The Myths and Realities of Early-stage Startup Fundraising 🚀

Dec 15, 2022

Had enough fundraising advice? Here's some more 🤗

If you’re an entrepreneur looking to raise your first round of investment, I imagine you’ve shared this very specific, Hollywood-inspired daydream… 😴

You sit down in a coffee shop. A stranger looks over your shoulder and sees you working on your product. You hit them with a slick one-liner on how you’re changing the world. It turns out they’re the biggest Angel investor in Silicon Valley, and the next day they send you a $1m seed round cheque. Job done! Time to get an office 🏢, build a unicorn 🦄 and buy a Patagonia gilet 🦺.

Unfortunately, fundraising at the early stage isn’t as glamorous as it's made out to be. There’s a lot of grunt work and rejection between you and the next round. As someone who recently went through the process, I noticed that there are lots of myths flying around on how, when and why to raise. Here are some lessons I learnt the hard way, so you don’t have to! 😊

Myth: All you need is a good idea 💡

Reality: You need timing + team + traction

I have a great startup idea!

I have a great startup idea!

The concept of a ‘billion-dollar idea’ is misleading.

An idea is only as good as its execution, and timing plays a big part in this too. In truth, even right at the beginning of a startup, when you feel like all you have is a golden idea, you need to have killer answers to the following questions:

  1. Timingwhy is now the right time to do this? You have to convince investors (usually venture capitalists) that now is the time to join you on the journey of building this idea, particularly if others have failed in the past.

  2. Team 🙋‍♂️ what makes you the team to build this? It's not uncommon for investors to buy into your idea, but simply not believe you and your cofounders are the people to pull it off.

  3. Traction 🛞 how many people have shown interest in your product so far? This could include early adopters, newsletter subscribers, social following, waitlist sign-ups, a group of power users, etc.

Before you speak to even one potential investor, have firm conviction on your timing, team and initial traction. If not, think about whether you need to raise capital right now and why. This brings me to my second myth…

Myth: Any money is good money 💰

Reality: There are smart and dumb investments

give me money for my startup idea please

Gimme money pls 🤑

In much the same way as there are good and bad businesses, good and bad investors, there’s such a thing as ‘bad capital’. You don’t want to raise funding for the sake of it - not least because it's a difficult and time-consuming process to go through. At worst, bad money can hinder your startup’s trajectory before you’ve even properly started, with investor updates and external pressures taking you away from the only thing that really matters at this point: building your company. 🔨

Some investors disguise this under the cloak of being ‘hands-on’. The adage that too many chefs 👩‍🍳 spoil the broth applies here. Equally, a completely ‘hands-off’ investor isn’t much better. Look for Angels and venture capitalists with a ‘hands with’ approach, meaning they are there when you need to lean on them, but equally they are willing to let you do your thing in peace. ✌️

Smart money not only provides you with capital to grow your business but also the validation and support needed to launch the rocket ship. 🚀

Myth: Bigger valuation = higher chance of success 🤑

Reality: Strive for what you actually need

Startup founders raising a lot of cash from venture capital firms

When you raise too much capital as a founder

Sure, large numbers make for better TechCrunch headlines. I can’t deny that. But raising an immense amount of capital, more than you need to build the next phase, comes with a wealth of problems 🤕.

First, it holds you to a much higher bar the next time you come to fundraise. Some sectors are capital-intensive and need a serious cash injection to get off the ground, but most tech businesses, especially SaaS, require very little. Raising more at Seed means you have a much greater mountain to climb to reach Series A. 🏔 Raising more at Series A gives you harder metrics to reach before looking at Series B and Series C rounds. And so on.

And whilst you might be thinking, ‘I’ll just raise as much as I can, but I’m not going to use it’; that’s easier said than done. Not only do we usually give in to Parkinson’s Law - in this case meaning that if we are given more to spend, we will spend more 💸 - but VC firms deploying a lot of cash will expect it to be put to use, fast.

A better mindset is to come up with your Plan A, B and C 📝 Think of these like stepping stones, land one and then go for the next, and so on. Ask yourself: how much money do I really need for this round of funding?

  • Plan A is the minimum you need to stay alive and get your idea off the ground.

  • Plan B is how much you need to launch and grow, without excess.

  • Plan C is the most you could possibly dream of raising.

Put numbers to these plans, then aim to reach Plan B.

Myth: Big-name investors matter 👨‍💼

Reality: You need to find the right investors for you

founders raising from a16z, sequoia, Index for their startup

How founders feel when they get an A-list VC

Sequoia, a16z, Index, et al. are the pinnacle of venture capital. But at the Seed and pre-Seed stage 🌱, getting a big-name investor is often little more than a nice-to-have.

