By Vivek Jayaram
It’s been a busy first half of the year for many of our early stage clients who have sought and secured angel and VC funding from firms around the country (and the world). In reflecting on these successes and failures from Q1 and Q2 of 2018, here are four pieces of fundraising advice, based on actual deals from 2018.
1. Understand the Lingo. As a founder, be intimately familiar with the nuances and differences between a priced round and a non-priced round. In a priced round, the investor will immediately receive equity in the company in exchange for an investment. In a non-priced round, the investor receives equity upon the occurrence of a qualified financing, which is usually the next round of funding. Why is it often done this way? Because pegging a reliable valuation on an early stage venture is extremely difficult and often times speculative. However, if you’re going to do a priced round, make sure you’ve got a sound methodology for your valuation. For a robust understanding of these terms and related concepts, every founder should read “Venture Deals” by Eric Feld.
2. Be Specific. Everyone you talk with should know exactly how much money you are looking to raise, and what that money will be used for in connection with the Company’s business. There’s nothing worse than a “we’ll take what we can get” approach; that usually signals to a VC that you haven’t really thought through the long-term cycle, or that you are simply unsure of how much you will need or what you will use the money for once it’s in house. This doesn’t mean that you cannot depart from your plan — any founder will tell you that a negotiation with an early round investor can be grueling. But, have a proposal with defensible projections and stick to it initially. Be prepared to give ground during the negotiation, but your initial proposal should be clear, cogent, and logical.
3. Be Efficient. We have seen several transactions grow stale because either the founder is either not quick to respond to VC concerns, or because the founder is inflexible on certain deal terms. Reputable venture capital professionals are literally reviewing scores of possible investments at any given time. Not responding in a timely manner or getting hung up on minor or standard but onerous terms — making things unreasonably time-consuming or difficult for the VC or its counsel — could cause “deal fatigue” and inspire your VC to move on. Be reasonable, prompt, and timely in your negotiations.
4. Be Patient. Despite what you read online, most software ventures have a cycle of 7-10 years from seed to exit. The idea that you can raise money and reach a liquidity event in a shorter period of time is probably not reasonable. Founders need to be aware and ok with an extended period of financial uncertainty. That said, every round of fundraising should take into account what the founders realistically need to continue dedicating their valuable time and resources to the startup.