How to think about different types of funding for your early stage startup

One of the things that I’m noticing is that the early stage financing scene is changing quite rapidly. It may not feel like it — it’s still hard to raise money of any form, but there are a lot more options now than say even 5 years ago.

Traditionally, you have a lot of tech startups flocking to venture capital firms to raise money, because VCs have done a great job, as an industry, in marketing themselves. But the vast majority of startups who seek VC funding are not the right profile for that type of funding. As an entrepreneur, this is something I didn’t understand — what types of funders are out there and who is a good fit for what?

For example, angels and VCs are often lumped together in the same category. Afterall, they both invest in early stage startups on an equity-basis (this includes investing in convertible notes and convertible securities as well)  But they could not be more different. (See my post on closing angel investors)

In this post, I want to talk about different categories of funding beyond equity-based financing. These are categories I’d not even thought about as a founder. Here are the rough categories of financing options for early stage founders:

1) Equity financing (priced / notes / convertible securities)
2) Revenue based financing
3) Debt financing

…and some permutation of the above!


Image credit: Giphy

1) Equity financing

This is the one that everyone knows about or at least has heard about. In its simplest form, with equity financing, you as the founder sell shares in your company for cash.

Variations on this include using convertible notes and convertible securities (SAFEs / KISS doc). (see here for details on the differences)

What most people don’t realize is that this is the most expensive form of financing if you are successful. Why? Because your payback amount is delayed significantly and the amount you end up paying back is a LOT if you are successful.

Let’s say you sell 5% of your company for $100k. You think “whee! I have $100k to work with.” In 10 years, if you do incredibly well, and now your company is worth $100m and you sell your startup for an all-cash deal, you pay your investor $5m (assuming no dilution in this example). That is a 50x return for your investor.

Now let’s suppose you had a crystal ball and you knew this outcome would definitely happen.  Knowing that, would you take this deal? Of course not. $5m is a ridiculous amount to give up for a $100k investment. If you knew for certain that this outcome would happen, you would likely try to fund your business with other money so that you could retain the extra $5m for yourself. Right?

Now of course, the reason entrepreneurs take this deal is that you don’t know ahead of time if you will be successful in 10 years! And most founders don’t get to this outcome. A common phenomenon that I see successful founders face is that they are at first incredibly excited to raise their first couple of rounds of equity but then later, they become a bit frustrated that they have taken too much dilution.

Guess what — equity investors need to take a lot of your company in order to justify the risk they take so early on in your business. The heavy amount of equity you sell in your business needs to offset all the losers in a given investor’s portfolio (plus more).

People don’t realize that equity financing is one of the most expensive forms of financing — because you don’t feel it until years later.

The flip side is if you raise equity financing and your company does go belly up, you don’t owe anyone anything. The investor is taking all the risk here as well.

2) Revenue based financing

Revenue based financing is a bit akin of income-shared agreements (ISAs) for individuals. With revenue based financing models, an investor invests money not for shares in your company but for a repayment percentage until you hit a certain cap.

In this model, say we invest $100k and the deal is to pay 10% of your revenue every week until you hit 1.2x or $120k in total repayments. Let’s say that next week, you generate $10k in revenue, so in this model, you pay back $1000 that week. And the week after that, let’s say it’s a great week, and you generate $20k in revenue, so you pay back $2000 that week. Now let’s say that the following week, you have a bad week, and you make $0. You pay back $0. In this model, the investor is with you through the highs and the lows — always taking 10% no matter what. If it takes you 6 months to hit $120k in repayments, that’s a great fast return for the investor, and if it takes you 3 years to repay back $120k, that’s probably a lot slower than the investor would have liked with a much lower IRR. He/she is with you through the ups and the downs — that is the risk that he/she takes.

Investors in this model make money by essentially picking companies that are generating fairly consistent revenue that have low default risk, and they are trying to target quick payback periods so that their IRR is high.

Now, let’s compare this form of investing vs equity investing. Suppose again we are pretty certain we can sell our company for $100m in 10 years, I would rather take $100k in revenue-based financing. Afterall, I would only have to pay back $120k instead of $5m.

