Some very juicy seed and series A money is being thrown around ignorantly by the same people that caused the last bubble. I've had 2 close friends / family raise their seed rounds in the last 4-6 weeks.
Three things to be aware of:
1. VCs will take their time doing real diligence on your market / team. This means it will take 1-3 months from initial outreach instead of 1-3 days.
2. You should also be raising seed money from angels that are executives/fellow founders at your early customers / pilot partners. Ideally you fill a $2M seed round with ten $50-100K checks from these people and a great seed fund that will be value add-oriented.
3. Raise as much money as you can. In 2021, this was terrible advice. Now taking 15% dilution is not the end of the world if it is how you stretch to your next raise vs the 8-10% dilution of yesteryear.
How so? If you raised a ton of cash in 2021, you should better equipped to ride out any economic downturn than nearly any other business in existence. Most businesses do not have millions of dollars in cash in a bank account. Sure, your valuation might be bonkers, but that's better than being kicked to the curb, and inflation will probably dampen the blow anyways.
This analysis benefits from hindsight.
There are a lot of early-stage startups out there right now that raised at silly valuations 6-12 months ago, already put most of that capital to work, and now have another 6-12 months of runway ... and zero leverage in fundraising discussions. The best time to talk to investors is when you don't need their money.
I feel bad for companies with runways ending in the next 6-12 months, of course, but that's life. If they hadn't raised funds 6-12 months ago, they'd likely be in a much, much tougher spot.
> Throw a collapsing market into the equation and suddenly your next round is looking decidedly unfavorable.
I'm not sure in what universe an unfavorable round is worse than insolvency.
If you need to raise funds, you raise funds or die, realistically. No one knows what tomorrow brings. Anything else is trying to time the market.
If you didn't need to raise funds, but did... enjoy the privileged comfort of your war chest over the next few years.
> I'm not sure in what universe an unfavorable round is worse than insolvency.
An early-stage company already raising a down round and pressing on can very easily have a worse outcome than one that admits defeat and folds. You're just getting started, have years of hard work ahead, and things are already off the rails. The odds of success, low to begin with, have dropped precipitously. The business and the team are both on fire (existing equity grants blown up, employees ready to leave, lots of damage control needed). It's rough, and walking away is a legitimate alternative to buckling down for 5-10 years trying to save things.
The only way in which this can possibly be true is investor psychology. In purely economic terms, having raised equity capital at what turns out to be a "silly" valuation is unconditionally good for the company and its founders.
The company isn't off to a bad start at all. Investors are off to a bad start.
Raising at a terrible valuation isn't the alternative.
It's easy enough to think through the mechanics of a down round:
* Why would a company accept a lower valuation at all? Desperation. They need the capital to continue.
* Is a desperate company going to get good terms? No, this is how you end up with onerous liquidation preferences, lose control of the board, get outside executives foisted on you, etc.
* What happens to the team? The company landed in this predicament by being overextended, so people will lose their jobs. Morale tanks, other people leave by choice.
* What happens to the stock? It loses a lot of value. Not only is the company worth less, but there's more dilution than a typical round (which gets compounded if existing investors have anti-dilution provisions). More morale issues. More people leaving.
On and on.
Not everyone who raised at absurd valuations will end up in this situation, naturally. If they didn't spend the money, they'll be fine. (If they raised on a SAFE where the "valuation" was really a cap, they'll just have to reset their expectations. It was never really a valuation anyway. If they misrepresented things to their team though they'll still have problems.)
It's the early-stage companies who took a bunch of money on an idea and spent most of it over the last year getting to a sellable product that are in trouble. They were only doing what they were told -- floor it, spend the money, build as fast as you can, raise more in a year -- but now things have cooled, they still need to find PMF and generate revenue, and while a year of runway might seem like a lot, it's blood in the water for investors.
If you previously raised cheap equity capital (i.e at a high valuation) you have presumably used that money to create something of value (a product). Never having had that opportunity is strictly worse.
We aren't discussing hypotheticals, though. We're talking about the actual seed landscape today, which to be clear is fantastic for founders, and the actual predicaments of a bunch of companies that raised in the last two-odd years at nonsensical valuations and are now forced to accept whatever investors offer (which in many cases will be nothing -- a down round is actually a luxury).
