Part 2: how to fundraise in this market
Last week we shared Part 1: what you need to know about the market. Here’s the TL;DR:
Raising for Series A and beyond is hard right now. Why?
- VCs are having a hard time raising funds
- Company valuations are lower
What should you do? Two strategies:
- Stop the bleeding: Cut costs. Reduce expenses. Ask yourself: What is the absolute minimum you need to keep your company running?
- Long-term planning: If you can stop the bleeding, then how much cash would help you with long-term planning?
We’re going to finish this series off with two more crucial topics:
- How to approach your fundraising
- What are “series A” benchmarks?
One benefit of having existing investors is that they can help you cut expenses. But their support is easier to get if you have a good relationship with them.
So... what do you need to get there?
First is clear and frequent communication. Founders don't ususally want to send bad news to their investors because they think that it will cause investors to lose confidence in the business.
But bad times are actually when founders need to lean into sending these updates.
Trust is built with more communication, not less. Sending weekly updates in times of hardship will go a long way towards securing more support from your investors.
Find inflection points
Something we see all the time is founders trying to raise in desperation.
“I only have three months of cash left and I want to raise right now.”
But investors aren’t attracted to desperate companies. People invest on momentum.
This could look like:
- Hitting a revenue milestone
- Winning an award or getting a massive amount of PR
- Landing a big client
The key here is to show that you're growing despite the market... that you aren't letting tough times kill your efforts.
Raise a traunch round
To execute these two strategies, you may need to raise a traunche round.
A traunch is a fundraising round that basically bridges the gap between your last round and your next round, just to get you over the hump.
Traunches are generally completed via SAFEs and has a valuation cap. It could be at the same valuation as your last round, or a tiny bit higher.
What's cool about traunch rounds is that you can create forcing functions to have investors come in now.
For example, you can say to existing investors:
“Hey Elizabeth, I’m going to give you special terms on this traunch that will help us reach X milestone. And we can put that money to work tomorrow. The cap is Y but that cap is going to go up after [June 1]."
You'll find out quickly if raising the traunch round was easy or hard. If it's easy, you can raise the valuation. If it was hard, you may want to rethink when you need to raise next or possibly keep the same valuation cap.
What are Series A benchmarks?
TBH, valuations are all over the place.
If you’re in a hot space like generative AI or climate, valuations can be pretty high. Some seed stage companies are raising at $40m. Others at $20m, $15m, etc.
On the other hand, we're seeing a lot of $5m valuations for companies in "not hot" spaces right now.
Geography plays a role, too. If you’re in an emerging market, your valuation could be under $1m.
Your team’s background is also a big factor. A serial entrepreneur can probably command a $40m post vs. a first-time founder who may only get a $2m post.
To put things in perspective... we have a portco who just raised Series A at over $100m valuation. But we also have companies that aren’t able to raise a traditional Series A and are using the traunch strategy.
So it’s all over the board.
The traction benchmarks have moved up. Companies are expected to be at $1m-$3m run rate (or in some cases, over $3m) to raise a true Series A.
With that said, these numbers depend a bit on what kind of revenue we're talking about.
For example: Did this revenue come in the last 6-12 months? Or did you hit $1m in revenue over the last 3-4 years? There’s a big difference. The hyper-growth in less time is much more attractive than the latter.
Look. Things are harder now than they were a year ago.. but this is not a repeat of 2008.
Seed-stage investors are less affected than later-stage companies. Deals ARE happening but all stages are moving slowly. Companies need to be more prepared.
We’re helping pre-series A companies with this exact topic at Hustlers’ Retreat. Join us and 70 other founders in person to connect, learn from each other, and deep dive into tactical topics like these.