How to Navigate Today’s Rich Fundraising Environment as an Early Founder
I’ve been studying abroad in Florence, Italy for the last few months. In a short window of time, I’ve seen and done a ton. As I get ready to head back home, I’ve taken some time to reflect on my recent experiences. Doing so has provided me with a unique insight: Americans are impatient as hell.
Cultural comparisons really are fascinating. I used to worry about how close the nearest Starbucks was. Now, I’m worried if I’ll ever again witness the passion Italians have for soccer. If you haven’t yet experienced this, it’s quite amazing. Entire restaurant staff would drop everything — almost literally —to run and watch a match development being broadcast on a tiny TV in the back kitchen. No joke.
Anyway, in wrestling with these recent reflections, I’ve stumbled onto an important maxim often taken for granted:
Time is our most important nonrenewable resource.
There’s no room to waste it. How you use it matters…especially when raising money.
“Being present” isn’t just some cliché used outside the business world. It’s a mentality. There’s a reason we praise those individuals with a “presence of mind”. They deeply understand the value of their own time and how it relates to whatever it is they’re working on. They are efficiency gurus.
Let’s face it. We all could use a little more presence of mind. Think about the many distractions we encounter and fall victim to on a daily basis. Social media, emails, what the person at the desk next to you ordered in for lunch.
We often plan for the next milestone before knocking out the one right in front of us.
There’s an interesting paradox here. While planning ahead is important, if not critical to one’s business, it can also be incredibly costly if done incorrectly. For instance, you’re thinking about the fundraising trail for your Series A in about six months, but you haven’t yet determined your burn rate and runway. You’ll have successfully planned for that next objective, while at the same time ensuring that you never actually make it there. This is one loop you don’t want to be apart of. Don’t plan ahead at the expense of more immediate issues that demand your attention. Especially at an early stage.
In other words, it’s not about if you plan, but how you plan.
As a founder, you’ll wear many hats. It’s part of the job. Multitasking, whether you believe in it or not, will be your best friend. Get comfortable with it.
And, remember the self-awareness and composure you developed from a true presence of mind? Well, you’d ideally like to have it before shit hits the fan. Not after.
Speed is an invaluable asset to startup founders once you’ve developed your self-awareness and bedrock. The foundation of your business is the one thing you cannot afford to sprint through. In tandem with a deep understanding of your business, your VC’s business, and yourself, efficiency is a recipe for near-invincibility. We’ll return to this thought later. But, for now…
More Money, More Problems (And More Responsibility)
Just like the song.
I’ve come across a lot of young startups over the last year or so — both up close and from afar. I can’t tell you how many issues arise as a result of poor financing decisions. As Brad Feld and Jason Mendelson of Foundry Group point out in their dealmaking handbook for startups, Venture Deals:
Given how important precedent is in future financings, if you reach a bad outcome on a specific term, you might be stuck with it for the life of your company.
Pay close attention to the precedent you’re setting. It’ll stick with you.
I realize this might seem obvious. But, then why isn’t it focused on more? Perhaps, it’s that the current —wildly successful — fundraising environment is sending the wrong message to seed and early-stage founders. Perhaps, it’s allowing them to fly too close to the sun, as Icarus once did.
Let’s find out.
Observation #1: Less are receiving more, and for longer.
How much more?
Some $28 billion. According to PitchBook, 1,683 venture-backed companies raised $28.2B in funding during 1Q 2018. That’s the highest amount of capital deployed in a single quarter since 2006. More money has been invested in 1Q 2018 than in all of 2009. Wow.
There’s a lot of cash out there.
That same cash is lasting companies just over eight years in the private market. Eight. More capital and less recipients means better-funded companies. There’s less of a need to raise serious capital through the public markets (an IPO, or direct listing nowadays) when you can raise the same amount in the private markets and avoid fees from investment banks.
Just ask SoftBank.
I’m sure you’ve seen these trends playing out somewhere. Dropbox’s recent IPO (10 years later)? Amazon’s $1.2B acquisition of Ring? SoftBank’s $100B Vision Fund? The industry’s clearly red hot.
Why wouldn’t you be able to receive the most capital under the best terms in today’s funding environment?
Observation #2: As a result of the market conditions I’ve just outlined, many of today’s startups sit atop heaps of cash. They’re genuinely rich and believe it too. How could you not?
Uh-oh.
With success — both in the private markets and within individual companies — comes responsibility. Reality check: things aren’t always rosy. As a startup founder, you’re embarking on a rollercoaster ride. There’s no smooth sailing here.