It’s worse in any universe where the choice is between insolvency now and insolvency later, because “later” can mean wasting a lot of time and burning bridges with investors that may end up funding your next business instead.
If you think what you're doing is a waste of time, you can always leave. If it's your company, you can forfeit your shares. Why throw everybody under the bus? This is wildly irresponsible.
And burning bridges... I've never heard anything so funny. As if the feelings of investors ever really matter.
It takes a special type of entrepreneur to burn a bridge by taking an investor's money. Snubbing an investment is one thing, but taking an investment and using it as intended in good faith should never result in a burned bridge. Investors are typically understanding of changes in the market. It takes a party acting in bad faith, in which case not doing business with them in the future is reasonable, but that truth is applicable generally.
In an up market raising too much money is a function of valuation and equity. Raising too much money as a function of inflated valuations results in inflated expectations that won’t be met in a downturn.
Otherwise, if you are a profitable, late-stage company, why would you raise money at all? Either spend your profits down close to 0 to achieve business goals and only raise some money if you've got non-dilutive ROI (i.e. the margins on this new spend are superior or equal to existing margins in your profitable business and you are in land grab mode). Or just be comfortable with your current trajectory because of how well-defended you are financially. From a risk management perspective, founders should be able to live with going from $10 to $20M in ARR this year at break-even instead of $10 to $30M by burning $5-20M if it means your business gets to continue existing.
Wait is it normal for an executive of a company to invest in companies that thier company is paying for services. That seems like there could be a lot of conflict of interest.
https://apply.ycombinator.com/
Less obvious, so worth adding: if you don't get accepted, keep applying for future batches. Repeat applications are more likely to get funded. The main thing is to demonstrate progress since the last time you applied.
Edit: also, YC is very invested in not overlooking applications from compelling founders who don't have any elite or industry connections. It's one place where you can prove yourself based on how good you are, not who you know. Not that YC is perfect in that respect, but it's something people here really care about and have a lot of practice with.
Edit 2: these recent comments from pg are also relevant:
I’m about to leave my job to work on a fashion startup with my husband. There are some technical aspects to the business that I am building into products, but my immediate focus is to get his clothing store online.
I know the product(s) I want to build will be compelling, but my concern is not having enough cash to hire a small team.
At what point is it best to apply? After you have a working application environment? After you have 1-2 people on your team?
They are based in Los Angeles and I believe have had a few successful fashion startups. LA being a global fashion hub probably doesn't hurt.
I have had experience with Amplify in the past and they were always helpful and not too pushy.
In general, seed stage is less affected by the recent downturn than later stages. Which makes sense, since the time to exit for a seed stage company can be the better part of a decade, so today's macro climate has less impact.
A few tips and observations:
- from what I've seen, most seed funds are still investing, although on average at a 20-40% slower cadence than 6 months ago. On the other hand, some later stage investors are now more active at seed because that lets them keep investing while putting less capital at risk.
- assume valuations will be closer to what they were ~2 years ago. Earlier this year, the median seed valuation felt like ~$20m post, and we saw a number of $30m-$40m post money valuations. Right now we're seeing more valuations in the teens, and seed round sizes are more frequently $2m-3m instead of $4m-$6m.
- longer runways are favored. The fundraising climate over the next year is uncertain -- especially for Series A and beyond -- so the typical "raise for 18+ mo of runway" advice has turned into "raise for 24-30 mo of runway."
- cash efficiency and faster time to revenue are favored over growth in this climate.
- capital intensive businesses will be much harder to raise for.
- investor diligence is shifting away from FOMO and rushed decisions, and back toward normal diligence processes. Assume that investments decisions will take an extra 1-4 weeks for each investor.
It's not all bad news:
- anecdotally, it feels like hiring is a little easier.
- historically, recessions have been a great time to start big companies.
- there's still a LOT of capital waiting to be deployed into startups.
- "fundraises are looking like they did in 2020" is still pretty good, since 2020 was already a great year to be fundraising as a founder.
On the one hand, some companies are trimming and many others are hiring much more selectively. On the other hand, there are a lot of people out there with comp expectations set by big tech large RSU inflation and bonus levels, much of which will likely come down to earth.
I always encourage every company that is raising to start by establishing to lay of the land for them. Are they vastly outperforming? Amazing traction? Is there team extremely credentialed? Well connected? Hot space?
