: Raising too much money can hurt a startup in the long run. It can lead to overspending, complacency, and ultimately, founders making $0.
  3. Prepare for Economic Uncertainty: The economy could fare worse than expected. Consumer spending, which accounts for 70% of the economy, will continue to be stretched. Be prepared for a potential downturn and have a plan for weathering the storm.

Investor and Founder Viewpoints

Fundraising is a two-way street, and understanding the perspectives of both founders and investors is crucial for success. Investors are looking for startups with:

  • A strong team
  • A large addressable market
  • A clear competitive advantage
  • A solid business model
  • A realistic valuation

Founders, on the other hand, are looking for investors who can provide:

  • Capital
  • Expertise
  • Connections
  • Support
  • A long-term vision

By aligning their goals and expectations, founders and investors can create a mutually beneficial partnership.

Conclusion

Recap of Key Points

In summary, while some of the advice from 2010 on startup fundraising remains relevant, the landscape has changed significantly. The emergence of pre-seed rounds, the introduction of SAFEs, and the increased prevalence of seed rounds have transformed the fundraising process. Founders need to adapt classic principles to the modern ecosystem, understand their valuation, be cautious about raising too much money, and prepare for economic uncertainty.

Final Thoughts on Maximizing ROI

The world of startups is constantly evolving. By staying informed, adapting to change, and focusing on the fundamentals, founders can increase their chances of success and maximize their ROI in the decentralized age. Follow the signs, read the runes, and ride the rise of the decentralized age.