The market is difficult and many investors put new deals on hold while taking care of their existing portfolio companies.
Aside from preparing for strong growth and low burn, what other suggestions do you have for young startups?
This is an ideal time to raise seed money. Many funds have moved heavily down market away from the big Series B/C's of 2020/2021. You now have a lot of tourists at the seed stage who are obligated to deploy capital and even if it is at 10-20% of the previous rate, that's still five $2M seed rounds for every $50-100M series B/C that used to get done. You won't get a killer valuation like 2020/2021, but you will have plenty of opportunities. My recommendation is to look for a SAFE and hope the market clears in 2-3 years when you go to raise your A round (this implies you need to give yourself 2-3 years of runway with your seed money and/or get to $1M of ARR faster on decent unit economics).
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.
> Raise as much money as you can. In 2021, this was terrible advice.
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.
Obviously this is situational, but you expect a round of funding to carry you for about two years, less for Seed. When you raise at a favorable valuation, you have to grow into it, and the clock is ticking. Throw a collapsing market into the equation and suddenly your next round is looking decidedly unfavorable.
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.
Sure, but was not raising money a better alternative at any point? It sure doesn't seem like it to me.
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.
The choice doesn't have to be between raising and not raising. Seed rounds in particular are flexible, so you can optimize between raising at $Xm and Y% dilution. For example I raised seed money in early 2021 at $25m, but the highest valuation offered was around $32m. Why not just take the bigger number? Mainly because they wanted more of the company, but the higher valuation also comes with risk, and it wasn't worth a few extra bucks that I didn't need. I was happy with that decision a few months ago when the market was still at peak frothiness, and I'm doubly happy with it now.
> 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.
I'm not sure I understand. Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation?
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.
> Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation?
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.
I don't disagree with you on the negative effects of a down round. But I'm unconvinced that it's worse than having to raise seed funding in a down market.
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.
Sure, it's not a universal law. We can imagine all kinds of scenarios where raising gobs of seed money at absurd valuations is the better choice.
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).
Your not making sense. Normally a down round has negative consequences because of what it indicates. Here it indicates something different: they got a great deal in 2021.
> I'm not sure in what universe an unfavorable round is worse than insolvency.
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.
I chuckled at this. If it's a waste of time for you to be paid and to pay your employees...
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.
If you are certain that you are going to fail then it’s absolutely in bad faith to raise more money and it’s absolutely a waste of time for everyone involved.
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.
True. But not by very much. Anyone that googled “quantitative easing” in 2021 would have been able to figure out that the boom was likely to come to an end soon.
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.
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.
Often at this level a corporate client is already serving as a backer/incubator for a promising service. It might even be an investor or promising acquirer from day zero. B2B is weird like that, relationships are multi-pathed and could easily be adversarial and cooperative at the same time. Corporate execs investing in the startup is standard practice as a way of lending political support inside the larger org (and hopefully profiting of course).
I would say $2 at $20M post-money was a very average round last year (I think the median from the top 50 seed funds was very close to this and average was slightly higher). I was hearing a lot of $3 at $30 and several $5 at $50s.
That’s insane. If you’re a founder and you own 20-90% of a 30m dollar seed stage company, you’ve essentially ballooned your paper net worth to a very nice number. A number that would be equivalent to a healthy acquisition. Obviously the founders can’t really dump those shares on the secondary market but it just feels weird for seed stage companies to be worth that much.
It’s not impossible to happen that fast. A SAFE takes almost no lawyer time to prepare, and sometimes investors think there’s good reason to move that fast. But the fact that it does happen sometimes doesn’t mean that’s “normal” in any way. Even great people with really solid ideas usually take weeks to really put together and close a deal like that.
a “3 day raise” can mean many things, imagine something like this: 2-3 strategic angel investors already in place; prior to “starting fundraising” is a 1 month period of pitch discovery during which your angels are introducing you to investors but you are “not fundraising yet”; during this period investors start asking to invest but you are “not fundraising yet”; once you hit like $500k in interest, you email all the investors you’re already talking to and say “i’m fundraising now and already have $500k in interest for a 1.5M round” and one seed fund takes the remaining $1M and you’re done (the three days is for diligence). or 4 famous angels follow with $250k checks and you’re done. it’s an orchestrated process
How do you reckon the market is for startups that have already raised at later stages and are profitable? Good time for M&A to consolidate market share?
That's a really interesting question as I rarely think of a company from pre-seed to series C as having profitability. If they have the cash on balance sheet to do smart M&A, it would only be worthwhile if the company had the human capacity to source, diligence, and integrate without compromising the core product. Integrating is the most important part of that because that's where all of the value is generated and tends to eat a ton of everyone's time. That's going to be series C/$20M+ of ARR at the earliest usually. Even then it's buying a team or niche technology, not a complete product/business/ So the answer to M&A is a yes with a lot of caveats.
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.
This is obvious, but please consider applying to YC—if accepted, it will not only give you initial funding, but increase your chance of obtaining further funding, even in a down market.
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?
I’ve also raised from Amplify and can confirm that they’re some of the most helpful investors I’ve worked with. They helped with strategy, intros, and subsequent rounds.
