Not every startup can or should be backed by venture capital, and not every business hits a milestone with enough capital remaining to fundraise. Below is a simplified categorization of the 4 buckets an early-stage investor might place you in, each with its own likelihood of fundraising success.

Bucket 1: Everything is up and to the right

This is the ideal case for venture capital. Your growth is up and to the right and you are demonstrating good early profitability (unit economics, gross margin, positive revenue retention).

In this case fundraising should be the fastest and easiest of all the buckets, assuming you are able to validate the results, demonstrate confidence and competency as a founder, and have your data room ready (financials, compliance, cap table, etc). Here founders typically have a lot of leverage, and sometimes investors will even waive diligence if things are growing really quickly, or there are a lot of term sheets.

Bucket 2: You are growing but need to improve unit economics

If you fall into this category, you are still in a good position to raise venture capital, but you will need to articulate a compelling vision to how your growth and improvements to unit economics will translate into a profitable business in the future.

This may involve making changes to your pricing strategy, reducing costs, or increasing customer acquisition and retention. You will need to have a clear plan in place for how you will improve your unit economics and be able to demonstrate early progress towards those goals, ideally with supporting evidence.

A few examples of how this could work are:

• Economies of scale. Some operating costs are known to come down at scale. Is this enough to demonstrate profitable unit economics.
• Market share. Some companies artificially lower prices in the early days to capture market share, but can demonstrate that in the future they will be able to increase fees to overcome a hurdle of poor unit economics.
• New markets. Some companies build a playbook and show positive unit economics in one market, but are rapidly expanding into new markets. If you can demonstrate that the new markets are showing improving similar trends.
• Product expansion or loss leaders. Sometimes giving away something for free can get people in the door to then upsell or cross sell to a more profitable business.

Bucket 3: You have profitable unit economics but cannot achieve escape velocity

This is one of the most frustrating fundraising situations to be in, because you know the business works. If you fall into this category raising capital will be a challenge, but not impossible. You have a functioning business at the core, but either cannot start the growth flywheel or your business is directly tied to marketing or sales. As a founder, I have found the biggest challenge in getting funding is a disagreement between the founder and investor around valuation. Don’t let your ego get in the way of a capital - owning 10% of $1B is better than 100% of $1M.

To increase your chances of success of raising capital: