How much of a plan do you really have?
There are countless sayings and phrases that you’ll hear during the fund raising process (on both sides) but I can guarantee you that one stands out among the rest…
Once you raise, you’re always raising
We have one company that raised a seed round and doesn’t have to raise again, while another has raised $1B+ but for 99.99999% of you, you will be somewhere in between those.
As early investors at pre-seed/seed levels we take HUGE risk when you have very little generally to show in terms of a business, traction or even sometimes a product. Why? Because we’re crazy and love it but most of all for the potential HUGE return multiples that will hopefully someday justify what we do. This is why your valuation is very important to us — if we invest at a $5M or $10M valuation and then you sell for $100M, that’s the difference between a 10x and 20x. This is a game of multiples.
Lately I’ve noticed that many first time founders and/or first time fund raisers set milestones, metrics and speculative traction based on what they want but not what the next round of investors might want. For example, I just met with a startup building an app that projects with their seed round they will achieve 250,000 downloads. Sounds like a lot but my first question was “Is that good and why that many?” They didn’t really have an answer to that because they thought that vanity number alone just sounded good enough.
It’s a safe assumption that with your pre-seed/seed round of ~$500k-$2M you won’t be a profitable, self-sustaining business and that’s OK. So in order to keep the company going, you will need to raise more money, so this round will give you the proverbial 12–18 months of runway. That means you have about 12 months to hit your key metrics because it will take 3–6 months generally to raise your next round, so you will have to time it properly to make sure you’re still in business AND not about to go out of business when talking with prospective investors. Always try to raise from a position of strength!
Fundraising is rarely a clean and straight forward process:
- Always make sure your cap/valuation is appropriate and justified. Too low and you might get diluted too much but too high and it increase expectations.
- You have a set amount you want to raise in order to hit or exceed your milestones and goals. We always say half your revenue and double your expenses to be safe as unexpected things usually happen.
- We always ask if you had more money, what would you do with it… Money can cheat time (but not execution) so sometimes it’s strategic to ask for more than you think you will need.
- If you under raise, what can’t you do now that you wanted to? Can’t hire that person, can’t build that feature, can’t attend that show. You set out to raise $2M but only raised $1M, which basically allows you to do half of what you wanted.
- Sometimes talking with later stage investors early can be very helpful. While they wont invest as early, they can give you a ballpark of where they want to invest. You can then keep them updated on your progress.
- Fundraising is basically a full-time job, so you want to time it properly with your business needs.
- You can only go back to your investors so many times for additional / bridge capital. We like to make sure it’s a “bridge to somewhere,” not just additional capital to keep the lights on a little longer.
- A red flag that we often see is when your raise doesn’t line up with you financials.
We always say at the early stage that we bet on founders and their unfair advantages. One of the many skills and traits that I generally don’t hear often but we like to see if also your ability to raise capital — it’s a necessary quality as you have to do it. Your ability to multi-task, taking the lead to keep everyone updated, working with lawyers, your investors and your team is an invaluable startup skill.