That’s because it's not really valuable to have the resources and infrastructure of the major investors whilst you are still developing your startup. At your Series A round and beyond this might change, but at the early stages, it's far more important to find the right investors for your company. A smaller Angel or VC that understands your stage of development, has deep expertise in your field, and genuinely gets what you are trying to achieve is a much better bet. 🤝

Myth: A call with an investor means they’re interested 📞

Reality: Depth, not volume, of relationships matter

startup founders taking calls with venture capital partners

Startup founder on 10th call with the partner 🤐

Investors book hundreds of calls each week. It's part of their job. It means little more than that someone thinks you and your startup are interesting enough.

The truth is: investors invest in lines, not dots. 📈

It's all about trajectory. Good investors won’t make much of a decision based on one call, which makes sense considering they are deciding which companies to strap themselves to for a 5+ year journey. Most startups take a long time to get anywhere, and the minority that does ‘make it’ usually don’t see an exit opportunity (such as an acquisition or an IPO) for 8-10 years. So instead of judging you based on where you are at one particular point - a dot - they want to see how you grow and mature across multiple interactions, drawing a line between these points that they can extrapolate outwards. ✍️

Take the following example. On your first introductory call with an investor, you show off your MVP. It’s interesting but hasn’t launched yet. A few weeks later you update them saying you’ve hit your first 100 sign-ups on a waitlist. Later they see you launched a Beta version of the product to the waitlist community. A month or so later they see you’ve released a major feature update, and hit 500 users. And so on. It's not hard to connect the dots and see where this small business could be in a matter of months, let alone years. A fast-growing line is far more valuable to an investor than one impressive dot. 🏎

NB: I want to add here that the process of hitting milestones clearly takes some time. Keep this in mind. If you want to raise in, say, 4 months’ time, then start plotting dots with investors now so that when you’re ready to raise, the investors are ready too. 😌

Myth: Signalling doesn’t matter anymore ⚠️

Reality: Fundraising needs momentum

startup founders with momentum

How founders actually feel when they have momentum 😅

The first cheque is always the hardest to secure, simply because it's the riskiestfrom the investors’ point-of-view. You’ll likely find the first investment is hard to push over the line and, afterwards, it gets easier to add on additional investors. Each investor de-risks the next. Chase the ball down the hill until you fulfil your Plan B. 🏃‍♂️

For this reason, I highly recommend avoiding a price round and opting instead for SAFEs. SAFEs are convertible share agreements, standardised by YCombinator, that allow you to take on capital from multiple investors at different valuations. This means your startup can move incredibly quickly 💨, without being held to wait for a unified legal agreement between all of your potential investors. Every hour saved on admin allows you to prioritise actually building your startup.

The 5 Vertebrae System of startup funding 🖐

If you’re thinking about starting the fundraising process, but aren’t sure whether your company is ready to raise, use this handy framework. It’s called the 5 Vertebrae System; writing and refining these 5 aspects of your company puts you in the best position possible to answer investors’ questions without getting undone. 🧶

Together, these should make up the spine of your pitch deck and fundraising strategy:

  1. What you do 👀 In a sentence or two, what exactly does your company do? Make it short, easy and memorable.

  2. Traction 🔥 Without wanting to repeat myself, I can’t stress this point enough. Since you started, where are you now? It can be as simple as XYZ (‘since X, we’ve done Y and expect Z to happen’). For example: since we launched in June, we’ve gained 150 power users and expect to grow 50% week-on-week…

  3. Team 👫 What unique experience or skill set does each founder have that categorically showcases why they are the ones to take on this challenge? What killer skill can they bring to the fight - and it really is a fight 🥊 - of building a unicorn?

  4. Insight 🧠 This might be an insight about the industry, something you have learnt since launch that the rest of the market has missed. Is there a trend you are seeing that you can prove you will be able to fulfil?

  5. Business model/market size 💼 The proof that your investor can make a 10x+ return on their investment. How many users will your product and how much can you charge them? Don’t just find the largest TAM available, instead opt for your actual market size. It's far more convincing.

Once you have your 5 Vertebrae nailed, you’re ready to take investor calls! ☎️

Final thoughts

When it comes to fundraising, there are a lot of misconceptions that get thrown about. The truth is good investors appreciate founders actually focused on their companies: building products, creating a user base, testing new markets, etc. That’s what the best startups do. They focus on genuine results and avoid vanity projects. Take the same approach when it comes to raising capital! Focus on investment that aligns with your goals, understands your product, and is willing to help you when needed. These things are far more important than the prestige of your VC firm, the valuation you get, or who leads your round. 🤗

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