Calming the Fundraising Storm
There’s always another storm. It’s the way the world works. Snowstorms, rainstorms, windstorms, sandstorms, and firestorms. Some are fierce and others are small. You have to deal with each one separately, but you need to keep an eye on what’s brewing for tomorrow.
― Maria V. Snyder, Fire Study
You’ll find advice on how to raise money with VCs nearly everywhere. And still, when fundraising for your next round, you’ll first get a “no” as the answer. That might be not as bad as it seems, but the risk to screw up heavily is tremendously high — running out of cash has been researched by CB Insights as the second most common reason why startups fail.
Glorifying the success
The startup press is full of success stories — everyone in the startup world heard the story of Airbnb’s founders who sold cereal to survive while building one of the most popular businesses in the world. At the same time, failing is lonely and isolating, and stories of companies that haven’t ended up in glory, remain untold. (Okay, there are some exceptions, such as Startup Graveyard). The vast majority of startup stories highlighted in the media are glorifying success, and only sometimes mentioning the challenges along the way. Even more rarely can you read about the stories with no happy ending. Why is that so? Where can founders openly talk about the problems they face?
Calm/Storm’s Academy
There is one place where our founders have a chance to exchange war stories: Calm/Storm’s Academy. The latest session included two interesting stories on the difficulties of fundraising. One of our guests shared his story on how too much focus on optimizing the valuation for one term sheet destroyed the whole fundraising round. It all started with the best thing that can happen to a founder: 3 term sheets on the table, some negotiations regarding the valuation, and a quick term sheet signing with a clearly higher valuation than originally expected. Then, however, a storm developed on the horizon. An attempt to optimize the business went south and destroyed the conversion without anyone noticing why. Growth stopped suddenly. All that while going through the investors’ due diligence. In addition, the CEO — being quite confident — has announced the upcoming round to the team. Clearly too early. In the end, the team found out why growth has stopped, but that was too late to get the DD process over the line. The investor dropped off, the company had to go back to the other investors who handed in less attractive term sheets. This made them skeptical, and in the end, the fundraising round exploded. The company got some funds, but had to accept a significantly less valuation than the one offered before valuation negotiations started. Today, the startup is up and running, but the experience taught the founder to not get too excited too early on and that the final results can be completely different than expected.
The second founder shared the consequences of not doing due diligence on the investor. As simple as that. He received an investment offer shortly after closing the previous round and decided to “go with the flow” and move quickly with the process. The investor committed to investing, but then — surprisingly — never reached out to the company again. Surprisingly? No. If the founder did his due diligence, he would have known that this happened before, he would then be careful and de-risk. The problem was only he didn’t. The process was very engaging for the founding team, this resulted also in a significant slowdown of traction and therefore reduced the success of the next round.
Academy’s goal
In Calm/Storm’s Academy portfolio founders don’t receive strict advice on how fundraising works. They also don’t get a lecture on how things should not be done. The Academy is a place for founders to listen to fellow founders sharing their own stories in non-pitching mode. Honestly sharing fundraising successes AND failures by experienced founders might prevent some new founders from their fundraising screw-ups. We believe leading a startup is very similar to sailing a boat. Founders, as sailors, don’t get their skills from books and lectures, instead, they improve while on the water — watching other boats and hopefully making the right decisions by learning from the wrong ones of others in front of them.
Join Calm/Storm
Are you interested in these stories? Do you want to join this great bunch of founders? Every Calm/Storm portfolio company takes part in the Academy. Submit your pitch here!
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