FFF: Fundraising, FOMO and Failure

Reading the tech headlines could lead you to believe that every start-up company out there is either raising a massive funding round, is merging with a SPAC or has just listed for a record-breaking IPO. I am here to remind you that even if one of these headlines (or tweets) is not about you or your company, you have not failed. Yet. This is an open letter to help you focus on creating success rather than worrying about others.

Soona @soonaorlater
Seeing more $50m rounds for companies that don’t have a product yet. We’re at that point in the cycle where investors will gladly take on pre-seed risk at a Series A price…

12:46 AM ·May 14, 2021·Twitter Web App

Sure, the market is frothy. There is a lot of exciting activity. Companies are raising significant capital at high valuations. Some may seem like they have less traction than you or a lesser product/service offering. But we know that is not necessarily what wins the day.

It is all about the ability to execute. Creating traction across all elements of building your company – scientific breakthroughs, technological development, product-market fit, customer acquisition, retention and margins. It is about gathering the best talent around you – hires, investors and customers – to sustain long-term growth towards that elusive unicorn status. There is a reason that these are rare.

Let’s put things in perspective. Most of these record-breaking capital infusions are going into later-stage deals. PitchBook data indicates three-quarters of all VC investment dollars in the US during Q1 2021 were deployed in late-stage deals, the highest portion since 2010source. Meaning, that these overnight success stories were years in the making.

So in reality, these stories should be inspiring for younger companies and founders at earlier stages. Hard work can lead to great success. Prove your ability to execute and develop the necessary traction for your current stage, and then your company can receive strong backing for its next phase of growth.

But it seems that the opposite is occurring. Too many founders who are still on the fundraising journey for their Seed or Series A rounds are scratching their heads as to why they are not closing investors as easily as the media portrays it. Each new headline on TechCrunch has them scratching their heads asking “why isn’t that me?”.

Founders have figured out that they can raise capital from their kitchens, bedrooms, and offices in weeks vs roadshows that lasted months. I don’t think we will see founders going back on the road in any material way ever again.

Fred Wilson: https://avc.com/2021/05/in-person-vs-on-screen/

It seems like we have become impatient. We do not respect the process or appreciate the journey. The pandemic has created efficiencies that should change our industry as Fred Wilson points out in the quote above. But I do not believe that there are any shortcuts. You put in the work, you get the traction and then you will get the reward. However you define that.

A word of caution. I constantly warn founders that one good meeting does not equal a term sheet. You should not be counting your chickens before they hatch (thanks mom!). This is especially true today where the abundance of investment capital may further create a perception that a deal is done way before it actually is. Don’t make that next hire, or close that new lease (assuming you still plan to have an office), until the money is in the bank.

Everyone is out raising capital. Like others, I thought it was a seller’s market. Meaning, I assumed that the startups were setting the prices and the investors were competing to get into deals. I am not so sure anymore. The bar for any given round has been raised from where it was set a year ago. The large rounds and higher valuations are due to market forces on the investors side – they need to deploy more capital quickly and cannot dilute the founders too much while doing so, hence we have higher valuations for companies with limited traction.

To be sure, the competitive landscape amongst investors creates opportunities for smart founders who can take advantage of this. That being said, certain fundamentals of a high-growth potential business must still be solidly established to receive investment dollars. What those are seem to be getting a little blurry.

I was recently exchanging messages with a friend who is a VC at another early-stage fund. I asked them this question straight out: If the team is strong and the science exciting, with large potential markets it can be applied to – what else can you be looking for to pull a trigger on a seed stage investment?

His response: “…”

I think that sums it up pretty well.

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