All startups begin with an idea.
To turn that idea into reality, you need time and money. You need time from yourself and others to turn it into reality. You need money to pay salaries, to reach customers and cover expenses.
At some point, most startups are going to need external funds.
First time fundraising can be exciting.
Some people find it quite fun, others hate it.
I’ve only been involved in one real fundraise, for my first company Livecoding.tv. We raised something like $800,000 in total.
After the Y Combinator Demo Day, we had meetings with VCs and angel investors, and were able to raise a small amount of money.
I have a memory of being in a crowded area just outside the hall where we had just presented, and someone came up and gave us a $25k SAFE right there. This was an investor we had never met before, and they invested after seeing a 2 minute pitch.
I thought this was wild, first that anyone had 25k to invest into a tiny startup, and second that someone would do so based on nothing more than a short presentation.
Crazy.
Anyway, the first money in is called a ‘pre-seed’ round. It’s the first external funding that you get through the door.
What I want to explore is one of the under-appreciated aspects of raising a pre-seed round which is timing.
Let’s think about timing for your pre-seed round.
Raise as soon as you start the company
It can be tempting, especially if you are in a “hot” space like AI right now, to raise as much money as quickly as you can.
A French startup recently did this, raising over $100m to take on OpenAI 4 weeks after the team was formed. Companies that raise a huge amount of money early on often seem to struggle. For example, the VR startup Magic Leap raised billions of dollars before ever releasing a product, and never quite lived up to the hype.
The good thing about raising early is that you can cover personal expenses. This means you don’t have to rely on savings, reducing what can be a big source of stress for startup founders.
The downside is that the fundraising process is going to distract you from what is actually important when you are building your startup - figuring out what to build and who your customers might be.
“The best early stage founders focus on staying lean, talking to their customers, iterating on their product, and discovering product-market fit.” - Michael Seibel
Fundraising takes your focus away.
To get momentum in your fundraising you might need to schedule 50-100 meetings in a matter or weeks.
Another challenge is that you will likely be giving away more of your company early on. The earlier you are in the journey, the more investors are likely to want in exchange for their investment.
You also have the pressure of knowing that you need to figure out a direction and product in time for your next funding round, before you run out of funds. This is quite a stressful situation to be in.
The final point is that once you are on the fundraising treadmill, it’s quite hard to step off. You have to keep investors updated, you need to think about your next round, and you want to keep momentum so that you don’t have to raise the dreaded ‘down round’.
The alternative is to…
Raise once you have some progress
If there’s one thing you remember from this article, let it be this.
The more progress you can show investors, the better terms you will get.
If you wait before fundraising until you have a prototype of your product, or some early customer interest, you will be able to give away less of your company.
Also you won’t have the distraction of trying to run a fundraising process, and can concentrate on talking to users and building your product - which are the main things you should be doing in the early days!
For me, this is clearly a better option.
But it also comes with disadvantages. The main one being you need to live off something whilst you figure your early direction out, which means digging into savings, doing some consulting on the side, or continuing with a part-time job. Apart from living off savings, the other options all reduce your focus on your startup - and also make it harder to raise money when you do want to.
Investors want founders to be full time.
Of course, it’s a privilege if you are able to take this approach, because not everyone has a heap of savings they can rely on as they get their startup off the ground. It’s also stressful.
In addition to those main options, let’s consider a couple of alternatives that you can consider.
Join an accelerator or incubator
Joining an accelerator is raising money, but its much less distracting than raising a round of financing from angels or VCs because you just have to deal with one investor.
Accelerators fund people with ideas, so you don’t necessarily have to be quite as far along. You also benefit from the VC/angel network of the accelerator you join, and some mentorship which might be helpful.
You do have to give up quite a chunk of equity (often ~7%), but in exchange you get some early runway and time to work on your idea.
Don’t raise!
This is the ‘indie hacker’ approach. Build something people want and charge them for it. Head straight for revenue and grow organically. You can try things like pre-selling your product.
If you can do this, you might decide you don’t even need investors.
However, you are unlikely to be able to grow as fast or reach significant scale without investment at some point.
Staying small can be a choice, but its a difficult path.
What else should you think about with investors early on?
There are two basic approaches to pre-seed fundraising - raising on narrative and raising on traction. An example of raising on narrative was the French AI startup I mentioned at the start. They raised on the narrative that they are a group of AI experts and they are going to build a novel product to take on Open AI.
Alternatively, if you have traction (users, revenue, even a working prototype), then you can use that to raise - i.e. demonstrate the progress you have made.
Even if you want to wait before fundraising, its a good idea to start talking to investors early.
There’s a saying, “if you want money ask for advice, if you want advice ask for money”. So early on start making contact with investors and ask them for advice. You can tell them you are fundraising now, but ask if you can update them as you progress. We’ll talk about the different types of investors and how to approach them in future.
Whichever approach you take, keep in mind
“*success isn’t the same as raising a round of financing*” - Michael Seibel
Try not to let fundraising distract you from the ‘real work’ of building your company.
I hope this has given you some food for thought for your own fundraising journey.
Until next time,
Jamie
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