If you have some of those, you go the the VCs who invest in your market (research companies in your space but not directly competitive and see who funded them) by getting connected through your network and you have a reasonable shot at someone being interested at some price. You then try to use that pricing (if you think it is unfavorable) to drive other investors to a decision -- investors feel FOMO.
If you don't have this, you normally simultaneously build while either: 1. Joining an accelerator. 2. Meeting people about town until you find a believer. The slight difference in this market is that angel investors may be less likely to invest on their own because follow-on funding is an existential risk. So you likely have to find a true believer who can write a bigger check or is comfortable with that risk.
Even in down economies the appetite for M&A is still strong.
Wrt/ post-raise - be smart about how you spend and leverage the fact that you probably aren't starting off with, hopefully, high burn. Lot's of companies might be operating under an assumption that there is quick cash around the corner... it's not as "quick" anymore I suspect.
If you go through the advisor agreement at https://fi.co/fast you can get a sense of how much equity you should give up.
If your next questions is how to find these entrepreneurs, go to LinkedIn, TechCrunch and so forth and cold email people you find and ask them if they would interested in being an advisor.
Even having a small network on day 1 is enough to bootstrap but you need to consciously grow. And yes it will feel slow at the beginning.
The change is dramatic and fast though, and minds take a beat to catch up to the market.
I wrote about it here, which I recommend you read: https://www.freshpaint.io/blog/anatomy-of-a-seed-round-durin...
Some additional thoughts ~2 years later:
1. Wait if you can. Even just a few months. VCs tend to freeze up in the face of macro uncertainty. This happened in Q2 2020 when COVID was very new – nobody knew what was going to happen, so investors just paused for a few months. Then things really took off. I think we're in that "I'm not sure how things are going to shake out so I'm just gonna pause/slow down for now" period right now. Investors will get used to the conditions – regardless of what they are – after a few months. The summer is also a terrible time to raise money, so I'd suggest you wait till the fall regardless if you can. If you gotta go out now, read on...
2. If you can't land a bigger check because those VCs have cold feet (they often freeze up during market uncertainty), then you gotta raise from small checks.
3. Small checks is a numbers game, just like B2B sales. We pitched 160 investors to raise $1.5m
4. Seek momentum wherever you can. Getting forward progress from a handful of $10-25k angels is really important for your mental state, and that will flow into every new investor pitch. And it often becomes easier to raise with the more momentum your round has.
5. Be super realistic about your valuation expectations. It's not a thing worth losing a good investor over by over-optimizing on valuation. You're better off taking a little bit more dilution now and staying alive than never getting going.
6. Ignore the advice of anyone who hasn't raised in bad conditions or isn't an investor. Everyone else doesn't know what they're talking about. Even then, don't run your business off of what one person on the internet says. I feel qualified to give advice here because I raised $1.5m in March 2020, and just raised a Series A 3 weeks ago. Just don't run your business based on what I (alone) say.
We did YC as well. Think about applying if you haven't!
I don't agree with this advice. Sure, looking back at March 2020, you'd be right. But this time we won't have the Fed to print unlimited money and artificially stop the crash in its track, create a surplus of capital to deploy, and destroy the value of the US Dollar in the process. This newer downturn is us having to pay the price for the foolishness of spring 2020. And it will be far more expensive than it would have been just dealing with it back then. The dollar will never recover this destruction of value – and all we've done is transfer a massive amount of wealth to those who had capital invested in growth assets from those who didn't. (i.e. from the poor to the rich)
If you need capital at all, start raising it now and don't wait. Nobody knows how bad things are going to get, and there's no savior bailing us out in a couple months this time.
(Am a seed VC)
I'm not saying that waiting a few months will make it better like it did in 2020. My experience is that most investors don't know how to act in a rapidly changing environment. Nobody wants to look like an idiot holding a bag just a few weeks after doing a deal with a sky high valuation on a company that's hype-y and doesn't have strong fundamentals. What investors end up doing is just pausing investing to get a feel for where the market is going to end up. As a founder you don't want to pitch VCs during that "pause" period. VCs still talk to founders during this pause period, they just have little to no intention of actually deploying dollars in anything that's not completely obvious (whether they realize it or not). You see it in this thread with a few comments from VCs around deals above seed stage definitely feeling "stalled". That's exactly what I'm talking about. Founders just end up burning thru a bunch of investor leads that are no's today but could likely be yeses in 3 months time. I think we're in that pause period right now. And if a company is able to, it's probably best to wait 90 days for VCs to adjust.
