How to Raise a VC Round in a Bear Market

ether.fi recently raised a round of financing during the depths of the crypto bear market. Fundraising is never easy, but there are definitely ways to make it less hard. The good news is that if you focus on what matters you can get it done in any market conditions.

Before going down the path of a VC round there are two questions you need to ask yourself as a founder:

1. Do you actually want to do a startup? why?
2. Is your startup idea venture fundable? do you want to run a venture funded business?

We’ve been living in a world where money has been free for so long that these questions almost seem kind of quaint. However if you don’t honestly take time to think them through you could end up going down a path that makes you miserable for years and wastes a lot of your time and other people’s money.

A startup is a special kind of business. A startup is a business designed for rapid growth (usually tech enabled.) Startups are really hard. The odds of success are stupidly low, and the ROI vs just taking a high paying job at bigco never makes sense.

Lots of people romanticize the startup experience. There are a lot of movies and shows that make it seem like a giant party. The reality of the experience is that it’s a stressful grind with tons of ups and downs that probably takes years off your life (or at least it feels that way.) The rewarding part of the journey is building something alongside great people and getting to see your vision turn into reality. For most people it’s not worth it. You have to be a special kind of crazy.

My advice to any potential founder would be to work at a super early stage startup for a few years before trying to go down the path of starting something yourself. You’ll learn a ton and you’ll get to see the experience first hand without the extreme downside risk.

If you do decide to go against reason and probability and found a startup then it’s important to make sure you are working on something that makes sense from a venture math standpoint. It has to make sense at a physics level, or else you’ll burn years trying to make something work that was never meant to be venture funded (e.g. never meant to grow 300% a year.)

It’s very easy to convince yourself, and investors, to dump money into something if the story is compelling. Resist the urge to bullshit yourself into trying to build a physical manifestation of an Escher contraption. It looks awesome as a drawing (or a pitch deck) but rarely works out.

The best way to make sure that you’re not bullshitting yourself is to get actual traction with customers. Traction looks different depending on the business, but in most cases it’s users and revenue, with somewhat sane unit economics. So it’s usually a mistake to raise money before before you have something real with customers.

Once you have traction with customers you will usually have some sense of the customer acquisition mechanics and unit economics. At that point it becomes easy (or at least possible) to see if the business could credibly and quickly scale to >>$100MM in revenue with positive gross margins. Which is another way to say that it’s venture fundable. These things are not always obvious, but they’re sure as hell more obvious than if you haven’t done any customer development and instead just made some shit up and put it on a deck or built a random prototype that no one has tried or paid for.

Notice that so far I haven’t talked about any of the mechanics or process of raising money. The reason is that most of the work happens before you go out to raise. If you’ve done the work then the raising process is just about the mechanics and fine tuning your pitch, which are tractable problems.

So starting from the position of someone who has an MVP with users and possibly revenue, what are some of the more common mistakes?

Common Mistakes

Not spending time and $ on a pitch deck

• The deck should be beautiful, easy to understand and super clean. A poorly thought out or poorly designed deck will tank your fundraise. There are lots of guides on how to build a pitch deck. Spend a bit of money to make it pretty, and spend a lot of time honing the story. Don’t go after your most high-value investors first (see below.)

Cold outreach

• Every VC fund has a link on their site to submit a deck or business plan. If you click that link you are guaranteed to never be funded by that investor. Never do cold-outreach. But what about..? NEVER DO COLD OUTREACH. See below.

Pitching investors who are not a fit

• If you’re building a B2B SaaS startup, you are wasting time pitching investors who only do B2C or only do crypto. You need to be targeted with your approach because you only have a few weeks to pull things together before the round starts to get over-shopped and fizzles out.

Bullshitting yourself and not listening to market feedback

• If you keep hearing the same feedback from investors it’s important to iterate on your pitch and vision, and to ask yourself the hard questions about whether what you’re working on makes sense. The fundraise process is a great opportunity to refine your vision.

Moving too slowly, dragging fundraise out for months

• Deals make their way through the VC grapevine remarkably fast. After a few weeks of pitches pretty much every well connected VC will have seen your deck. This means that if the round doesn’t wrap up after about a month or two it starts to feel over-shopped and few people will touch it at that point. You’re better off pausing, going back to get more traction/customers/revenue and then re-booting the fundraise in 6 months.

General Rules for Running a Process

Have a viable idea, with real PMF, don’t bullshit yourself

• The most important thing, as emphasized above, is to actually have a viable business. If you don’t have that then everything else gets harder. Don’t bullshit yourself, listen to your customers and iterate quickly.

Have traction, don’t assume you can raise on a deck

• Unless you have a track record of founding and exiting companies you will likely need to have some traction before you can raise institutional capital.

Network with other founders and get intros to investors

• The best way to get introductions to investors is through founders. The good thing about (most) founders is that they’re willing to help other founders. If you just reach out (it’s ok to do cold outreach to founders) and ask, most founders will reply and give you feedback and if they like what you’re doing they’ll introduce you to their investors.

Run a super tight process, move fast fast fast

• As mentioned above, one of the ways to tank a round is to move slowly and drag things out. You need to make a list of target investors, get introductions lined up and try to run through pitches over the course of a few weeks. Ideally within 4–6 weeks you have term sheets.

Practice pitching low risk investors — your first 10 pitches will be trash

• Your first 5–10 pitches are going to be terrible. I’ve done 10+ fundraises at this point, and still every time the story and message starts out weak and gets better as I hear feedback and battle test the ideas. Start by pitching friendlies who will give you honest feedback and then move up the chain as your thesis gets more refined.

Abort if you’re getting consistent negative feedback, go back to step 1

• If you’re hearing the same feedback over and over, take a hint. It could be that you’re a genius and no one gets you, but more likely you’re just missing something. If you’re hearing inconsistent feedback and random reasons for rejection then most likely there is some other underlying reason that no one is willing to tell you and it’s important that you figure out what that reason is (it’ll probably be uncomfortable to hear, so work hard to seek it out.)

Under any market conditions the starting point always needs to be having a real business that makes sense. Once you have that then the mechanics of fundraising come together naturally. Reach out and get help from other founders who are building in your space and refine your story and vision. Avoid some of the common pitfalls and you’ll do fine.