Fundraising is obviously an extremely pivotal event for a young company. As a friend once remarked, for a song and a dance, you get a huge infusion of capital, which in turn can be used to put the company on a completely different trajectory. Few events carry as much weight.
And yet, as an advisor, one of my biggest surprises and frustrations is that in many cases founders are not thoughtful about how to approach fundraising nor how it fits into the broader company strategy. As a result, they run into a number of common pitfalls such as:
One of my biggest gripes while advising startups is that in many cases a founder’s main reason for fundraising is that they are running out of money and time. That is, founders are backed into a corner and are frantically looking for a way out.
This is not a good spot to be for at least two reasons. First, from a purely logistical point of view, fundraising takes time and requires momentum. Without enough time to set things up, it is basically impossible to get things going. Second, investors are very savvy and can quickly discern whether a startup is looking to just survive or has actually figured out something that makes for an exciting investment opportunity.
A similar dynamic happens when founders end up passively fundraising without even realizing it.
Often, when I engage with a startup, founders share that they recently had coffee or a video call with an investor in order to build a relationship. Unfortunately, what most fail to recognize is that every meeting between an investor and a founder is effectively a pitch. That’s because an investor’s actual job is to find companies to back. This in turn means that entrepreneurs “building relationships early” are pitching and thus passively fundraising whether they realize it or not.
To be clear: building relationships early is useful and important. But it needs to be done in a careful way and backed by a coherent fundraising strategy. Random coffee chats can lead to VC checks - I have seen it. But that’s not a coherent strategy. Indeed, one-off investor meetings can backfire as founders lose the ability to create momentum and shape the perception of their startups with the investor community.
Another common pitfall is founders making unrealistic asks - usually, around introductions to investors.
One of the most valuable resources of a founder is the social capital that they accumulate throughout their career, especially with investors. A good introduction from a founder to an investor is practically an endorsement. That’s why founders are naturally conservative when it comes to making such connections. They have to be - if founders made poor intros, that reflects badly on them and reduces their social capital in the long run.
Founders, who don’t understand this dynamic, end up asking peers to make such endorsements before spending the necessary time to impress - and are then upset when their requests are met with radio silence. The irony is that such entrepreneurs are shooting themselves in the foot. If only they spent the necessary time setting things up, they would quickly see the dynamic reverse - founders always want to look smart and connected and one of the easier ways to do that is to make great introductions to investors. That doesn’t mean that every founder you know will help you out - but a lot more will if you put in the time and effort needed to earn the right to ask for an introduction and an endorsement to a key investor.
Without proper planning, creating momentum is somewhere between hard and impossible, which in turns makes fundraising a lot less likely. And fundraising is a low probability event to begin with. Such compounding of low probabilities increases the chances of a failed fundraise. In many cases this means the company is dead or turns into a zombie as it effectively runs out of money.
Even if founders somehow manage to keep things going, there is a significant time penalty to a failed fundraising effort. You can’t really try again for another 6-12 months because it takes that amount of time (at a minimum!) to change the trajectory and story of the company - which in turn enables you to meaningfully re-engage investors that turned you down previously.
Revitalizing a startup that is in this spot is extremely hard.
It is obvious that without adequate capitalization, building a succesful company becomes at best harder and at worst impossible. There are two other related factors that are a little less obvious:
First, you need to buy yourself enough runway when fundraising. One of the worst dynamics that founders find themselves in is the vicious cycle of constant fundraising, which goes something like this: spend 6 months talking to investors -> raise 6 months of runway -> keep raising because fundraising takes time and your runway is too short -> rinse and repeat. This leaves very little time for thoughtful company building.
Second, if you ever raise any private capital, you most likely will need to continue to raise capital for the rest of the company’s lifetime. That is because once you raise outside funding, you will naturally deploy it, typically by hiring a larger team, thus increasing your burn. An unfortunate characteristic of reality is that in most cases revenue catches up with expenses slower than ideal. Not to mention that if you find strong product-market fit, you should aggressively keep investing in growth, which can mean losing money for awhile. One way or another, that means burning cash. And that’s why you will need to raise again and again.
That is not a negative per se - indeed, venture capital allows you to put the company on a different trajectory, which is a tremendous opportunity to build an outsized company in a short amount of time. However, it is a delicate game to play and not having a company or fundraising strategy is one of the easier ways to lose or end up in a tough spot.
That’s why I advocate building a thoughtful company and fundraising strategy centered around milestones - including boosting the company’s trajectory with risk capital. The next chapter deals with how to think about creating such a strategy.