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How Do You Know When to Raise?
Part 1 of the “How to Raise a Pre-Seed Round” Series
👋 Welcome back. This week we’re going to get into Part 1 of the “How to Raise a Pre-Seed Round” Series and answer the first important question when it comes to raising: How do you know when to raise?
How to Raise a Pre-Seed Round Series
🕑 Part 1: When to Raise (this post)
First things first: Why raise money in the first place?
Bootstrapping your startup is great, but a startup is an exploration exercise, which by default means the odds that everything is going to work perfectly from the start are low. The odds your customers pay you more than your monthly burn rate are even lower.
In addition to the capital, bringing people on board with a vested interest in your company’s success also helps. Especially since investors will likely have experience in your industry and/or investing in other successful startups, they will likely provide help well beyond just their investment.
When to raise
As with most things: timing is everything. Try to raise too early, and you waste valuable time you could have been focused on building your company. But, try to raise too late, and you risk running out of money.
To start, I think an easier way to think about when to raise is first thinking about when not to raise. Like many first-time founders, I made the mistake of thinking that investors would invest in us because I thought I needed the money and was “ready to raise”. But in reality, I wasn’t ready to raise, and I wasted precious time trying to fundraise when I should have instead been focused on getting traction and building a team.
I was making a mistake that many founders make. As Paul Graham puts it:
“When people hurt themselves lifting heavy things, it’s usually because they try to lift with their back. The right way to lift heavy things is to let your legs do the work. Inexperienced founders make the same mistake when trying to convince investors. They try to convince with their pitch. Most would be better off if they let their startup do the work — if they started by understanding why their startup is worth investing in, then simply explained this well to investors.”
It can be a hard pill to swallow that investors don’t invest based on if you need the money or not. Instead, they invest when they see strong teams starting to have success solving large problems in a scalable way. So instead of focusing on what you think you need, focus on what investors will look for when making an investment decision, and in the meantime, keep your expenses as low as possible!
What is worth investing in
Every investor looks at investments differently, but it seems like just about every early-stage investor’s thesis boils down to some variation of these three things:
Team: The startup is led by founders who get what they want and the skills to make it happen. This doesn’t mean a full-fledged team but rather two or more founders with the necessary skills to get an initial prototype off the ground that can start generating traction.
Market: A large problem to solve. A viable path to being a company with a $1B+ valuation (ie, ~$100m/yr in high-margin revenue). This article by Christoph Janz that I’ve referenced before provides a great perspective on how to do this.
Traction: Indicators you’ve had some success solving the problem. The way you measure traction should depend on the difficulty of the problem you’re solving. For the vast majority of companies, it’s early revenue, and you should be very skeptical if you think it is anything other than revenue because just about every first-time founder tries to come up with a reason for why it shouldn’t be revenue. However, letters of intent or meeting industry benchmarks may be more appropriate for harder problems (infrastructure, deep tech, etc.). If you don’t have traction, here are some thoughts on creating a Minimum Viable Product (MVP) and getting traction.
From Day 1, you should be thinking about getting to have these three variables as fast as possible. If you don’t have these three variables, you should focus on doing what it takes to get them - and then fundraise. If you aren’t thinking about these early enough, you may run out of runway.
Note that many early-stage investors and accelerators claim on their website that they invest in the idea stage with no traction required. Sounds magical, right? In reality, I think this is very rare, and they are saying this for two reasons: 1) They are incentivized to make it appear that they invest as early as possible, so they get as much deal flow as possible, even though they rarely invest at the idea stage. 2) For founders with the right pedigree, they may invest at the idea stage, so it’s not entirely untrue in general…but it is likely untrue for you.
San Francisco or Nah?
One last thought about when to raise is to consider waiting until you move to San Francisco. This is not very popular these days, but startup talent and investor density are much greater here than anywhere else. Despite the upheaval of the pandemic, it appears that Silicon Valley will still be very dominant. Below is a summary of the data from a recent Bloomberg article with close cities merged together (ie, San Francisco + San Jose; Denver + Boulder).
For a more qualitative perspective, I recently wrote the thread below on my experience trying to build a team and raise money in Colorado vs. Silicon Valley. The thread sparked an interesting debate, and Paul Graham event chimed in at one point.
In summary: When to raise?
When you have a solid team with initial signs of success and solving a large problem in a scalable way.
Unfortunately, investors tend to invest in that as opposed to when you think you need money.
Lastly, I’d strongly consider moving to Silicon Valley if you can.
Continue Reading → Part 2: How Much to Raise
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