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Fundraising When You’ve Been at it a While
Fundraising for startups is a mix of selling both promise and reality. In some respects, one of the often non-intuitive privileges of a seed stage fundraising process is that the company is so new. There isn’t much history, much reality, to get in the way of a good story. So a lot of Founders can weave a tale of the promise of what could be created rather than what has been created. And the earlier stage the startup, the less capital that’s gone into it, the small amount of time spent to date, leaves a blank canvas to paint a vivid and promising vision of the future.
But what happens when you’ve been at it a while? Most startups have hit a patch where they’re figuring things out, not linearly (or geometrically) progressing forward, facing challenging external circumstances, or refactoring a product or go-to-market approach. Sometimes those time-periods are extended ones. And it’s even more likely in light of the current Covid crisis that company development and subsequent fundraising timelines will be longer in the next several years than in the past.
The reality is that when fundraising for a successive financing round along the seed stage continuum, all startups are graded on a curve based on the amount of time and capital which has gone into the company. Companies are evaluated not just on the absolute progress & scale which they’ve reached, but also the relative progress and scale given the inputs.
This situation presents a challenge for those startups which took a little bit (or a lot) longer than they’d hoped to figure out product-market fit, or for those startups which spent more than they should have in determining the right marketing channel mix and tactics. Fair or not, venture investors look at the time and money it took to accomplish that traction as a proxy for the success trajectory following a subsequent financing.
So given the reality of what’s happened in the past, what’s a founder to do?
The best way to address excessive resources utilized when you’ve been at it a while is to clearly and explicitly reframe and “reset” the starting point of the company.
”We founded the company four years ago, but we consider 16 months ago when we launched our product to [x]”
“We hit an clear inflection point in our revenue trajectory 14 months ago when we radically changed our marketing positioning”
“$1M of our capital raised previously was spent on a product that isn’t currently in market, but the remainder is what we consider to have brought us to the business milestones today.”
It’s incumbent on a company in this situation which has a history to answer not just the question “why invest?” like all startups have to, but also “why invest now?” There’s an additional onus on the startup to demonstrate an inflection point of catalyst for why new capital now will be more efficient than that and quicker response than what’s gone into the venture in the past. The brighter the line of before and after, the better.
Additionally, in today’s environment, the narrative must also include a “why now” vs. waiting until the uncertainty surrounding the pandemic is over.
How hard should CEO Founders lean into this reset story? I believe in most cases it’s beyond a voiceover when presenting. Rather, the longer that a company has been around, the more rational it is to incorporate a “why now” into the whole narrative of the fundraising pitch deck. Draw arrows in the revenue ramp for that “ah-hah” moment where things changed and there was a kink in the curve.
I can foresee a situation in the future when the Covid shutdown impact (and hopefully subsequent recovery) are explicitly shared in a pitch for context. Murkiness and burying the truth is the enemy; rather, directness and crispness of an inflection point are a friend.
Startups which deserve to raise subsequent funding in a pre- Series A seed/post-seed/extension round eventually cross the finish line to accomplish that goal. Yet the race can be more difficult because they’re really starting behind the starting line due to a not-so-linear history or absence of the promise of an empty page. The best way to jump-start this profile fundraising is to directly acknowledge the past, what’s worked and what hasn’t, and articulate a clear & specific time & place when the real race began.