Stop Pitching to VCs: Let’s Get Back to Business
As I continue having conversations with startup founders and learning about all of the problems they are solving, there is one constant: they’re dead tired of raising funds and pitching their ideas. From the difficulties of setting up meetings to the constant revision after revision of pitch decks, the burnout is real right now.
So, in an environment where it’s more difficult than ever to raise a first round, how does a founder avoid burnout and get back to running their business? It’s taking longer than ever to raise funds and the funds being raised are at smaller and smaller increments. Here’s our recommendation for getting back to building and not pitching:
Raise an initial angel round to run pilots
Why this helps with raising later
One of the “sexiest” things that you can show a venture firm or other investor is market traction and velocity. By running pilots, you can gather a cohort of prospects and create a small batch of product / focus efforts on success of this cohort. At the completion of a pilot you’ll have proven (1) revenue generation, (2) target market adoption, (3) production / service capabilities, and generated feedback to iterate on your product.
Why this helps with raising now
Typically, when looking for traditional venture investors, you should be raising to ensure cash runway for 18 - 24 months. Anything less than that, you won’t be able to dive head first into the business to ensure that the round was a success. However, for an angel round, you can get smaller checks and plan to raise again more quickly. Angels won’t be as alarmed by a raise 6 months later and require less due diligence and time than the average institutional investor.
What this looks like
Imagine you are currently raising $1.5 million at a $7.5 million SAFE to purchase a batch of product, hire employees, and have 18 months of runway. With this money, you will be able to run your pilots and begin selling to your revised target market. 18 months later, you’ll have run 3 pilot groups and have long term traction. This sounds great, however, raising $1 million at this stage, in this environment may take a year to do.
Instead, let’s raise with the purpose of just running the first pilot round. At the end of this pilot round, you’ll have proven velocity and revenue creation. Instead of raising $1.5 million at a $7.5 million SAFE, you recalibrate to raising $500k at a $5 million SAFE. With this round, you can target angel investors and friends and family as the burden of the raise is not as high. With these funds, you need to stay incredibly disciplined and organized with how you deploy the capital. There will be obvious places to cut costs: founder salary, additional headcount, generalized advertising, etc.
The result
There are three key results that come from this approach:
You get to get back to running your business after raising significantly capital from less intense investors
When you return to raise from institutional investors, you’ll have a more robust view of your market traction
The next round will be able to be priced higher due to further velocity
The risks
There is non guarantee that cutting your raise target by 67% will make it possible to raise. It will definitely be easier, but there are no guarantees
You are giving away equity and then needing to raise again in just 6 - 9 months, if you fail to generate traction, the next round becomes even more difficult
Cost cutting is paramount and included in there is founder salary. You give away only 10% of your business (in this example) but also are still in the same mindset as bootstrapping.
Alternative adjustments to get back to building quicker:
Approach: Raise at a lower valuation than you desire.
Value: More upside for investors so likely to be easier to raise
Risk: Giving up more of your business than you should be. Still no guarantee that the raise will be successful.
Warning: Avoid giving away too much equity that you won’t be able to raise future rounds. Investors like to invest in founders that maintain a large share of their company after all dilutive raises.
Approach: Get back to bootstrapping
Value: Allows for you to show dedication to your company and get further traction before reengaging with investors. Hopefully, when you return, the markets have become more favorable.
Risk: This isn’t as easy as just deciding to bootstrap. You still need to eat food and have a place to live – this requires a decent amount of savings or a supplemental income stream. Not everyone has the privilege of the opportunity to “bootstrap a little longer”.
Warning: Don’t delay a raise without clear steps you are going to take to increase the value of your business for when you reenter the fray. Taking time off and doing nothing, won’t actually improve your prospects.
If you’re in the middle of your raise and are looking for someone to vent your frustrations to before recalibrating and figuring out a plan, please reach out! We love working with founders and understand the frustrations, excitement, and suffering that comes with the territory.
