February 17, 2017
Even when capital is readily available, fundraising is still not easy. The markets are cold, and according to Crain’s and Alley Watch, early stage investment activity in 2016 in NYC is down compared to 2015. The lack of IPOs and liquidity in the later stage has a reverse domino effect on the whole investment ecosystem. The bitter election and uncertainty around world economics and the future aren’t helping either.
As a result, we are seeing a significant reluctance in seed investing. There are fewer angel investors, and those who do invest take much longer and invest much less. Similarly, micro VCs are more cautious and take a lot longer to make decisions. What used to be two or three meetings to a check, now is five or six meetings to a maybe.
This market is not likely to improve quickly. 2017 may continue to be slow and difficult for seed fundraising. Here are some practical things founders can do to be successful in this new environment.
Raise Less Capital
Start by thinking about how you can do more with less. If you previously planned to raise $1 millon, can you revise your plan to accomplish the same with $700K? Most of the time, founders ask for arbitrary round numbers like $1 million or $2 million instead of the actual amount of capital needed to achieve specific milestones.
Think about what can you cut. Work to re-budget. Hire less people. Spend a little bit less on marketing. Get rid of your office space. Try to get hosting credits from Amazon or Digital Ocean. Be creative and stingy. Spend time really polishing your financial model, and forecast, so that you can confidently tell investors why you are only raising $700K and why you know you can achieve the necessary milestones with less capital.
Lower Your Valuation
Very few things upset founders more than a low cap or pre-money valuation. Whenever founders look at a term sheet, the only important term they see is valuation. In reality, many other terms matter, and post-money valuation actually matters a lot more than pre-money valuation, because thats the true indicator of how much dilution the founders are going to have.
It is important for founders to realize that in a slow market, investors want a deal. When there is plenty of capital to go around, founders ask for high valuations. When there is little capital to go around, investors push for low valuations. Investors want a deal.
Instead of being stuck on the numbers, lower the valuation and get your round done. You thought you were going to raise capital on $5 million cap but investors want $3 million cap? Fine, agree to the deal. Yes, this is a lot more dilution, but you’d rather raise quickly on a lower valuation that not raise at all.
More importantly, if you crush it, there will be an opportunity for you to make up the dilution in future financings. A year from now, when you may need to raise capital again, your numbers will be stronger and maybe the market will be better as well. At that time, you will be in a position to ask for better terms and you can compensate for the dilution you have to agree to now.
Simply put, you can get diluted 25 percent now and 15 percent later, or 15 percent now and 25 percent later, and it is the same amount of dilution. Sure, ideally, founders want less dilution now and later, but this is not the real world, that’s not how markets work, and that’s not what investors want. Recognize the reality, give the investors a deal, and close your round faster. Also, raise less capital and your dilution will be smaller.
Meet More Qualified Investors
When in doubt, add more to the top of the funnel. This is true for both sales and for raising capital. In a slow market, the shape of your fundraising funnel changes in two ways.
First, it gets taller. It will take you more meetings and more time with every single investor. What used to take two to three meetings to a check, may now take five to six. Be prepared and ask what the steps are, how long the process will take, and what to expect. Secondly, a lot more people will say no in every stage, so it is important to triple the top of your investor funnel.
Fundraising, like sales, is a numbers game. You need to meet a lot of investors to get funding. Most say no, because seed stage companies are super risky. Just be ready to get a lot of no’s, and keep finding new investors to talk to.
While it is important to talk to a lot of investors, this doesn’t mean you need to talk to every investor out there. Quite the opposite. You can only get funding from a qualified investor – someone who is interested in your space, someone who has capital to invest, someone who hasn’t backed your competitor. Research the investors to make sure they are qualified. Do not waste your time by trying to talk to every single investor out there.
In a world enamored with venture capital, we rarely talk about profitability. Yet, profitability for a startup is the most liberating thing that can happen. When you become profitable, you no longer depend on raising external capital.
Can you become profitable by closing a few more contracts, cutting expenses, and slowing down your growth? If you can, then this is the time to seriously consider doing it. If you become profitable you will be able to control your destiny.
A company that’s profitable is also more attractive to investors. It’s less risky and it’s clear that the management team will spend the money responsibly. Even if you aren’t profitable now, make profitability your next milestone. Instead of telling investors you will need to raise more money in 12 months, build a plan that gets you to profitability.
Get More Customers
Early stage investors are reluctant to invest because the companies don’t have enough traction. Real traction is revenue and paying customers. Get obsessed with sales and getting customers, not just fundraising.
Every single paying customer gets you closer to profitability, and to ultimate independence. The more customers you get, the more convinced you are about the business and the faster investor dollars will come. Become your own toughest critic, leave no stone unturned and ask all the questions investors will ask.
Nothing excites investors more than actual paying customers and hockey stick growth in customers and revenue. Get to revenue, grow the revenue, and your chances of fundraising will go up.
Be More Inspirational
In a slower environment, the bar for everything is higher. Not only do investors expect a better deal, they will also expect an inspirational vision and a bigger story. Investors are naturally attracted to founders who have strong founder-market fit, see the future, and have the ability to make it happen.
The reason investors are attracted to artful storytelling is because they know that great CEOs and founders have to inspire customers, employees, and new investors. Founders who have a clear vision are also very resilient – they know where they’re going, why they’re doing it, and what they are doing, and that gives them strength.
Inspirational founders with massive vision are the founders who won’t give up. Take your vision and weave it into an inspirational story and investors will be more likely to invest.
Be Ready to Bootstrap
Lastly, be ready to not raise capital at all. Strong founders need to be ready for every situation, and there is a real possibility that you won’t be able to raise any capital or will raise a lot less than you set out to do.
Do you feel like investors aren’t biting, and you’ve been fundraising for months? When your fundraising is not going well, it is time to pause and re-think your strategy. It is probably time to switch to plan B and to bootstrap. The important thing is to have clear plan.
What can you do with little capital? How long can your team go without being paid? Can you tap your friends and family to help a little bit? Can you make progress on the product? Can you sell more customers? Can you execute on the business without the capital?
Having a very specific and concrete plan and having very specific and open conversations with your co-founders is really important. Come up with a plan, discuss it, get feedback and then go back and execute on it.
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