The Anti-Deal Flow Fundraising Announcement

When the market crashed in March, we placed an indefinite pause on months of fundraising momentum that had just started to materialize in early checks. This was Homeroom’s pre-seed round. It was cut brutally short, and our runway was burning up.

Next quarter, we’re restarting the round. And this time we’re doing things differently based on something that not a lot of people talk about.

Unspoken rules

Over the past year, we’ve met dozens of founders who previously raised relatively large pre-seeds in SF and NYC.

We noticed that many of their stories roughly outlined this counter-intuitive sequence of events:

1. Founders tap their networks to set up introductory meetings with potential angel investors.
2. Founder messaging in these meetings is, “We’re not raising yet, but let’s get to know each other.”
3. A few angels follow up and offer to write an early check. Founders take the money.
4. Founders circle back the angels that didn’t try to get in “pre-raise” with news — they’re raising, and checks are stacking up.
5. More commitments come in, and by now the word is out because investors talk.
6. Inbound requests for information follow. With a significant percentage of the round committed, founders can start using words like “oversubscribed” with clear eyes.
7. The deal is heating up. A few “top tier” investors take notice. Maybe one or two get in on the action. If so, the round is all but over.

Whether these exact steps are taken or not, the troubling unspoken rule was relatively consistent:

Unless you are crowdfunding or part of a demo day, keep your raise need-to-know. Stick to working your way into proprietary deal flow (AKA the curated flow of pitches that land in front of particularly desirable investors). Loud deals beg the question of why they need to be loud.

Quiet rounds are bad for early stage startups

Here are a few of the things they sacrifice by playing into deal flow games:

• Less cap table diversity. The American Angel report found that 68% of angel investors in the US are white males. It stands to reason that if a disproportionate number of high quality deals are circulated among white males, then actual cap tables end up grossly homogenous. For startups, this means less perspective and an early reflection of who your company is set up to serve. More broadly, it’s the continuation of a troubling status quo with regard to racial and gender diversity in tech.
• Down-side reputation risk. Investors talking to each other is a double-edged sword. If founders don’t impress a few people who run in the same circles for whatever reason, they can unwittingly get written off by large groups. Especially if they’re new to pitching.
• Missing out on what we call True Believer Unicorns. These are high value people who are outliers in how much they believe in a founding team’s vision for the future. What’s more, they deeply align with the values driving that vision. Externally, they can’t help but spread your gospel. Internally, they occasionally become part-time satellite team members that complement your core competencies. This happens at a time when your team is small and as under resourced as it will ever be.

What now?

If you’re a startup

We’re not in the market of giving untested advice. But here’s our approach:

1. Announcing our raise by communicating what we’re looking for in investors, and explicitly rejecting quiet fundraising. See: this article.
2. Positioning our announcement within an established culture of building out loud. We happened to be building Homeroom in public. Not only is this a great channel for the raise itself, but it demonstrates a culture of transparency and inclusion. We went as far as to give our pre-seed its own landing page.

If you’re an early stage investor

We’re Homeroom, a peer-to-peer e-learning platform. And we are building a slate of tenacious investment partners who see the future of learning the same way we do. Say hi.