As an entrepreneur in the early innings of a business, how you tread these waters could be the difference between life and death. Your mentality now is crucial to growth later. But, so is the environment you’re born into. Enter your market with the right mindset — one of practicality and precision — and you’re already wise beyond your years.
Just because the market’s successful, doesn’t mean you are too. Prove yourself first. Battle your way to the top. Then figure out how you’re gonna stay there. As Nathan Mayer Rothschild famously said:
It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.
Success is hardest to maintain, not achieve. If my recent reflection has taught me anything, it’s that having an “I’m rich” mentality as a startup is a bad idea.
So, I’ve taken some time to think about how we might steer away from the “I’m rich” mentality and equip early-stage entrepreneurs for the long-haul. Below are some ideas I’ve come up with for founders wishing to ground themselves in reality and ultimately lock-in on their business.
- Know Your Business
- Know Your VC’s Business
- Know Yourself
1. Know Your Business
Sure, this seems like a no-brainer. But you’d be surprised at the number of founders out there who don’t truly know their business. Start with the easy stuff…
Are you a hard-tech or software business? Are you something entirely different? Do you need to account for manufacturing costs or software engineers? In what quantity? For how long? What’s your rationale?
Try and put these answers into dollar figures. Knowing your runway and subsequent position on it will help you avoid crashing and burning. Don’t procrastinate when it comes to money (especially if it’s someone else’s). Are you about to fall off the edge, or is there any gas left in the tank?
Think long and hard. I can’t stress it enough. This is a pretty obvious step, but again, you’d be surprised at how little people actually know about what they need.
2. Know Your VC’s Business
You’re gonna be working with them quite a bit. They’re gonna be around for awhile. Don’t just go with any firm that’ll give you cash. Think of it like a marriage. There’s money involved. If things go south, it could get pretty ugly. Ugly enough to actually hurt your chances at success. All that blood, sweat and tears for nothing.
Do your homework. They’re doing their own. What companies have they backed in the past? Does it highlight a trend to you? What stage do they typically invest at, or are they stage-agnostic? What’s their reputation like with founders? Are they more hands-on or hands-off? Again, think long and hard about this. Don’t wait to ask these after signing the term sheet. Do this early and often. You won’t regret it.
Your answers here should align with the answers you’ve come up with for your own business. If they do, you’re setting yourself up for a good partnership. If not, move on.
You’re time matters, probably more than anything, so don’t waste it trying to make your relationship with a VC work. Let it go. It’s for the best. Like in any successful relationship, there needs to be some overlap in values for it to pan out in the long-run.
3. Know Yourself
Stick to your roots.
While you’re likely to experience a ton of change (especially early on), having a solid grasp of who you are will make consistently coming out on top much, much easier. What does your business actually need? How much capital does it actually require? What are your personal needs? After all, you’re supposed to be running the ship. These are the questions to be asking yourself. Not, how many more millions do we need to raise to officially be deemed a “unicorn” or become the next Uber?
Baby steps.
Your business is yours alone. You know what works and what doesn’t. Stick to it. Don’t deviate because others choose to. Your best friend just raised $100M?Your other friend’s company is going public? Great. Congratulate them and move on.
Drown out the background noise. Your needs are different. Go with what you know and keep going.
Conclusion
I’m aware that I might sound like an annoying parent. But when the going gets tough, having the presence of mind to make the right call goes a long way.
When it comes to laying the groundwork for a successful business, order of operations matters. Don’t put the cart before the horse.
When raising money, how much money you’re working with actually matters. Don’t go raising for shits and giggles. Be frugal. Be annoyingly stingy with your money. After all, it’s yours. And whether it seems like it or not right now, there is a limited supply to go around.
No one likes a money-waster, especially VCs.
So, slow your roll. Be like the Italians (and less like Icarus). A sense of urgency is fine, but there’s no need to rush.
Sure, as Mark Zuckerberg advised, move fast and break things.
But, do so thoughtfully.
Thank you,
Jackson Feder — Venture Partner at Contrary Capital, Summer Venture Analyst at Bowery Capital, & Senior at Boston University’s QSB
Love it? Give it a clap. Hate it? No hard feelings. Questions? Ask away! You can check out more of my posts here on Medium by following @jacksonfeder or on my personal site. If you’d like to get in touch, feel free to connect with me on LinkedIn or email me at: jacksonfederblog@gmail.com. More to come soon!