So what if it gets worse? In that care investors are settled in and know the game. They'll be deploying capital, just with more scrutiny and lower valuations. Capital will still be out there – there's tons of funds and plenty of money available for seed stage. That's a better situation than the "pause" period I describe above, where founders go out pitching and investors kick tires but don't deploy capital.
Also my opinion is that the summer is the worst time to raise, regardless of macro market conditions and even in great times. Once school gets out, people start traveling, etc...the reality is that the old trope of VCs don't work over the summer is probably unfair to some in the industry, but not undeserved :)
Did you do YC before seed or after seed? If you raised after YC, aren't you also not qualified to give advice? From what I understand getting into YC is guaranteed to put you among the top while trying to raise.
Did you decide you wanted the 1.5 before starting the pitches?
I don’t know if this is what parent was referring to, but my town has a seed fund that calls themselves “angels”, but they’re not full time investors and they have a low rate of funding anything, and when they do it’s for small amounts. My business partner liked to call pitching for them “doing dinner theater” - it was literally in a restaurant. They were fine people, but they had very little idea of how to identify a good startup, and so pitching for them was both difficult and fruitless - they also didn’t really have any good advice or connections to help. It was weird, but pitching for larger funds was way easier, the larger the easier in my limited experience. The goal posts were clear, the rejections were quick and easy and helpful(!), and they gave us real and practical advice, and btw told us exactly why we were asking for too little money.
Experience pitching will reveal some things about the different kinds of investors. Aside from gauging the group of investors, probably the only other good advice I have is go around asking a bunch of people what they think about an investor, you can glean a lot from learning about people’s reputations. (Note that goes both ways - investors talk to each other and you will have a reputation soon enough, so keep your record clean!)
Entirely disagree here. I know lots of bullshit investors with big funds, and lots of serious investors with tiny funds. In fact, newer fund Is with a few million in capital will often be the most helpful and serious investors.
(Disclosure: I am a seed VC, though I am no longer in the tiny Fund I category described above)
But if there was ever a time that parties and vanity metrics didn’t matter - this is it.
If you have an actually good product you should be fine, just make sure to present yourself in the right light as the dynamics are changing. Things can go a bit more meritocratic.
- an affiliation with an ivy league school
- a prior notable technology or business contribution, such as authoring a protocol (or more recently an open source project)
- some unusual circumstance such as family relationships that causes VC partners to care more about them than a random person
- be obviously independently wealthy already
- have been a founder or high level employee involved in a very successful vc-backed startup exit
One or a combination of these will ease getting an initial investor and closing a seed round.
However, it does not necessarily mean the person has competence to be a good founder.
I would take out "traction" from this. If a company has strong traction (that looks sustainable) it will outweigh everything else.
I really don’t get how.
Are there any actionable steps you could point me towards, other than getting involved with the school incubator? I’d love to learn more.
I didn't say it would be easy.
Fundraising is generally hard and much more so if you have never done it before. Despite what some are saying, even for seed capital it is probably not as easy now as it was this time last year. Even if you have advantages over other founders.
As for steps, as another commenter mentioned, look inward. Seek out founders affiliated with your school or in your area of interest that have raised seed capital.
Cold email them, ask for advice and feedback. If you want it, I'd suggest doing your best to put aside any potential advantage of your affiliation and expect to hustle like you don't. If you land the cash, the network won't help you find product market fit.
Do consultancy. Become excellent. Build a team. Bootstrap your entire development phase. Sell enough to demonstrate the market
In my limited observation, a good number of small startups were still getting their Series B in early 2010, when most folks were still busy laying off or freezing hires. Those did have either a good university brand backing, a serial entrepreneur or both.
The best thing you can do is to speed up raising operations and also target new funds with lots of enthusiasm still. It's the same phenomenon everywhere, only the very elite people and entities can afford to sit out and not play, if you are a new VC fund you have to play even in a bear market, matter of fact it's an opportunity because the bear is reducing competition downstream as the bigger and elite funds sit this one out because their priority is survival not swinging at the fences.
I think its good to approach some angels and raise pre-seed.
Right now it's at this awkward stage where it doesn't make enough for it to be my full time job and I don't have the skills/budget to market it effectively. It keeps growing month over month via organic search traffic though, so I must be doing something right.