Second this, and not just for fashion. I went through amplify.LA at our geospatial analytics startup, Mapsense. The amplify folks were some of our best investors.
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.
The focus on revenue is definitely a paradigm shift for the current environment. It's part of my hypothesis behind Automated Capital (http://automated.capital/).
>anecdotally, it feels like hiring is a little easier.
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.
Thanks for the insights; this was exactly the sort of answer I was looking for! I sent you a DM on Twitter in case you're open to taking a closer look at my startup and fundraising plans.
Full time investor here. There have been some clear changes in the market that others have pointed out:
1. Diligence windows have increased. Nobody is rushing to deploy capital.
2. Series A and beyond feel fairly frozen at this point in time.
3. Seed valuations have compressed a bit towards pre-seed.
4. Your average joe feels poorer and is concerned about the market and future funding.
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.
Another answer which you might not like: instead of focusing on raising, build a strong product offering or major feature enhancement that fills a hole for another established company looking to jump a few spots on Gartner's Magic Quadrant and get acquired or sell the IP for a quick win and save yourself some major headaches.
Even in down economies the appetite for M&A is still strong.
We just closed a seed a few weeks ago. At least in my experience... "new deals on hold while taking care of their existing portfolio companies" never came up. Honestly I don't even think things like the massive tech re-valuation in public markets even came up (at least not that I recall). The convos continued to focus on team, market and GTM. I will say that from early 2022 to mid 2022 - GTM increased its weight in the discussion.
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.
For me, the best source of seed investor introductions (relevant firm and getting to the partner directly) was from other founders. And the best source of getting introductions to founders was, ironically, from seed investors.
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 easiest way is to reach out to entrepreneurs that have raised before and see if they are willing to be an advisor in exchange for equity in your company. If you have something they believe in, they won't hesitate to introduce you to investors they know in exchange for equity in your company.
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.
advisors who provide intros should be invested, not compensated. the social capital gain of making a great intro is enough. compensate advisors for their time spent coaching you
Unless your team is made up of serial entrepreneurs with one or more successful exits, then the only thing that really matters is customer metrics: usage, revenue, and rate of growth.
I raised a seed round in March 2020. The market later in 2020 + 2021 went kinda haywire, but between March and July 2020 it was pretty rough out there. We started fundraising a week before the country went into lockdown from COVID-19.
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!
> 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...
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.
I'm commenting on investor emotions, not whatever the fed is gonna do or the value of the dollar in the future.
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.
39 investors total (this is highlighted in the post I linked btw, with a bunch of other analysis you'll likely find interested). When we started, we planned to raise between $1m and $2m.
This is a great time to weed out bullshit investors. Like BS jobs, some don't need to exist and this downturn is a great filter for them. The ones who are still investing as normal are the ones you should still raise from even when markets are different.
Before you pitch, see if you can find out how often the investors actually fund something. Also find out if the investors are full time investors, and how large the fund is, how large the firm is. I could be wrong, but I’d guess a first-order rule of thumb is the seriousness of the investor is more or less proportional to the size of the firm & fund.
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!)
> but I’d guess a first-order rule of thumb is the seriousness of the investor is more or less proportional to the size of the firm & fund.
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)
That very much depends on where you are located. In Europe it is pretty much 'business as usual' at the moment, in the bigger cities I'd say that for the time of the year it is actually busier than usual in the start-up scene.
Some of the greatest and most successful companies or products come to light at difficult times. No free floating free money also means less competition that lives off on that money and less customers who are subsidised with that money.
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.
Either you have a product that customers clearly love and are willing to spend money on, or you yourself (and your team) are very impressive people in some way. The investor is ideally betting on both an impressive company && an impressive team, but at the very least one of those needs to be true to have a shot.
Long story short, nothing to do with your actual business or business model or innovative technology or hand-wavy "disruption" or large addressable market size or traction or any of the other things that VCs tell the plebs matter, when in reality they only matter if you don't have anything more valuable like the above. This is how companies raise ludicrous amounts of money without ever finding product-market fit, because of the Ivy league / family / prior possibly irrelevant past history matters more.
> nothing to do with your actual business or business model or innovative technology or hand-wavy "disruption" or large addressable market size or traction
I would take out "traction" from this. If a company has strong traction (that looks sustainable) it will outweigh everything else.
It's hard to prove counter-examples of companies that have had significant traction but were unable to raise money, because, well they were unable to raise money. The only alternatives are those companies who have had large amounts of traction, were unable to raise money, but ended up being successful anyways by bootstrapping or finding some alternate method. But it's not generally / necessarily true that companies that have strong, sustainable traction will outweigh everything else because the counter-examples are just not obvious. Intuitively, I can imagine that there have indeed been companies that have had great / strong traction, but have no Ivy League management team, no VC connections, no real family strength, no past history of success, and none of the other things that were described above, and thus, despite their strong traction, they were unable to raise money.
