Texts with Founders: Raise the round behind you
Avoid a drawn-out process and optimize for the best investors.
Welcome to Texts with Founders — tested tactics for early stage startups. This is a free newsletter designed to give an inside look at how I work with other founders.
Two new releases that complement the newsletter:
New essay Founders and Customers: Love and Service — this one got people on Hacker News riled up which leads me to believe I might be onto something. My favorite comment was “I generally frown upon dumping on someone's effort that was clearly just put out there with the best of intentions. That said, I hated this essay.”
It's easy to fall into the trap of believing that the whims of investors drive a fundraise. Don't dismiss your agency. You get to decide when to raise and how much.
You determine the difficulty and time it takes to fundraise successfully.
One of the highest points of leverage for an effective fundraise is raising the round that's behind you instead of the one that's ahead:
One of the obvious-but-unspoken rules: it is SO much easier to raise the round behind you than ahead of you. If you're halfway between a seed and an A, raising a seed is like a 2w affair, and raising a good A is months of work (it also has some chance of failure, but ignore that).
Timing and Partners
If you're an early-stage founder, you can choose to raise a seed as your first round of funding. The question to ask yourself is whether or not you should.
Before jumping into a $3M seed raise, consider two things:
Speed to close
Quality of partners
A seed can take months longer to close than a pre-seed if you are pre-seed-fundable but only on the cusp of seed-fundable. If you are an obvious pre-seed investment, you'll be able to wrap things up faster and get back to focusing exclusively on your customers.
Even if you can close a seed round, it's essential to consider which fundraising strategy might lead to better long-term capital partners. Many of the best funds can be somewhat valuation and stage sensitive. It’s possible you might be too early for some top seed funds but able to take your pick of excellent pre-seed investors.
Level Up Your Round Midway
Another benefit of raising the round behind you is that if things are going well, you can always level it up midway (leveling up pre-seed to seed, etc.). One company I backed started raising a large seed and ended up with an oversubscribed $20M series A instead. Counterintuitively, if they had started with a $20M raise as the goal, it would have taken much longer than starting with a seed and leveling up.
Higher Valuations Mean Higher Hurdles
Lastly, valuations create hurdles for you to jump over for the next round.
The next hurdle will be more achievable if you raise the round behind you. That's good news because few investors want to lead flat rounds, and many are worried about the existing cap table getting angry if they were to lead a down round.
Get momentum, then raise.
The worst time to raise money is when you need it. The best time to raise it is when you don’t. And the best time to focus on customers is immediately and always.
Most founders would be better served early on spending little to no time thinking about fundraising before they have business momentum (paying customers, waitlist growth, etc).
The tactics shared in this post will be super effective if you have already focused on generating tangible momentum in your business. If you have yet to do that, bookmark this essay and come back here after you’ve made more progress.
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