To raise or not to raise, that is the question. The following is a real (but anonymized) email to us at NextView where a founder debates the timing of his seed raise:
I met with someone today who said I should push to close a seed round before I launch the product. I planned on launching, taking in the feedback, iterating based on the data, and then working hard to get to product-market fit. I wasn’t really thinking about the funding side. I was just trying to solve this problem. However, two people I’ve met over the last couple of days are adamant that my network is strong enough to go a little earlier. They also said it’s best to raise a seed (if you can) just before the launch so that you aren’t as dependent on the immediate results/traction and you can sell the vision a bit more.
There isn’t a single correct answer for what is in fact a nuanced decision. However, to push the right type of thinking about the issue, I typically ask founders three questions:
1. What kind kind of company are you looking to create?
If the goal of the startup is that you know you want to go as big as possible from the beginning — “unicorn or bust,” so to speak — then raise as much capital as soon as you are able to successfully do so. However, many founders want to maintain some degree of optionality. Just taking any outside capital comes with a lot of responsibilities, including having a fiduciary responsibility to other parties involved in the business. Even if it’s assumed that the startup will raise outside (venture) capital, raising sooner often creates an accelerated (and riskier) timeframe. The further the company is capitalized ahead of cash flows, the less opportunity there is for an early successful exit because the expectations bar is higher.
2. How difficult will it be to fundraise?
A year from now, will you have gone “faster” and accomplished more because of outside capital accelerating the business, which justifies your time spent fundraising today? Do you have the experience, reputation, and network that make it relatively easy to raise seed capital? Or is there uncertainty with risk that the time spent fundraising could be better used proving out some initial product or market milestones? Given a mix of background and sales skills, some entrepreneurs are able to raise more easily than others – a decision about seed timing shouldn’t be in a vacuum ignoring this fact.
Framed another way: If it seems like it’s going to take awhile or be an uphill battle, you’re better served building and gaining initial traction and learning. If you have a positive signal on two fronts, however — you’re an experienced, well-networked founder and it’s a founder-friendly fundraising climate as it is today — then consider starting to fundraise sooner. But if one of those scores negative, one positive, or both are negative, consider getting back to building.
3. Do you have asymmetric information about the company’s future compared to investors?
How much more do you know or believe compared to others about the success of reaching upcoming milestones? If you have ultimate confidence about events happening that new outside investors wouldn’t at all be able to appreciate, then they’re not going to value it during a fundraise. The greater the disparity in understanding the likelihood of short-term success, the better off a startup is waiting until they have been achieved. On the other hand, if there is a clear hypothesis with uncertain results, perhaps it is better be up front about sharing the risk-taking and taking the seed stage dilution sooner rather than later.
“It Depends,” But…
While this is all an “it depends” answer, you can draw some very broad conclusions, mainly based on ease of process and length of time your fundraise would take. Fundraising isn’t the end goal or reason your company exists — capital is best used as a weapon, not your oxygen, after all. As a result, anything you do that isn’t building, learning, and iterating is time you’re taking away from those things — away from the reasons you do exist. So if you feel your seed fundraise process is going to be easier and faster relative to others while still pre-launch, go for it! But if you have any major doubts due to lack of founder track record, or strength/weakness of network, or current climate, then you should focus on building and reaching early, small-but-important milestones.
As for the email we received above, it seems that this founder’s positives are their network and the current ecosystem climate — less so the past experience — so had I been given all the context of that situation, I might advise them to build a little, then fundraise. It’s also possible to prime your network lightly for feedback today versus start a “formal” process. That way, if you get positive signal from investors, you can move fast to switch from build mode to fundraise mode. You’d be amazed at how many of NextView’s most productive investor/founder relationships started as informal sharing of ideas or advice-driven meetings before dovetailing into a more “official” fundraise meeting process as a round comes together … especially at the seed, and especially given our specific model of being high conviction, hands-on investors.
In the end, my favorite part about the founder question above is the quote, “I was just trying to solve this problem.” This is a way to recognize an “authentic” founder who is starting something out of a need arisen from their own experiences. This characteristic of authenticity is one which we deliberately seek out in entrepreneurs, as it’s one of the core set of “ethos” here at NextView. It also informs all of our current investment areas of interest. This founder clearly isn’t starting a business for the sake of playing startup, but instead is starting the business as the method to solve a problem.
Answering this question of timing leads to a generalization of course, but typically these types of authentic founders are the ones who both benefit from outside capital to accelerate their vision the most but are also most likely to withhold from raising a seed round at first.
To the founder who emailed us: I hope this helps address your question. Despite any lack of clarity you may think you have, the very reason you feel that way is the reason you’re more likely than others to succeed.