There is an obsession with raising venture money from top tier VCs. Taking in money from a VC that also invested in Facebook, Twitter, Snapchat, Instagram, etc. may seem like a great thing to be able to tell other people.
“Oh yea, we have the same investors as Instagram.”
The thing is, it really doesn’t matter. It may make you feel good in front a certain type or group of people, but it is not going to make mainstream people or businesses use your product/service/offering. In fact, they’ve probably never heard of KCPB, Sequoia, Accel, NEA, AH, USV, Spark, or any other VC or seed stage fund. For them it is more about what your product/service/offering does and why they should care.
The truth is:
- Startups raising money from top tier VC’s aren’t always successful
- Expectations get higher when you raise from top tier VC firms
Now, I’m not trying to discount what investors bring to the table. Obviously they bring capital to operate a business. Time and time again, I have seen investors help identify and recruit essential employees. They can give feedback on your product/service/offering. They may also help you get some press coverage. But at the end of the day it is up to YOU to make your business a success. Your investors have tons of companies in their portfolio and only a limited amount of bandwidth to help, so don’t depend too much on them.
What I am trying to emphasize here is that some startups seem to believe all their problems will be solved if they can just get investor “X” to lead or participate in their fundraising round.
Don’t believe this. It’s toxic. You are better off finding a specific investor that gets your business at a less prestigious VC than taking money from a Tier 1 just to say you have a Tier 1.
VCs will help you think big about your business, might help you recruit some key personnel, and may even play a key part in getting you acquired (if it comes to that), but they will not solve all your problems. You need to do that yourself.
There is a lot of noise out there right now. So many startups raising money, going through the hype cycle of the tech blogs, it can really mess with your head. Seeing things announced on prominent tech blogs, day in and day out can make you feel shitty and ask yourself “why not us?” It was a lot easier when startups were not as sexy and companies could focus, mess up, fix things, and get them right without the bright-light in their eyes.
After all is said and done, the ONLY thing that matters is building a product that people actually use and care about. Sure you need money to operate and scale a business. And sure you need to promote your product so more people will discover it. But if you do all these things and forget about the most important thing (i.e. the only thing that matters) you will not last.
This is why it concerns me when companies, who depend on user adoption, raise money before they have a product in the marketplace. It’s frightening to think that people would even fund something like that. If you consider that a good product is the only thing that matters, you’d think people would want to see a product that people care about and use before pumping money into it.
This also make me think about the real startup work. This isn’t the sexy aspects that you read about on TechCrunch. This is the stuff that is happening behind the scenes. The blood, sweat, and tears. The determination. On occasion you will read a blog post about what it is really like, but this is not a side frequently seen in public. Product spec’ing, long days and nights of writing code, bug testing, pipeline building, market research, copywriting, product iterating, and more. Nailing this is what makes a company successful. Not the stuff that makes noise.
So when you see some big splashy announcement- read it, internalize it, then remember - “don’t believe the hype” - it will mess with your head.
I was talking with a friend about a startup founder this past week and we agreed that one of her greatest qualities was that she could always convince people about what she was saying.
We dug a little deeper and thought about why this person always convinces people and we figured out that it’s because she always talks with confidence. No matter how much she actually knows about the topic, there is an amount of assurance in her voice that makes the other side believe that what they are hearing is correct.
Having confidence helps in all aspects of startups, ranging from convincing investors to give you money, pitching a story to a reporter, or even getting the best talent to join your team. If there was one thing I would recommend prospective founders it is to have confidence (in yourself and your product) and get good at convincing people. It will go a long way.
When you are in the early stages of your company and raise money at an insane valuation you face the problem of not reaching that value (and more) by the time you need to raise more money. To get the money you need, you will need to take money in at a down round and that sucks.
We are living in frothy times (yes, still) and eventhough you may be able to raise that 750k at a 10M pre, you shouldn’t. There are a million things that will go wrong and it is better to take an appropriate valuation and have the right investors/support system around you.
I’m all for better terms and more equity for the operational team (founders, employees, etc) - but I’m also for meeting your expectations and not setting up yourself to fail. I’m seeing a ton of companies (especially companies coming out of accelerator companies) set their terms where there is nothing else to do but not meet expectations.
I’m not an investor (although I send deals to some here and there)- any investors out there seeing something similar?
Every founder who asks me how much money to raise (seed/A), I always tell them to raise enough for everything to go wrong for six months to a year PLUS pivot money.
Whether they did it on purpose or not, Stickybits/Turntable is a great example for this.
They raised $1.6mm for Stickybits and once they realized it wasn’t sticking (see what I did there?) they pivoted to Turntable.
So you should raise whatever you think you need plus enough money to fire all the employees, retain founders (or key employees), and work for 4-6 months on a new project. This comes out to about 250k in my estimation.