The market is difficult and many investors put new deals on hold while taking care of their existing portfolio companies.
Aside from preparing for strong growth and low burn, what other suggestions do you have for young startups?
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Some very juicy seed and series A money is being thrown around ignorantly by the same people that caused the last bubble. I've had 2 close friends / family raise their seed rounds in the last 4-6 weeks.
Three things to be aware of:
1. VCs will take their time doing real diligence on your market / team. This means it will take 1-3 months from initial outreach instead of 1-3 days.
2. You should also be raising seed money from angels that are executives/fellow founders at your early customers / pilot partners. Ideally you fill a $2M seed round with ten $50-100K checks from these people and a great seed fund that will be value add-oriented.
3. Raise as much money as you can. In 2021, this was terrible advice. Now taking 15% dilution is not the end of the world if it is how you stretch to your next raise vs the 8-10% dilution of yesteryear.
How so? If you raised a ton of cash in 2021, you should better equipped to ride out any economic downturn than nearly any other business in existence. Most businesses do not have millions of dollars in cash in a bank account. Sure, your valuation might be bonkers, but that's better than being kicked to the curb, and inflation will probably dampen the blow anyways.
There are a lot of early-stage startups out there right now that raised at silly valuations 6-12 months ago, already put most of that capital to work, and now have another 6-12 months of runway ... and zero leverage in fundraising discussions. The best time to talk to investors is when you don't need their money.
In an up market raising too much money is a function of valuation and equity. Raising too much money as a function of inflated valuations results in inflated expectations that won’t be met in a downturn.
This analysis benefits from hindsight.
Wait is it normal for an executive of a company to invest in companies that thier company is paying for services. That seems like there could be a lot of conflict of interest.
http://automated.capital/
Otherwise, if you are a profitable, late-stage company, why would you raise money at all? Either spend your profits down close to 0 to achieve business goals and only raise some money if you've got non-dilutive ROI (i.e. the margins on this new spend are superior or equal to existing margins in your profitable business and you are in land grab mode). Or just be comfortable with your current trajectory because of how well-defended you are financially. From a risk management perspective, founders should be able to live with going from $10 to $20M in ARR this year at break-even instead of $10 to $30M by burning $5-20M if it means your business gets to continue existing.
https://apply.ycombinator.com/
Less obvious, so worth adding: if you don't get accepted, keep applying for future batches. Repeat applications are more likely to get funded. The main thing is to demonstrate progress since the last time you applied.
Edit: also, YC is very invested in not overlooking applications from compelling founders who don't have any elite or industry connections. It's one place where you can prove yourself based on how good you are, not who you know. Not that YC is perfect in that respect, but it's something people here really care about and have a lot of practice with.
Edit 2: these recent comments from pg are also relevant:
https://twitter.com/paulg/status/1538223184679403521
https://twitter.com/paulg/status/1538224086123483142
I’m about to leave my job to work on a fashion startup with my husband. There are some technical aspects to the business that I am building into products, but my immediate focus is to get his clothing store online.
I know the product(s) I want to build will be compelling, but my concern is not having enough cash to hire a small team.
At what point is it best to apply? After you have a working application environment? After you have 1-2 people on your team?
They are based in Los Angeles and I believe have had a few successful fashion startups. LA being a global fashion hub probably doesn't hurt.
I have had experience with Amplify in the past and they were always helpful and not too pushy.
In general, seed stage is less affected by the recent downturn than later stages. Which makes sense, since the time to exit for a seed stage company can be the better part of a decade, so today's macro climate has less impact.
A few tips and observations:
- from what I've seen, most seed funds are still investing, although on average at a 20-40% slower cadence than 6 months ago. On the other hand, some later stage investors are now more active at seed because that lets them keep investing while putting less capital at risk.
- assume valuations will be closer to what they were ~2 years ago. Earlier this year, the median seed valuation felt like ~$20m post, and we saw a number of $30m-$40m post money valuations. Right now we're seeing more valuations in the teens, and seed round sizes are more frequently $2m-3m instead of $4m-$6m.
- longer runways are favored. The fundraising climate over the next year is uncertain -- especially for Series A and beyond -- so the typical "raise for 18+ mo of runway" advice has turned into "raise for 24-30 mo of runway."
- cash efficiency and faster time to revenue are favored over growth in this climate.
- capital intensive businesses will be much harder to raise for.
- investor diligence is shifting away from FOMO and rushed decisions, and back toward normal diligence processes. Assume that investments decisions will take an extra 1-4 weeks for each investor.
It's not all bad news:
- anecdotally, it feels like hiring is a little easier.
- historically, recessions have been a great time to start big companies.
- there's still a LOT of capital waiting to be deployed into startups.
- "fundraises are looking like they did in 2020" is still pretty good, since 2020 was already a great year to be fundraising as a founder.
On the one hand, some companies are trimming and many others are hiring much more selectively. On the other hand, there are a lot of people out there with comp expectations set by big tech large RSU inflation and bonus levels, much of which will likely come down to earth.
I always encourage every company that is raising to start by establishing to lay of the land for them. Are they vastly outperforming? Amazing traction? Is there team extremely credentialed? Well connected? Hot space?