Ideally I'd have a co-founder or something to take care of this part of the business, fingers crossed that I find someone at startup school speed dating tomorrow!
I am not a marketer though, so take this comment with a big grain of salt.
https://youtu.be/C27RVio2rOs https://youtu.be/FBOLk9s9Ci4 https://youtu.be/0LNQxT9LvM0
There are a class of startups that do grow this way to PMF (Dropbox, slack- typically multiplayer tools). The rest do so via traditional sales and marketing (mulesoft, launchdarkly - enterprise saas).
Make a nice pitch showing all these things. Make the pitch to 100 people.
We’re looking to raise investment at the moment, and this kind of ethos really resonates with me.
hfsp
0. Have integrity, people who manage money spend a lot of time dealing with professional liars and thieves. This doesn’t mean volunteering information that weakens your negotiating positions, but rather a warning that any BS will be uncovered eventually.
1. find a product/service niche unique to your physical geographic area, as this helps keep competition to a minimum while you grow (off the public web? Even better)
2. provide value to a happy customer
3. make small revenues in an early profit-mode, and try to stay liquid (cash, and not credit)
4. start small, but keep your legal, accounting, and customs positions clear
5. never table your own assets… debt-financing is foolish when they are often predatory loans
6. find the grants, tax credits, and labor assistance programs… The American Chamber of Commerce has many great people that often provide US state business advice for free
7. Early equity is worthless if your product is still theoretical, and dividing up imaginary space-cash is a fools errand… listen when senior people without an interest in your firm give you advice. Also, when working with academic/institutional incubator programs be aware of the legal traps. I have seen many stakeholders get nailed by nasty legal loopholes that claw-back or dilute company shares before an IPO or asset transfer. Usually it is developers/engineers/managers getting legally robbed, but sometimes it is the early investors too. Again, this alludes back to #0, and why people avoid bandits.
8. Always make it more profitable to cooperate with your team, than rip you off. Most large companies know a soft target when they see one, and will often renege on small companies/contracts as policy given the legal power asymmetry. Consumer and small B2B is a hard market too, but the risks are lower than dealing with a firm above a $3B market cap. Note, this is one reason service based companies tend to survive better, as they have limited risk-exposure per customer.
9. Never get emotionally attached to physical locations (keep your office a sparse coffee/laptop space). If you can’t find a free startup incubator space in your area/school, than you may have to lease or rent dev space. In general, sooner or later these commercial leases are always a rip-off, and this is the second biggest money drain after labor. Get your legal people to explain the lease before you sign, and think worst-case scenario here... I have seen viable firms bleed out due to con-leases, and this is especially dangerous to retailers. “The only winning move is not to play”… putting cash in the pockets of a bunch of young people crammed into their garage or warehouse is a good tradition.
11. Avoid recurring expenses and subscriptions, as a company one needs to plug as many cash leaks as possible. Once, we had to pay $9k for a legal journal no one used because some trademark lawyer passing through the previous year wanted it for something (replace L exisN exus with something less draconian, and you will make money for sure).
12. Finally, ask yourself if you would advise your parents to invest in your friends business if they were a competitor. If you have to second guess this question, than you probably don’t have a sustainable business plan yet.
YMMV, just remember business mistakes always cost money.
10. "I know this likely isn't what you wanted, but it is what you asked for..." Know the 4 types of customers, and when to jettison griefer clients which only bring losses/problems/bad-PR.
This is a boring book that explains most large company structures: https://www.amazon.com/Dictators-Handbook-Behavior-Almost-Po...
Another good read (if you can stand the personality) about developmental psychology, culture, and economics: https://www.amazon.ca/Outliers-Story-Success-Malcolm-Gladwel...
Software engineering and project management book everyone has alluded to for decades, but few actually ever actually read: https://www.amazon.ca/Mythical-Man-Month-Essays-Software-Eng...
You will need to look at the local tax/legal/customs/immigration rules for your target area, before setting up a company. As of 2019, there are limits on sales and how many customers in a given US state will trigger IRS tax filing rules for international corporations... this is one reason why your corporate tax expert should not be your legal rep as well. These rules apply to Amazon/ebay stores as well... It is a $10k USD fine if you try to YOLO this part. ;-)
SPAC’s were your best bet, past tense