WORKWEEK

Over the first few weeks of 2023, I’ve noticed that a lot of my calls and meetings with founders have revolved around one key topic: when should I raise?

This is largely applicable to preseed founders or folks raising their first round of capital, but is pertinent to any founder thinking about fundraising for their startup.

The last year in early stage tech investing has been dramatically different from the previous 2-3 years: a lot of founders started companies in 2022 thinking they’ll have the same fundraising experience as their friends, who were able to raise $2 million with 10% dilution, at $20m post money valuation, with just a demo or pitch deck.

Those days are long gone, and aren’t coming back. The current fundraising climate is how venture investing should go; if anything the free flowing capital we were seeing from 2020 to late 2021 was the anomaly—the result of a number of macroeconomic trends coming together to create a fundraising perfect storm (low interest rates, plus government surplus’s to consumer and businesses, and a huge public market spike in technology post-COVID, to name a few.) The likelihood that we’ll see another situation with those trends or similar ones at play at the same time is deeply unlikely.

So, what is this new normal? Companies need to focus on clearly defining goals and use of funds—why do you need money to make this idea come to life? There also needs to be much more work done on validating ideas, customer segments, and the liklihood this is a big and scalable business.

For repeat founders, especially those building in similar sectors as their previous company, the bar can be a bit lower—you may be able to raise based on an idea and a very clearly defined problem and product roadmap.

I think for first time founders the bar has gotten significantly higher—they’ll need to be able to point to a product and one that has some traction. This means that it might make sense to not jump into raising a $2 million seed—but raising more iteratively. A $500k “friends and family” round without institutional capital, or a $1m preseed round might be more attractive for you to build and get something to market. Then, by the time you raise a seed, you’ll have solid metrics and data to point to—which can not just help you raise a seed faster but also from Tier 1 VC’s and potentially help you raise more too.

Timing-wise, for some reason it seems like a lot of new founders think January’s a good time to raise. I mean it’s not bad but its not great either—most VC’s are just getting back into the swing of things, and a lot of them are fundraising as well. It might be best to see if you can hold off until Q2 to get started on raising.

Another mistake I see that isn’t really around timing your raise but is an important thing to discuss: running a tight process. Fundraising is a distraction and will keep you away from your responsibilities on the company building side. It will require all your focus and energy. So, turn that into a positive by running a tight process—get all your materials you need in order, send out emails and aim to have a fundraise done by a specific date. The longer a fundraising process lingers on, the more questions VC’s will ask themselves and each other about your company. Yes, VC’s talk to each other about your company. That’s pretty much all they do. And you want them to say “look at this sick company I’m thinking about investing in,” and not “why is this company taking 2 months to close $2 million.”

A few years ago, a common trend was to get 25%-50% of the round filled from angel investors, syndicates, and small funds. This made sense—it helped build traction and hype, and created FOMO for institutions looking at the deal. “Oh XYZ from X startup invested, so this could be a great deal!” In 2023, I don’t recommend this strategy at all—find a lead first and the angel and small checks will follow. These folks already outsource diligence to a lead investor anyway, and in a tighter fundraising market, there are simply less angel dollars floating around and people will be more stringent with their angel investing dollars than before. You’ll be putting in a lot of work to close angel investments—might as well have a lead investor that can help push some of those conversations over the finish line.

At the end of the day, fundraising for a company is hard because it’s supposed to be hard. Raising money for your business is a serious endeavor that needs to be taken seriously by founders. There are some positives for a frothy tech ecosystem, but now we’re seeing the downsides too—companies that raised a lot and haven’t been able to create or capture value, employees seeing equity compensation get devalued by 40-75%, chaos internally. I hope that this new bar that’s being set for founders will result in much steadier business with solid business models. It might seem like a huge pain in the ass, especially when you compare your raise to a friend who raised a few years ago, but it should be a more fruitful exercise for you and your business in the long run.