If you have some of those, you go the the VCs who invest in your market (research companies in your space but not directly competitive and see who funded them) by getting connected through your network and you have a reasonable shot at someone being interested at some price. You then try to use that pricing (if you think it is unfavorable) to drive other investors to a decision -- investors feel FOMO.
If you don't have this, you normally simultaneously build while either: 1. Joining an accelerator. 2. Meeting people about town until you find a believer. The slight difference in this market is that angel investors may be less likely to invest on their own because follow-on funding is an existential risk. So you likely have to find a true believer who can write a bigger check or is comfortable with that risk.
Even in down economies the appetite for M&A is still strong.
Wrt/ post-raise - be smart about how you spend and leverage the fact that you probably aren't starting off with, hopefully, high burn. Lot's of companies might be operating under an assumption that there is quick cash around the corner... it's not as "quick" anymore I suspect.
Even having a small network on day 1 is enough to bootstrap but you need to consciously grow. And yes it will feel slow at the beginning.
If you go through the advisor agreement at https://fi.co/fast you can get a sense of how much equity you should give up.
If your next questions is how to find these entrepreneurs, go to LinkedIn, TechCrunch and so forth and cold email people you find and ask them if they would interested in being an advisor.
The change is dramatic and fast though, and minds take a beat to catch up to the market.
I wrote about it here, which I recommend you read: https://www.freshpaint.io/blog/anatomy-of-a-seed-round-durin...
Some additional thoughts ~2 years later:
1. Wait if you can. Even just a few months. VCs tend to freeze up in the face of macro uncertainty. This happened in Q2 2020 when COVID was very new – nobody knew what was going to happen, so investors just paused for a few months. Then things really took off. I think we're in that "I'm not sure how things are going to shake out so I'm just gonna pause/slow down for now" period right now. Investors will get used to the conditions – regardless of what they are – after a few months. The summer is also a terrible time to raise money, so I'd suggest you wait till the fall regardless if you can. If you gotta go out now, read on...
2. If you can't land a bigger check because those VCs have cold feet (they often freeze up during market uncertainty), then you gotta raise from small checks.
3. Small checks is a numbers game, just like B2B sales. We pitched 160 investors to raise $1.5m
4. Seek momentum wherever you can. Getting forward progress from a handful of $10-25k angels is really important for your mental state, and that will flow into every new investor pitch. And it often becomes easier to raise with the more momentum your round has.
5. Be super realistic about your valuation expectations. It's not a thing worth losing a good investor over by over-optimizing on valuation. You're better off taking a little bit more dilution now and staying alive than never getting going.
6. Ignore the advice of anyone who hasn't raised in bad conditions or isn't an investor. Everyone else doesn't know what they're talking about. Even then, don't run your business off of what one person on the internet says. I feel qualified to give advice here because I raised $1.5m in March 2020, and just raised a Series A 3 weeks ago. Just don't run your business based on what I (alone) say.
We did YC as well. Think about applying if you haven't!
I don't agree with this advice. Sure, looking back at March 2020, you'd be right. But this time we won't have the Fed to print unlimited money and artificially stop the crash in its track, create a surplus of capital to deploy, and destroy the value of the US Dollar in the process. This newer downturn is us having to pay the price for the foolishness of spring 2020. And it will be far more expensive than it would have been just dealing with it back then. The dollar will never recover this destruction of value – and all we've done is transfer a massive amount of wealth to those who had capital invested in growth assets from those who didn't. (i.e. from the poor to the rich)
If you need capital at all, start raising it now and don't wait. Nobody knows how bad things are going to get, and there's no savior bailing us out in a couple months this time.
(Am a seed VC)
I'm not saying that waiting a few months will make it better like it did in 2020. My experience is that most investors don't know how to act in a rapidly changing environment. Nobody wants to look like an idiot holding a bag just a few weeks after doing a deal with a sky high valuation on a company that's hype-y and doesn't have strong fundamentals. What investors end up doing is just pausing investing to get a feel for where the market is going to end up. As a founder you don't want to pitch VCs during that "pause" period. VCs still talk to founders during this pause period, they just have little to no intention of actually deploying dollars in anything that's not completely obvious (whether they realize it or not). You see it in this thread with a few comments from VCs around deals above seed stage definitely feeling "stalled". That's exactly what I'm talking about. Founders just end up burning thru a bunch of investor leads that are no's today but could likely be yeses in 3 months time. I think we're in that pause period right now. And if a company is able to, it's probably best to wait 90 days for VCs to adjust.
So what if it gets worse? In that care investors are settled in and know the game. They'll be deploying capital, just with more scrutiny and lower valuations. Capital will still be out there – there's tons of funds and plenty of money available for seed stage. That's a better situation than the "pause" period I describe above, where founders go out pitching and investors kick tires but don't deploy capital.
Also my opinion is that the summer is the worst time to raise, regardless of macro market conditions and even in great times. Once school gets out, people start traveling, etc...the reality is that the old trope of VCs don't work over the summer is probably unfair to some in the industry, but not undeserved :)
Did you do YC before seed or after seed? If you raised after YC, aren't you also not qualified to give advice? From what I understand getting into YC is guaranteed to put you among the top while trying to raise.
Did you decide you wanted the 1.5 before starting the pitches?