Tom Wilson, Carlos Espinal, Kate McGinn
Raising funds is challenging both because of expectations people have of you, but also because of the competitive circumstances you find yourself in with other companies tackling the same market as you. These days, with public markets at an all-time high and many public investors looking to get into private markets, startups valuations and round sizes have reached new heights and as a consequence have warped investors’ expectations of companies. Only a short time ago, founders and VC markets could rely on traditional back-of-the-envelope metrics to help benchmark for fundraising readiness. These days, however, it increasingly feels like the traditional metric of “100k MRR” is no longer sufficiently adequate to use as guidance for your next round (in this case a Series A). Let’s unpack how some companies are adapting to these changing circumstances by first understanding the macro context, and then suggesting a possible course of action to take.
Firstly, it starts with sectors. Some sectors are being judged almost exclusively on promise, whereas others are, at best, being judged by metrics alone, and at worst, being penalized by their metrics.This may have to do with how the market is giving premiums to companies whose promise of fast growth is sufficient to generate interest, rather than the ‘stability’ of demonstrated, but slower growth.
In this “risk-on” world, sectors like consumer social, therefore, rise to the forefront. Companies in this sector with very early but growing metrics can attract huge amounts of investor attention in the search for the new holy grail of a breakout platform (case in point, Clubhouse). Similarly, businesses that were historically viewed as potentially challenging from a unit economics perspective and requiring large amounts of capital to scale (i.e. the on-demand grocery delivery sector) are viewed more favourably in today’s context partly because more weight is given to the potentially massive market they are serving rather than the risk associated with access to future funding and/or challenges around efficiently scaling the business model.
The flip side of the coin is that those businesses that are focused more on selling to what could be viewed as a less sexy, smaller or steadier part of the market (i.e. SaaS selling to professional services) can suffer loss of investment attention as a result. This can understandably be frustrating for founders in the latter category, particularly if the metrics they are going to market with are in-line with what they set out to achieve and/or are at or exceeding expectations for a company at their stage. Regardless of whether this might be fair or not, such founders will have to show metrics that are considerably beyond those that are expected of them when they go out to market in order to really capture the attention of VCs. Unfortunately, this phenomenon further distorts the market around what progress metrics are required because certain sectors might see the bar increasing whereas for others it seems to be getting less and less!
In other words, if you are in a sector that can return billions of dollars in record time, you will be rewarded with greater leniency in your numbers and traction. If you show slower but steady growth, you might pique the interest of more committed investors, but you will likely not command the level of feeding frenzy some companies are generating.
Secondly, your ‘team’ continues to be a key factor in driving how a company is treated during a fundraise, but as more people with experience in company-building and industry-knowledge are founding startups, the expectations thrust upon them by investors to build billion-dollar outcomes is also growing in proportion. Some early “seed” rounds have gone up to 15m+ on the top end and be reported as such in Techcrunch for example because of this outsized expectation early on!
High-quality talent with stellar track records and extensive personal networks are able to command round sizes and associated company valuations for seed rounds that can exceed those of what previously would have amounted to a Series A because investors are assuming that a solid background is more ‘correlated’ with startup success. They are willing to pay a premium over other similar companies, even if certain fundamentals about the team are not there, for example, whether the team is full-time or not, or if the founder has founder-market-fit in this new sector.
Again, this is further adding to the confusing state of the market, making founders uncertain as to when is the right time to raise and what investors are actually looking for when raising their next Series A sized round.
With this distortion lens warping traditional metrics of success, and greater emphasis being placed on the ‘potential’ of growth early on, be it via sector or team, what’s left for founders that aren’t clearly in either camp? One remaining element that might help you take advantage of today’s circumstances is your narrative. Ultimately, at the early stages, the right narrative ties commercial trade-offs together in a way that convincingly points towards a large outcome even if the start of the growth is not quite where it needs to be. As discussed above, in a funding environment that has a risk-on mindset, thinking about how you frame the opportunity and emphasise the disproportionately large potential upside could be key to landing your next round funding partner of choice.
While the current market is confusing and, at times it feels like there is a lot of hot air, this is still one of the best times in history to be raising funds…. it is not only lenient on you if you are not as far along as you should be relative to other companies (provided on the conditions discussed above), but it’s a time when you will have the best access to capital. If you find yourself raising and are struggling, consider how you are packaging up the attributes of your company relative to those that are driving the best companies to success in these times.