Masha Bucher
More posts from Masha Bucher
The contracting private tech markets are driving down the pricing and frequency of funding rounds, while inflation cuts into companies’ runways, meaning they are able to build less product and acquire fewer users with the money they raised.
It’s true that VCs are doing more diligence and being more cautious with their decisions. Some want to make sure their existing founders have enough runway to weather this storm so they are prioritizing these companies. At the same time, there are hundreds of millions earmarked for early-stage companies, and firms such as Lightspeed, Collaborative Fund, CoinFund and Menlo Ventures have announced new funds in the last few weeks. Later-stage capital is now being redirected to earlier stages to avoid being exposed to one- to three-year exit timelines due to short-term turbulence and, instead, investors are focusing on exit horizons of over seven years.
In this economic environment, I’ve been asked by many founders how they can raise capital successfully, especially by those who feel demotivated by how long the process is taking. I want to share what is actually happening within VC, myths about raising in this environment and actionable tips for closing pre-seed to Series B rounds that have also been instrumental in helping me raise $100 million for our fund.
As a founder, how can you navigate this environment and successfully raise a round?
Don’t dilute yourself for more than 10%-15% in any given round
If you want to build a big company, you need to keep enough equity for the next rounds and for yourself so that you’re incentivized to continue growing it. Investors often require this in later stages. At the same time, don’t get obsessed with certain valuation markups. If it’s taking ages to close at a higher valuation, raise money on the same valuation or terms as the last round, or in the worst case, a down round to ensure your company’s financial stability.
Optimize for quality of investors over volume
First, create a list of every investor you know who is a good fit for your round. Then, create a second list of founders and advisers who could introduce you to good investors. Rank them as tier 1 and tier 2.
Tier 1 can lead rounds and signal to other investors that they need to get into your company ASAP. Tier 2 are those you’ll prioritize going to after you strike out with tier 1s. As you map out these lists, think about how relevant their funds are to your company.
When requesting intros, the best way to stand out is by showing alignment with the right partner at a relevant firm. Introductions are about quality, not volume. It’s better to get 20-30 meaningful conversations than sending 200 cold emails that result in nothing. Figure out who from your network can give the warmest intro to an investor. Then create a purpose-drafted pitch for that particular investor to ensure you show alignment in your interests.
If you strike out with all the investors on your two lists, spend time nurturing your community of fellow founders and figure out who from their networks can be a good fit for you. You might not be a focus on the fund, but if you’re introduced by a really successful person, they might make an exception. You’ll also learn who is actively investing.
You can also work with LPs to get introductions to the funds they invest in, but founders are a better option.
Start raising when you have more than 12 months left
Calculate how much money you actually need to grow and hit product-market fit. Choose how much to raise based on objective business needs and milestones you need to reach to continue not based on your assumptions about what’s accessible.
I’ve met a few founders who’ve told me, “Since the market is bad, we’re only going to raise a $500,000 seed round.” Such sentiment causes founders to run out of money before they’re able to test their hypotheses, and then they need to raise again.
Update your existing investors and advisers regularly
Include both successes and what you’ve learned. Use a tool like Cabal to ensure you’ve given everyone in your community actionable information on how to help you.
Provide information regularly — ideally every month, and in the worst case, every quarter — to ensure you’re top of mind and can get help from your shareholders and community.
Investors tend to invest more in the companies they hear from most and that they help most. Prove you’re alive by making specific requests for help.
If you can’t get a fund to lead, put together a party round
You may approach angel investors or existing investors for a SAFE round. You can further roll this into a priced round, but the bridge will add stability and runway.
Don’t let things take too long. If someone committed, minimize the time between commitment and wire. Getting any money is better than accepting failure with the “ideal” amount of money. If you have a choice, choose someone with enough capital to support you in the next round and who is most aligned with you on the company strategy.
Don’t shop around unless the terms are actually offensive
Take the cash and keep moving. In this market, you can’t let a term sheet expire because you were trying to use it as leverage with other investors. This the worst time in modern history to be pursuing such optimizations.
Double down on promoting your milestones and momentum
If you are about to launch a new product, plan how you’re going to get social media and traditional media buzz so that investors feel the momentum. Figure out what other progress you’ve made that can accelerate this momentum — perhaps you have an important executive hire, impressive revenue growth or have hit a milestone of some kind.
I suggest combining at least three significant events into this milestone. Write it clearly and promote it to investors, reporters, partners and introductions.
Once you meet an investor, drive the process
If someone isn’t getting back to you, give them a reason to schedule another call, perhaps some news about your momentum, as mentioned earlier. If you get a no, don’t take it outright. Ask them why and try to make the deal still work.
Sometimes, investors say no because of your valuation but could be interested if you renegotiate the terms of the round. Perhaps they misunderstood a piece of your strategy and reexplaining with specific data points could get them to reevaluate. Always push for the next step.
Use news and updates about your company to follow up
Be visible online. Increase the frequency of your Twitter posts. Do interviews with press and put out thought-leadership content.
Investors have a short attention span, and if you’re constantly active in their mind, they’ll subconsciously assume you’re productive and successful. The best way to do this is by highlighting your experience, knowledge and milestones.
Befriend VCs you’re looking to bring in as partners, and speak with them on social media to build relationships. Post on Linkedin, tweet quips from your day and constantly be telling stories about your company, product, founders, data, milestones and mission. Building in public creates a massive long-term advantage not only for fundraising but also for hiring and sales.
Don’t let fear disempower you and delay your raise: It is the path to death for your startup. Any change is an opportunity to create leverage and a downturn is no exception.
Despite the narrative of shutdowns and destructive portrayals of company failures, dozens of oversubscribed rounds, from pre-seed to Series B, are still happening every day. It’s very possible to create momentum and organize a fundraise properly to get top-tier VC interest and oversubscription. If they can do it, so can you.
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