But, let’s say we are at the very very beginning of our startup, and we don’t have many customers and not a lot of revenue. Equity financing allows us to keep all of the cash we make to pour back into the business. We don’t have to pay anyone out each week, and that extra cash can help us get to the $100m outcome faster on an equity investing model. Moreover, we probably wouldn’t qualify for revenue-based financing at that stage.

3) Debt financing

The last form of common early stage financing is debt financing. Unlike revenue-based financing, this is time based. This is also the cheapest form of capital but also the riskiest to the entrepreneur. In debt financing, if an investor puts $100k into your company, he/she is looking to be repaid back with interest by a certain date. So, say we do a debt investment of $100k into a company, we might ask for $120k back after 1 year (the principle plus 20% annual interest).

In addition, often, you have to personally guarantee a loan if your company cannot pay it back. Sometimes, debt financing come with warrants as well — if an entrepreneur cannot pay back the debt within a certain time period, the entrepreneur must give up other things including equity in the business.

So even though this is the cheapest form of financing, it’s also the highest risk for the entrepreneur.

Tying this all together…

Let’s analyze all of these forms of financing. First off, usually debt is the cheapest form of capital and equity is the most expensive. Now you might think, “Wait, a minute! 20% annual interest in this last example feels really expensive!” But when you compare the interest to the revenue based financing model and the equity model, it’s not.

To compare all 3 of these financing options, we need to look at the returns on the same time scale.

  • An equity investment of $100k that turns into $5m 10 years later has an average annual IRR of 48% per year.


  • A revenue-based financing investment of $100k that turns into $120k in 6 months has an average annual IRR of 44% per year.


  • And of course, a debt investment of $100k with 20% interest after 1 year has an average annual IRR of 20% per year.

Of course, if the time scale for the revenue based financing model changes, that will impact the IRR. And if the company that raised money on an equity basis exits earlier or later, that will also change the IRR for the equity-based investment.

Now of course, we are just looking strictly at what capital each scenario can provide. However, it’s possible that with a value-add investor, he/she can change the trajectory of your company. In the equity example, what if it were your $100k investor who introduced you to your would-be acquirer? Then the $5m repayment seems totally worth it. Or what if he/she introduced you to your key hire that led to the acquisition? Totally worth it.

Wrapping this up…

Even though it’s a much cheaper form of financing, founders are typically averse to debt. It’s a natural reaction, because in our personal lives, we go around saying, “Oooooh, debt is bad.” In our personal lives, debt is often bad, because your own cashflows are generally not growing faster than your interest rate. You typically are not getting 20%+ year over year raises each year.

In a startup, if your revenues are growing 20% MoM and your interest rate is only 20% year over year, you are growing your business significantly faster than your debt. And so not only will you have the cash flows to cover this 1.2x multiple of investment, but cash that you can put to use today will make your company worth (1.2^12) 9x more valuable a year from now, while you are only required to pay back 1.2x of the cash you took in.

In the early days when you have no revenue (and maybe you cannot get other forms of financing), equity financing is the least risky for you as the entrepreneur, because not only are you NOT on the hook for losses, but you can pour all revenue back into your business. But once you start to get some certainty around your revenues and some predictability around your cash flows, it may make sense to look at a blend of different forms of financing.

For example, let’s say we’ve started a business, and we are doing $12k per month in revenue and growing on average 20% MoM. What if we did $90k in equity financing and 10% in revenue based financing? If our revenue and cash flows are growing at more than 20% year over year, then this could makes total sense.

On the surface, it may seem insignificant to only raise $10k in revenue based financing, but when you think about what that could potentially become in 10 years,  using the example above, it would be $500k in liquidity in 10 years on a $100m company exit, which is pretty significant.

I think that once you have some level of understanding of your cash flows, it makes sense to look at your composition of financing and try to figure out what proportions of various forms of financing make sense based on your risk tolerance and predictability of your cash flows. I don’t think we do this enough as business owners.

To SAFE or Not to SAFE?

