Acing Your Marketplace Fundraise: Seed
This article was originally published on the Speedinvest blog
How to Ace your Marketplace Fundraise — 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
In this blog article, we will be focusing on the early Seed stage, however you can also check out our top tips for acing your pre-Seed marketplace fundraise here.
Raising at early-Seed stage
Let’s assume your marketplace was launched around twelve months ago and that you now have some data on how users are behaving in the marketplace. What are the metrics that investors are looking for?
Show evidence of product market fit
GMV, number of users and conversion rates are all important, but what matters more in most marketplaces is increasing product-market fit. Hence, the metrics investors are looking for are increasing repeat rates, engagement and stickiness, and these need to be reflected in your fundraising docs.
Beware of averages
The first important message we want to convey here, when looking at retention metrics, is: beware of averages.
The graph below shows a company’s average customer retention, which is decreasing over time, thus not painting a very rosy picture!
However, if we look at the same company’s customer retention on a cohort basis, the picture becomes very different:
The yellow line on the graph shows that the retention of the January 2018 cohort is at 40% after six months. The orange line shows that the retention of the July 2018 cohort is over 70% after 6 months. The fact that retention is trending up over subsequent cohorts is clearly promising.
Do your cohorts analysis
So, what we as investors love to see in fundraising documents is cohort analysis. Most founders have heard of it, but only around 50% of the start-ups that pitch to us at Seed stage have them ready to show to us. And even fewer have prepared very detailed ones.
Customer cohorts:
The starting point of cohort analysis is usually customer retention. You look at how many customers were active in the first month of the cohort and how many in the following months. You can do this with absolute numbers, as shown below on the left, or you can do this with percentages, as shown on the right.
You then evaluate the cohorts by analyzing the rows and columns:
- Retention per row should optimally flatten out at a significant level. Ideally, you may even see a “smile-” or “U-”shaped retention curve, as the product improves over time.
- Retention per column, meaning the retention for a specific month of each cohort, should ideally increase over time as the product improves.
Cohorts by AOV:
After you have shown your customer cohorts, you can then do cohort analysis for average number of orders, as shown below on the left, and average order values (AOV), as shown on the right.
As customer retention improves over time, ideally you’ll see the order frequency and AOV increase.
Revenue cohorts:
Last but not least, we reach the most insightful view of all — revenue cohorts. These indicate how much revenue is retained from a particular cohort each month over time.
It’s much easier to look at revenue cohorts on a percentage basis, as shown in the table below on the right. In marketplaces with a high order frequency, where customers make at least one order each month on average, greater than 100% revenue retention is the goal. In the figures below, you can see this is being achieved by the later cohorts.
While revenue retention for the early cohorts is gradually decreasing, in the May 2018 cohort things start turning around whereby initially revenue retention decreases and then in month four starts increasing again. In the cohorts from August 2018 onwards, we are looking at revenue expansion, or negative churn, as revenue retention increases steadily from the start.
Do it all again for the supply-side!
As you come to the end of your cohorts’ analysis and you have your customer cohorts, cohorts by order frequency and AOV, and your revenue cohorts ready, don’t forget to do it all again for the supply side!
Take the time to build excellent fundraising materials. It’s worth it.
Cohort analyses are a great opportunity for you, as a founder, to see the real picture of your business and whether you are achieving product-market fit. We highly recommend that you analyze them on an ongoing basis and include them as part of your fundraising materials to investors.
Of course, other topics are also relevant when fundraising at the early Seed stage. Cohort analysis ties into the wider discussion of unit economics that starts to become increasingly important as you become later-stage. We dive deeper into unit economics and important metrics such as CLTV vs. CAC ratio in our next blog post about late-Seed and Series A fundraising.
If you are reading this because you are currently fundraising or planning to soon, we look forward to receiving your pitch at speedinvest.com/pitch!
Get the full presentation here!
Big thanks to my colleague Alexandra Woodmann who helped me prepare this blog post.
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