Before and after achieving product-market fit, founders must size their opportunity and raise capital. Market sizing typically distinguishes three layers. The Total Addressable Market, or TAM, is the total revenue opportunity available if the product achieved 100% market share, the broadest measure of market size. The Serviceable Addressable Market, or SAM, is the portion of TAM that the product can realistically serve given its business model, geography, and capabilities. The Serviceable Obtainable Market, or SOM, is the portion of SAM that can realistically be captured in the near term, given competition and other constraints. TAM can be calculated top-down, starting with industry research and narrowing down, or bottom-up, multiplying the price by the number of potential customers, an approach generally considered more credible by investors because it is based on real data.
Startup funding proceeds through a series of stages. Pre-seed capital, typically between $50K and $500K, comes from founders, friends, family, or angel investors to develop an idea and build an initial MVP. Seed funding, typically $500K to $3M, is used to prove product-market fit, build the team, and gain initial traction, often from angel investors or seed-stage VCs. Series A funding, typically $3M to $15M, is raised when a startup has demonstrated traction and PMF and is used to optimize the product and scale the business model. Series B capital, typically $15M to $50M, scales proven models, while Series C and beyond (often $50M or more) fund expansion into new markets, acquisitions, or preparation for an IPO.
Early-stage rounds often use special instruments. A convertible note is a short-term debt instrument that converts into equity at a later funding round, typically with a discount rate and/or valuation cap. A SAFE, or Simple Agreement for Future Equity, was created by Y Combinator as a simpler alternative: it grants the right to future equity without interest or maturity dates. Both instruments may include a valuation cap, the maximum valuation at which the investor's money converts to equity, protecting early investors if the next round's valuation is very high. Each new round causes dilution, the reduction in existing shareholders' ownership percentage when new shares are issued.
To raise capital, founders prepare a pitch deck, a 10 to 20 slide presentation communicating the startup's vision and opportunity. Essential slides cover the problem (told as a relatable story that makes the audience feel the pain, ideally with data quantifying severity), the solution, market size, product, business model, traction (a growth graph trending up and to the right), team, competition, financials, and the ask. The ask slide should state the amount being raised, the key milestones the funds will achieve, and the expected runway. Supporting documents include the cap table, a spreadsheet showing equity ownership, dilution percentages, and the value of equity in each round, and the term sheet, a non-binding document outlining the key terms and conditions of an investment, including valuation, amount, board seats, and protective provisions. Runway itself is the number of months a startup can operate before running out of cash, calculated as cash on hand divided by monthly burn rate, which is the rate at which the startup spends money each month, either gross of revenue or net of revenue.