Spending Time w/ Investors In Between Funding Rounds

Fundraising, above all else, is unpredictable.

We’ve had companies in our portfolio with nearly no KPI’s raise at over $100M valuations. We’ve had comes with 8 figures of revenue and doubling struggle to raise.

If you’re talking to VC’s — you’re probably gonna be hanging around South Park a lot…

My #1 piece of advice to all companies, no matter how well or poorly they are doing is: “hope for the best, expect the worst, and act accordingly.”

Here are some traps I’ve seen founders fall into:

(1) “My seed round was so easy, I’m sure my Series A will be easy as long as I execute.”

  • Sometimes that’s true, sometimes it’s not. But the later the stage, the more your round is going to be done on numbers, not pedigree and hope.
  • Your space may fall out of favor. If you were building Uber for X, even if your numbers were as good as everyone told you they’d need to be 6 months ago, the world changed a few years back and you couldn’t raise. Same for crypto.

(2) Being overly confident and trying to raise too much, at too high a valuation. Especially in a later stage round.

If you are a seed company, you can start pitching VC’s, pitch 100, and then change your asking amount and strategy before pitching 100 more. There are SO many seed funds.

But there are only 100 or so firms that can legitimately do your series B-D. And if you go to market with too big of an ask, you’re given a second chance. By the time you come with a smaller ask, you’re “old news” and “damaged goods.” You may have built a company with real value that’s about to go bankrupt.

(3) Not setting expectations to the market:

Many founders avoid talking to VC’s in between financings. It’s the founder’s job to inform the market “what is success between now and my next round” and then achieve it. But if investors don’t have a framework of “what is good and what is not?” they may just resort to market comps like 75% YoY growth of top-line and margin expansion, even if that’s not what you were trying to prove.

On top of that — right now growth funds are SO FOCUSED on growth it’s crazy. There is real power law. If you are growing 100% YoY, life is good, and you’ll raise a huge round. If not… you’re in a pretty vacant space.. which is bad.

If you are optimizing towards business fundamentals and not top-line growth — you better be screaming at the market about your intention well in advance of your raise, so that you’ve set the bar of what success is early.

(4) Founders not staying in touch with existing investors:

When things are going well, you can give existing board members/existing investors the middle finger and go find money from someone else. But when things are going in the middle, or poorly — it’s them who are going to bridge you. You better have a good relationship w/ them and know what they’re going to want to see “in case.”

(5) Over-valuing the signal of other deals in the market:

X company just raised at $Y valuation, why am I not?

Keep in mind… a valuation in VC is what one person at one firm thought one class of security of one company might be worth. There are SO MANY DYNAMICS that go into a raise. You can’t use one anomaly as the generalized rule of how your round should go.

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In short — I always suggest:

(1) Treat your existing investors as if you’ll need them to bridge you later. Even if things are going well now. And it’s been 4 years, and life is good, and you’re super confident… who knows what can happen. Assume you need to call the in 6 months with a big ask.

(2) After you close a round, talk to a handful of potential investors for your next round. Know what they’ll be looking for. If you disagree with them, educate them early on what they should be looking for.

(3) Keep in touch every 4 months or so.

If you do all this… worst case scenario you wasted 5–10 hours per month. As the CEO, your #1 job is to not run out of money. Seems worth it.

And if you don’t… you could run out of money for the whole company.

Feels like an asymmetric trade to me.

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s