The contract is private Tech markets have reduced the cost and frequency of funding rounds, but inflation cuts into companies’ runways, meaning they can build less product and acquire fewer customers with the money they raise.
It is true that VCs are being more cautious in their decisions. Some prefer these companies because they want to make sure their current founders have enough runway to weather this storm. At the same time, hundreds of millions have been set aside for early-stage companies, and firms such as Lightspeed, Collaborative Fund, CoinFund and Menlo Ventures have announced new funding in the past few weeks. Later-stage capital is now being diverted to earlier stages to avoid exposure to one- to three-year exit timelines due to short-term turbulence, and instead, investors are focusing on exit horizons of more than seven years.
In this economic climate, I see many entrepreneurs asking how they can successfully raise capital, especially those who feel overwhelmed by how time-consuming the process can be. I wanted to share what actually happens in VC, the myths about raising in this environment, and actionable tips for closing pre-seed to Series B rounds that helped me raise $100 million for our fund.
As an entrepreneur, how can you navigate this environment and successfully raise a round?
Any change is likely to create leverage and a reversal is no exception.
Don’t dilute yourself more than 10%-15% in any round
If you want to build a big company, you need to keep enough equity for the next rounds and for yourself so that you are incentivized to keep growing it. Investors often need this at later stages. At the same time, don’t get bogged down with specific valuation markups. If it’s taking ages to close at a higher valuation, raise money on the same valuation or terms in the last round, or in the worst case, a down round to ensure your company’s financial stability.
Optimize for quality of investors rather than volume
First, make a list of every possible investor for your round. Then, create a second list of founders and mentors who can introduce you to good investors. Rank them as Tier 1 and Tier 2.
Leads to Tier 1 rounds and can suggest to other investors that they want to get into your company early. Tier 2 is what you prioritize after you strike with Tier 1s. As you map out these lists, think about how relevant their funding is to your company.
When soliciting introductions, the best way to stand out is by showing alignment with the right partner in the relevant organization. Contacts are not about quality, not about volume. It’s better to get 20-30 meaningful conversations than to send 200 cold emails for nothing. Identify who from your network can give an investor a warm introduction. Then create a purpose-built pitch for that particular investor to make sure you show alignment in your interests.