The Seed Round Euphoria

So you’ve just raised your seed round! Congrats — I’m sure it wasn’t easy.

In fact I’m sure it was hard. Excruciatingly hard.

Sweat, tears, an open wound with lemon on top.

But guess what? It isn’t going to get much easier down the road. Truth be told, your chances of raising any follow-on capital will dimish with time.

To put things into perspective, out of ≈1000 seed-backed startups only ≈40% will go on to successfully raise another round — and that percentage will continue to fall with every subsequent round.

I’m not writing this to demotivate, demoralize or de-whatever. I’m simply here to say the facts as they are. Raising money is hard.

But that’s not a problem — difficulty breeds creativty.

The problem is ego.

The euphoria of successfully raising a first round frequently leads to overinflated egos and a sense of invinciblity.

I call this the Seed Round Euphoria.

I’ve encountered this time and time again, reaching out to founders to find out more about their companies simply to be turned down by the following:

“Thanks for reaching out but we’re not interested to speak with investors at the moment. We’ve just raised and we’re not currently looking for investment. How about you follow up in a few months?”

Wait, who said anything about investment? I just wanted to learn more about your product. It looked pretty cool 😕

A founder that turns down a meeting/call with an interested investor sends a bad signal. It shows that they are not actively working on building an investor network. It shows that they are not forward looking; they are overly optimistic, not realistic. It tells me that hubris exists and may trickle down to middle management over time, harming the corporate culture. Ultimately though, it tells me that they are not mature entrepreneurs.

Now don’t get me wrong, fundraising takes a ton of time — time that founders would be better off devoting to operations; to hiring, to building, to marketing and to selling.

There is no doubt that time is a founder’s most scarce resource. Investors have got to understand and respect that. If you’ve just raised some money, the last thing you probably want to do is go through your deck one more time.

But guess what:

If you’re not cash flow positive, you’re burning cash. And if you’re burning cash you’re going to need more of it very soon.

Founders have also got to realize that an investor’s time is pretty scarce. Investors need to manage their operations, report to their LPs, attend board meetings, assist their portfolio companies, complete transactions, source new deals — and on top of it all, raise money for their funds.

If they’re reaching out to you, it means they’ve picked you out of dozens (maybe hundreds) of others. It definitely doesn’t mean they’re going to write you a blank cheque, but it’s fair to say that they’re probably interested to learn more about what you’re doing.

And yes, sometimes investors fish for information; don’t let that thought hold you back. Do your research beforehand. Share what you’re comfortable sharing. Relax.

To add, over the last few years we’ve seen a proliferation in second seed rounds (AKA: seed extensions), from 3 rounds in 2009 to 98 rounds in 2013:

I’ve personally seen several dozen of these over the last year, even some third seed rounds — usually as a result of overly optimistic forecasts (and the ability to sell them early on) or capital inefficiecny.

It’s safe to say that if you get to the end of your seed runway and are not Series A material, you too will need to raise a second seed. Selling a concept at seed is easier than selling plateauing growth rates or increased churn at Series A.

But what can you do, shit happens. Sometimes things don’t go as planned.

The point is to have a plan B.

If you’ve fallen victim to the Seed Round Euphoria, you may have eliminated several potential investors that would have been able to hop into your second seed. Now they may not want to. And guess what — your existing investors (probably angels or micro VCs) may not want to double down on your company. They reserve follow-ons only for their winners. They may throw in a token to boost confidence for new investors, but you’re out on your own to fend for the remaining capital.

You let ego get in the way. You failed to build new relationships.

You see, what differentiates the good entrepreneurs from the great is that the great have massive networks around them. They know how to build new relationships. They understand the value.

Your network is your net worth — and for a founder, a network is his/her ability to raise capital.

If you’re not constantly building relationships, you’re simply not hedging against your risks. And if you’re turning down an investor because you’ve just raised capital — well, you’ve potentially burnt a bridge.

It also doesn’t matter if you raised your seed from a top tier fund. Just because you’ve got a good name behind you doesn’t mean you should avoid building new ties with new investors. In fact, having a top tier investor means you’ve got some pretty hefty milestones to meet. Top tier funds didn’t get to where they are by backing mediocre companies, they got there by backing the best — and if you’re not living up to their expectations, you may be on your own for future rounds.

So again, make sure to have a plan B.

If an investor reaches out, just get acquainted. It doesn’t matter if you’ve just raised or not. Don’t let the Seed Round Euphoria harm your chances of raising money down the line. Start building relationships. Do it early.

This is critical now as ever with the uncertainties in the capital markets.

Bottom line:

1. Build relationships with new investors
Network, network, network! If a new investor reaches out to you saying that he/she is interested in learning more about your company, get back to them. Building relationships is time well spent. You never know what’s going to happen. I’ve seen a number of companies secure a lead investor and then get stuck trying to find particpants to close the round. Knowing many small fish is just as important as knowing the big players.

2. Let go of any ego you have
As a founder, you’ll have plenty of ups and downs — running a startup is like riding a rollercoaster. While raising your seed is definitely a great moment, it shouldn’t overinflate your confidence. You’ve still got a long way to go and let’s face it, nobody likes a large ego.

As Benjamin Franklin famously said:

In this world nothing can be said to be certain, except death and taxes.

You may miss you sales targets. Your co-founder might leave you. Your investor might choose to double down on another portfolio company. Your marketing strategy might fail. Your competitor might outperform you. In short, you never know what’s going to happen.

But what you can do is try and hedge against these uncertainties. There are many ways to do that and building an investor network is one of them.

Investors want to find companies that match their focus and founders want to find investors that are aligned with their vision. It’s not an easy match to make. For both founders and investors, the entire process is constant trial and error.

Don’t let the Seed Round Euphoria get in your way.

Let the ego go, start building relationships.