I thought it might be useful to do a high level overview of what fundraising in 2018 will look like at the pre-seed and seed stages. Of course, this is just my prediction; only my $0.02.
It will be hard to raise a pre-seed round through traditional methods
If you are raising money through traditional methods (such as through angels, micro VCs, or VCs) via a convertible note, convertible security, or equity deal, it will be a lot harder to raise pre-seed money in 2018. I’m seeing a number of investors pull back on investing through traditional means. This means that traction bar has gone up for both pre-seed and seed stage companies.
In the late summer/early fall of 2017, we were investing in companies that were quite early. For founding teams we did not already know, they all had a product built and all had early customers. The companies we were investing in at the pre-seed level were doing as low as $1k revenue per month (non-repeatable) though we also invested in many companies with much higher revenue, too.
Towards the end of 2017, we noticed that downstream investors were slowing their investment pace, and we felt that it would be incredibly difficult to get our companies to the next point if we were investing only $25k at such an early stage. The market had definitely shifted. For your “typical” software deal, the stage after us (seed-stage) is probably around $30k-$50k per month in revenue as of writing this post (this will depend A LOT on the idea and vertical). So from my perspective, our entry point needs to be close enough to this rough benchmark for our companies to get to the next round of funding. This has caused us to shift a bit downstream, too. And in fact, in 2018, we have not yet done a single software deal even though last year we were averaging about one deal per week.
Raising money via an ICO is the exact opposite experience right now
However, if you are raising via an ICO, at least at this moment, you are probably having the opposite experience as a pre-seed company. In fact, the median raise I’m seeing in the ICO markets is $20-30m or thereabouts, and you need very little developed to raise a lot of money!
For me, I personally think ICOs, at this time, only make sense if you’re building a blockchain company that uses utility tokens as currency for your decentralized product or service. However, the frenzy is so nuts now, there are so many centralized/non-blockchain related companies that are successfully raising via ICO.
I do think in the long run, ICOs or some variation of today’s ICOs will disrupt traditional VC, and I plan to help this process along (this is what I’ve alluded to here). I’ll be bringing thought leaders to this blog who can talk more about ICOs in later posts.
Crowdfunding is also more mainstream than you might think
Beyond traditional methods of fundraising (e.g. convertible notes, convertible securities, equity) and ICOs, there are other ways to raise money, too. Crowdfunding can be incredibly effective if you already have customers and/or have built up an audience. Companies like The Hustle raised $300k from their customers in just a couple of days.
Pros and cons of different funding methods in 2018
This is going to be an evolving analysis, but as of today, here’s a quick set of pros and cons for various fundraising methods:
“Traditional” fundraising on a convertible note, convertible security, or equity round:
Pros: Tried and true. Professional investors understand how this works. There should be no surprises with this type of raise.
Cons: Slow. Investors can be annoying and obnoxious to deal with. Power is in the hands of investors.
Crowdfunding and pre-sales:
Pros: Customers are the perfect audience for raising money because they already understand your product or service. This works well if you’ve amassed a huge user base or audience or have a large mailing list. If you have a media company or do a lot of content marketing, for example, this could be a great path. And quick. And online so you can get investors from anywhere.
Cons: Each investor will likely write only a small check. So, you might have lots of people to deal with even if you go through a 3rd party platform (e.g. if people have lots of questions). And, this is most effective if you have something already and/or already have investors – in other words, you’re already in business and have raised some money.
Pros: Once you get all the pieces in place, quick to raise money. You don’t give up equity or control. Power is in the hands of the entrepreneur. Completely online so you can get investors from anywhere. Can raise on just an idea. And can potentially raise lots and lots of money.
Cons: Logistics can be challenging. Handling the security of ETH (cryptocurrency) is quite involved. If you don’t handle this correctly, you can get hacked and lose everything. If your ICO is not in compliance with SEC regulations, you can get shut down by the SEC. The value of ETH can fluctuate wildly (unlike the dollar). Generally makes sense at this point in time only for blockchain related companies that utilize a token that can be used for decentralized services and products.
I’m also seeing variations of the above – various combo deals with equity and tokens…the fundraising landscape has been changing a lot in the last couple of months, so who knows, this entire blog post might be obsolete in another 2 months. It’s an exciting time…