Fundraising Is Hard. Period.
This founder is about to start a fundraising round and needs some help/feedback
This post is long and complicated, so I would appreciate it if you could read all of it.
For context, I am currently running a startup operating in a specific niche of enterprise networking hardware and software. I launched the main product about one year ago, and it has so far generated around $400K in revenue with very healthy gross margins (About 50% gross margin for the hardware and near 90% for the software). Furthermore, 100% of this revenue came organically as I spent almost nothing on ads.
However, I don't have a lot of cash as I made a few mistakes when launching the business, which forced me to sell at a loss to keep my customers happy. But it's all good now as the brand name is stronger than ever before, the business is 100% debt-free, and I expect to make $200K in profits next year if I don't pursue my fundraising plans.
We are the first company to create this product (Let's call it product "A") even though many have tried and failed. Product "A" can save businesses up to 60-90% of costs than if they used traditional solutions and is overall a superior solution for most use cases. Product "A" is proven and already used by Inc500 companies.
I got into this industry when I was very young. Eventually, I wrote a very successful book about it when I was 20 and my entire professional life has pretty much been dedicated to it. My book has generated $100K in sales and pretty much funded the launch of the company.
According to one of the most reputable research/consulting companies, the industry we operate in had a TAM of around $1B with a SAM of $400M. That was back in 2016-2017. Now, I would estimate it is at least 3x to 5x that as the market had insane growth during the pandemic. My top competitors are $50M to $500M companies, but they are all providing the traditional solution, whereas we are the only company in the world making this specific innovative product "A" which cuts the need for my competitors in most use cases.
My problem (Or maybe blessing?) is that I realized I am sitting on a much bigger potential than I initially thought because my product could be streamlined and made so much easier for the end-user by incorporating all of its components into a single device (Let's call this device product "B"). I apologize for this being vague, but I can't get into too many details without exposing my identity.
This device (Product "B") will come as an all-in-one solution, and I am near certain with financial and research data that if I build product "B" and market it correctly, it can generate $30M in annual revenue within 2-4 years with a NET profit of 15-20%. Furthermore, product "B" would be a true market disrupter that is accessible to every user who needs it, as it will be much easier to use than product "A" and a lot cheaper.
But, how do I expect to get $30M annual revenue from product "B", when I couldn't get $0.5M from product "A"?
I made many mistakes and had a lot of logistical difficulties with product "A" which caused me to be out of stock for two months this year. Something like this will not happen with product "B", as we now have solid distribution and manufacturing networks.
Product "A" requires a costly software subscription which product "B" will not require and will have the software 100% free.
The smallest version of product "A" has seven components, whereas product "B" will only have one component, the device itself, with modular expandability built-in.
Product "B" will cost 30% less for hardware and offer better features and performance. Plus, free software.
Product "B" will solve all of the complexity that came with product "A" and make it a lot easier to use.
I did all of the marketing and sales for product "A" myself. So, when launching product "B", I plan to have an army of professional sales men and women.
Most importantly, I made the revenue from product "A" with a $0 marketing budget, and most of the market is still unaware that product "A" exists. I believe I have captured less than 2% of the SOM, which are also the most enthusiastic users.
There are a few other reasons that I can't mention.
So, now you might wonder, where did the $5B figure come from? $30M in revenue will not make a $5B company. Well, product "B" could be further developed in a certain way to completely dominate the SAM and offer the end-user a better solution for 7-10x less than what they pay now while maintaining very healthy margins for our company. Let's call this product "C". It is 100% possible to accomplish this and have our company be the dominant market leader through technology disruption, achieving which would make it valued at $1B to $2B in about 7-10 years. I am very well aware that this will not make sense to anyone who does not understand this industry, but there's a lot more to it that I can't write in this post.
We are the only company globally with access to the talent, IP, user base, distribution, and manufacturing partners who are skilled enough to build product "B" and grow it to achieve our vision. I am currently finalizing the design and idea, and if I get the funds I'm looking for, product "B" should be ready for end-users in 5-8 months, with the $30M revenue figure being possible in 2023-2026.
What I want to do now is to raise $2M in capital to build product "B". But there are a few things I am not sure about. So I would appreciate any help possible with this stuff. I plan to talk to many consultants, but I also had some of the best advice ever here on Reddit, so I would appreciate any input.
My main concerns are:
What should I call this fundraising round? Isn't it technically round A since the company is already profitable and has a solid user base?
I am looking for a $10M valuation based on our revenue, team, brand recognition, and future growth potential. Is this reasonable? If not, what would be a reasonable figure to look at? I am very confident that once I finish building product "B", the company will be worth a lot more than $10M.
Is offering 20% of the company too much? Considering I will need to raise around $10M in the second fundraising round, which will go towards business growth. I feel like $2M for a 20% stake could be undervaluing my company.
Should I look for a single investor? Or would it be a better idea to find multiple investors?
My company is an LLC based in the kingdom of Jordan, which is a small middle eastern country. Would investors feel comfortable investing in such a foreign company? I am willing to incorporate a Delaware C-Corp if necessary. Still, I will keep a presence in Jordan as we pay $0 taxes and have access to almost unlimited and affordable talent thanks to Cisco having its largest contracted enterprise support center in the world here in Jordan.
Should I focus on US or UK investors or ignore the investors' country and try to reach out to everyone interested? For reference, most investors in my competitors are UK-based, but 52% of my users are US-based.
Should I reach out to the investors of my competitors? Since if the product works, it could be their saving grace from losing money on their investment in my competitors as they invested $200M+ in them. But I can also see a lot that could go wrong when doing this.
Is it true that investors don't like investing in solo founders? If so, will my track record make up for this?
I could potentially build product "B" without external investments or using crowdfunding. Still, I have a hunch telling me this would be incredibly stupid as it will squeeze the business and delay everything. Is this hunch correct?
My current plan is to:
Talk to as many experts and consultants as possible
Finish product "B" prototype
File for the multiple patents that I could potentially get for product "B"
Build a company profile and collect as much financial data as possible
Build a pitch deck
Build a data sheet and spec paper for product "B"
Build product "B" manufacturing, distribution, and marketing plans.
Start reaching out to investors in 1-2 months.
I know asking someone to answer all my questions is a lot, so if any accredited tech investors are interested, I am willing to offer some equity in exchange for mentorship.
This post was re-published with approval by u/TheReverent