The traction has to be able to be turned into money -- a consumer "rate the celebrity" app could have millions of users but not really be investable. But I haven't seen any cases where an investor says, "They have real traction, that can grow at venture scale and at strong economics, but I don't like the founder." It's just extremely uncommon. Usually "dislike of founder" (with all of its biases) comes when you have to put a lot of faith into the company, not where the company has already proven itself. Of course -- investors can simply be wrong about the growth potential or unit economics or sustainability of traction -- but that's different.
Some of the points I listed do require some level of competence. (Such as authoring a popular OS project, or not losing existing wealth through poor judgement)
However, it does not necessarily mean the person has competence to be a good founder.
To clarify, I said it would "ease" getting an initial investor or close a seed round.
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.
Tap the alumni network for Angel investors, for starters. Also, just having your university listed on your people slide will help. But you’ll still want warm intros to VCs, since cold outreach from Ivy students won’t necessarily get you past their filters.
As a startup founder but also angel investor I’d say: Just do it the way you normally would. I’ve written down the experience + template from our last round (before the market went down) and how to do it efficiently here: https://www.questmate.com/fundraising-for-startups .. Happy to help you with your round.
Sadly, in a downturn VCs seem to back their connections (most likely their alma maters) when making choices. It is a bit obvious if you think: They choose ideas which have been pitched by people within 2-3 degrees of connection if they went to same/similar known schools. Although it doesn't change quality or success chances, the proximity provides some degree of personal vetting.
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.
Not sure I understand, now is the best time to buy. If you're going to find a cheap hidden gem, it's now. Not when you're having to fight with hundreds of other investors all bidding on the next Facebook.
From where do you have that information? The circles I know of are all increasing their investments at the moment. Way too much capital lying around even before heavy inflation hit; keeps rotting even more rapidly now.
Depends on what the startup is about. If you're in the business of hardware, biotech etc. that _requires_ an initial investment, just don't. Particularly if you're building SaaS, I'd seriously consider bootstrapping. Just build your MVP yourself, possibly with a couple co-founders if you need help on the tech/business side. Then validate the hell out of it. This way you will both prime yourself strongly for success, avoid unnecessary dilution and come out stronger with truly useful skills, without relying on a whim of VC bullshit.
If you hurry up maybe you can manage to raise in a non-down market.
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 feel like focusing on building revenue should be the focus of pure SaaS founders and then reach out to investors to leverage growth - something that can be done more easily once they've hit "proof of market". That's part of my hypothesis behind Automated Capital.
How does one get the kind of connections to even raise a seed round? I'm in the Midwest, and unless I'm doing AgTech or something B2B no one wants to talk to me. I have a B2C SaaS product that could take off like a rocketship if I had more resources to dedicate to it.
Homechart, the all-in-one household data management solution. Keep your household in sync and have all of your household data in one simple app. https://homechart.app.
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.
I don't think you hit product market fit, though. It should be pretty obvious. If you had, and the market was as big as you say, then people would be flocking in just by word of mouth. I would suggest to iterate on product, talk to your users, get some good metrics on usage, etc. There's great content about that at the YC YouTube channel.
By this logic, all startups that have achieved PMF have only done so via word of mouth / organic growth. This is false.
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).
(Assuming you would want it to be your full-time job if it could get there): how close is it to making enough for it to be your full-time job? If it's profitable, one way to look at it is that you have an unbounded timeline for learning/figuring out the marketing to grow it. You don't necessarily need to raise a VC round for it.
Indeed, the problem I run into with marketing in general is building a brand is _expensive_. Either you spend a lot of money or a lot of time to build a brand, neither of which I have an excess amount of at the moment. So I'm trying to split the difference by having a marketing firm help me build the brand while I continue building the product.
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 don't think you need to build a brand — you say that you're already getting organic search traffic, so you can probably just focus on performance marketing (i.e. figuring out what other things people are already searching for and bidding on those keywords). Building a brand is a roundabout way of doing that (get people to know about your brand, and then hope that they search for your brand to find your product).
I am not a marketer though, so take this comment with a big grain of salt.
Find a great market, understand it in depth, understand what product will be extremely valuable, and a plausible way to get to market. Make some progress building the product and getting customers interested.
Make a nice pitch showing all these things. Make the pitch to 100 people.
I do early stage (first check) investments in companies using Ruby on Rails. We primarily look for founders with a long term view who will be fun to work with (not nerds). Feel free to reach out, details in profile.
Simple answer, don't rely on other people to fix a broken plan...
=)
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.
"Do you have a book or email?"
Yes, I read many books, and run my own server for email. I also keep naughty and nice lists for unrelated benign hobbies. ;-)
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.
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. ;-)
if we take a seed money
is it means we also need to do a series a b c d?
is there any investor that acts like a bootstrap? I mean they only expect you to raise a seed no need for a b c d
I can't help thinking that one of the long-term utility applications for DAO's is to present additional avenues to projects entering seed stage especially now as funding drops. They may be a tangled mess of experimental trials and error in the present state with rug pullers and crypto maximalists crowding out other voices -- but as a way to harness the power of a user community to both generate and participate in value using a project coin/token without outside influence -- when looked at this way then using a DAO model for bootstrapping could offer projects a nontraditional way through the downturn while sharing the risk with a community who believe the risk is worth taking.
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.