For founders, especially those starting a business for the first time, the gyrations of the stock market, the resulting correction in public-market tech stocks, and the inevitable impact on private company fundraising can seem daunting. In recent weeks, geopolitical challenges have only added to this grim scenario.
As an entrepreneur who has survived two recessions (the bursting of the internet bubble after 2000 and the financial crisis after 2008), I know that business innovation will always be alive and that starting a business is a marathon, not a race. velocity.
Here are some of my favorite tips for those who want raise capital, and they do not have spurious networks to achieve it.
Capital raised and valuation must match the stage of the business
Rather than expect a spectacular valuation at the startup/Series A stage, founders need to remember that there will be many funding rounds to come. It's easier to go up than down, and the ultimate value comes from building a sustainable company.
Raising too much capital in the early stages can result in undisciplined spending, leading to layoffs and other painful actions when the rate of consumption soars and future funding is tight.
The list of startups that raised moderate rounds from the Serie A It's long: Lyft raised $6,2 million; Airbnb raised 7,2 million; Zoom raised 9 million; Uber raised 11 million; Confluent grossed $6.9 million; HashiCorp raised $10,2 million; Snowflake grossed $4,95 million. And the list is growing.
These founders understood the value of a long-term mindset and the importance of building startups with the right values and structure so they can grow into lasting businesses.
Founder dilution and investor ownership are part of a long-term game
While founders are rightly sensitive to dilution, losing percentage of the company's total in favor of equity, it's helpful to understand that investors who commit to partnering with them realize that the company will get many rounds of equity. who follow the one they are leading.
As stewards of capital raised from their limited partners (often pension funds, university endowments, and philanthropic institutions), investors are committed to generating returns, and having a significant stake in a future liquidity event enables them to do so.
For example, when they partnered with HashiCorp's Armon Dadgar and Mitchell Hashimoto, leading their Series A in 2014, they held 20%. When the company went public in December 2021, that stake was already 18,3%.
Sequoia Capital, an early investor in Doordash, owned 18,1% in the initial public offering; Benchmark, an early investor in Confluent, owned 15,1% in the initial public offering; and Sutter Hill, an early investor in Snowflake, owned 17,2% in the initial public offering.
In the end, if an investor can play a role in helping a founder build a sustainable company, everyone benefits from the resulting value created.
The key is trust between founder and investor
During the long process of creating the startup, the founders and their investors evolve, change and prosper. It is critical that they share a zone of trust that goes beyond the relationship between CEO and board members.
As an early-stage investor, they fill board positions in all companies, regardless of the size of the investment round, and act as advisors during the initial public offering and beyond.
For founders, choosing investors that go beyond financial metrics is key. Prioritize the investigation of an investor's reputation. Do they spend time understanding the business and engaging appropriately? Do they have a reputation for supporting founders through good times and bad? Do they deliver on promises of support in strategy, fundraising, recruiting, and client introductions?
In difficult times great companies are created
Many of the companies that survive were founded during the 2007-2009 financial crisis: Airbnb, Lyft, Uber, Square, Stripe, Pinterest, DataDog, Twilio, Okta, Cloudflare, and Zscaler as examples. While it is unclear if the current market volatility will last, it is safe to say that several large companies will be created in this current period.
Founders approaching investors in 2022 do well to take this historical factor into account, as well as current market expectations.
In the initial stage, it is mainly evaluating the team and ensuring that the company's product is appropriate for the market. It's hard to estimate the size of the market at this stage, but you're always trying to figure out how many customers will need your company's product and how it will differentiate itself from competitors to attract and retain customers.
If you have a product on the market, beyond the criteria listed above, we try to talk to customers to understand if the company's product is a must-have, not nice, and if the customer can live without the product.
We also want to be aligned with your plans for growth and cash expenditures to make sure you're not planning to “grow at all costs” before establishing product fit for market.
It is necessary to accept fair initial valuations for all, since the most important thing is the value of the subsequent company. Don't raise money with very high valuations as it can hurt future rounds.
While current times may seem intimidating, the founder's DNA of thinking big and aligning with social transformation trends is always a winning bet.
For Lyft and Airbnb, it was the sharing economy; for Twilio and DataDog, it was the rise of the developer; for Okta and Zscaler, it was cybersecurity. They pushed through bear markets and even a pandemic to make their expectations come true.
