Should you raise Venture Capital right now?
You may be approaching VC fundraising all wrong…
There are few things more intense for a first-time founder than fundraising. Egos and emotion are mixed up with incredible pressure to get the money needed to bring your idea to life. Plus, the hype around valuations doesn’t make it any easier for anyone. And like many other situations, fundraising can often pit investors’ motivations against your own as a founder.
Media, maybe future employees and for sure your parents all see larger rounds as bigger endorsements of your idea and business. It’s hard not to get caught up in that hype. #FounderLogic kicks in when all your friends — or accelerator classmates — are raising a $10M cap so you have to too or maybe you’ll signal that your company is less attractive than theirs. Or you’ve just raised an $8M cap from a notable firm so why not raise $12M right away using that notable firm’s endorsement of you? Makes sense, right?
Pausing to take the long view on the questions of if and when you’ll seek VC money will help immeasurably in the end.
Do You Even Want Venture Dollars?
Even though it’s my job to finance companies with amazing ideas, I’m the first to tell founders that they should only raise venture capital if you meet the following criteria:
- You want to build something massive. Venture is based on backing businesses that are aiming beyond the stars. If you don’t want to touch the lives of billions of people, your business model might not be right for venture. And that’s OK.
- Never raise because you can but because you’ve got a plan. Your space is hot and people are throwing checks at you? Resist the temptation. Do not raise the stakes without a solid strategy for making it huge.
- Do you need the money right now? Is your market getting crowded and you need to box the competition out in the next 12 months or do you have time?
Multi-party seed rounds can be a lot of fun to pull together. It’s gratifying to know that so many smart and accomplished people want to back your idea. Some seed investors make incredible promoters and their influence can be materially impactful to your business. Remember though that this investment is just as much an opportunity for them as it is for you. Splashy names might make for a quick win with media but think critically about whom you invite in.
Consider: Is this investor really bought into your team and idea? Will they be an asset for the long haul? Or are they someone who’ll just promote and push you for the highest series A valuation possible because that gives them another feather in their investing cap? You might argue that long view support isn’t the nature of angel investment and you’re right. Still, know what you’re signing your team up for.
Aim for Less Complicated
One thing I’m seeing more is founders who’ve raised multi-party and multi-stage seed rounds. Lots of time spent collecting names and checks. They’ve gotten a mountain of documents, maybe a SAFE Note or some other convertible debt notes. Everything’s converting at different caps and it’s nearly impossible for them to tell what their dilution or ownership is. And sometimes I see founders who are operating 100% under the fear of dilution. They’ll take a SAFE Note and get really excited that there’s no immediate dilution.
In this hyper-competitive landscape, top talent will want to know the details of your valuation and they’ll expect equity to be a not insignificant part of their compensation. If you can’t explain your valuation or have treated your options pool as an afterthought, you won’t be able to land the people you need.
Round and Round
All this and I still believe that venture is right for many founders. In fact, many ideas and companies probably would not have a chance without it. Companies I think have smartly navigated the venture process include a couple of GC’s own investments: Grammarly and ClassDojo.
ClassDojo believed that teachers were the most important audience to initially win. They raised their series A specifically to capture that audience. Their series B allowed them to then engage with parents and to begin producing original content that would unify a conversation between all three of their audiences: parents, teachers, and kids. They raised exactly when they knew what the money was for and how it fits into their long term plans. Grammarly bootstrapped their way to millions of DAUs and profitability before even thinking about raising a round. And when they did, it was specifically to expand their engineering talent to help them realize their vision of becoming an AI-driven writing assistant. These are two playbooks anyone would be smart to follow.
If you have an idea that you’re crazy passionate about and know why it’s the right time for you to raise some venture dollars, please connect with me.