VCs debate quite a bit about whether they like The YC SAFE or not. (Spoiler: Most do not…) We’ve done a lot of investments on SAFEs as well as on notes and in equity rounds, so I thought I’d outline pretty openly the pros and the cons of raising money on a SAFE.

First off, what is a SAFE?  

A SAFE is a convertible security that was developed and evangelized by YCombinator.  (500 Startups also has a convertible security called the KISS).  The convertible security concept, in itself, is an interesting innovation.  In essence, the convertible security is a placeholder for equity without the cost of both time and money doing an equity deal.  For a more detailed primer on convertible securities and the differences between those and convertible notes and equity, read my post here. (A lot of people, especially investors, confuse convertible notes and convertible securities but they are actually quite different! One is debt and the other is a placeholder for equity)

PROs for using a SAFE:

  • Your legal costs will be zero or low because it’s a template
  • There is no minimum threshold to raise before a deal goes through; investors simply sign and wire
  • Investors receive equity when an equity round happens; if a company goes through a liquidity event before an equity conversion happens, you’ll convert to equity and receive your proportional share
  • The new SAFE is a post-money SAFE, which is a BIG deal

The last bullet deserves a conversation in itself.

The post-money SAFE is easier math to calculate than the old pre-money SAFE

Previously, there was a lot of confusion before about how much equity an investor really owned.  The old SAFE was a pre-money SAFE — meaning your equity ownership was affected by how much money was raised on other SAFEs.  When companies raised lots of money at different caps on the pre-money SAFE, the math got to be pretty confusing for many people — both founders and investors.  No one really understood how much equity they owned. I also saw a lot of math mistakes in various deals that we were in that converted these SAFEs to equity. Investors were upset because they thought they owned a certain percentage of a company but then actually didn’t.  Founders didn’t understand how much of their company they had company they had sold.  This is why there are so many articles about how SAFEs are not SAFE.  The biggest pushback against the SAFE is in response to the old pre-money SAFE not the new post-money SAFE — namely, that no one knows how much equity they own.

With the new post-money SAFE, it’s quite easy for everyone to figure out how much equity has been sold.


Photo credit: Giphy

How to compute your ownership with the new post-money SAFE

Let’s say that we invest $30k on a post-money SAFE with a $3m.  We own $30k (how much we invested) / $3m (the post-money valuation) = 1% of the company.  That’s it.  When we convert this SAFE in the first equity round, we will own 1% of the company.  It doesn’t matter who else is investing and at what price or anything.

This is a lot easier for people — both investors and founders — to understand.

Now let’s say the company raises another tranche of money on a post-money SAFE with $5m cap.  Let’s say we put in $50k now.  We own with this tranche: $50k / $5m = 1% of the company.

Now when both of these SAFEs convert, they will convert at the same time.  So we now own 1% + 1% = 2% of the company upon conversion.

One update and caveat (6/7/2019): Thank you to Seth Bannon of — “The new post-money SAFEs get diluted by any options pool created for the equity round (the old SAFEs did not) so an investor’s actual ownership will likely be ~10% less than this example.”

Continuing on with the other PROs…

SAFEs enable small investments

For smaller investors (such as ourselves), there’s a cost to doing a deal (mostly legal).  So, with a SAFE, this makes our costs virtually nothing.  This means that with a SAFE, as a founder, you can bring in small investment checks here and there a lot more easily, and you don’t even need a lead.

The reality is that most companies will not be able to raise a seed round with an institutional lead, but there are many more startups that will go on to do incredibly well and should be able to be backed.  I like that SAFEs democratize the startup ecosystem and make funding more accessible beyond the 100 or so seed funds that write large checks. 

What are the CONs?

These are the biggest CONs that I hear about the SAFE:

  • People don’t know how much of a company they own (addressed above)
  • Investors modify the SAFE
  • QSBS tax exemption doesn’t apply to SAFEs
  • SAFE holders don’t receive dividends

Another pushback that I often hear about the SAFE is that a lot of investors try to modify it to create weird new SAFEs.  I encourage investors to please please please not do that.  Templatizing docs, in general, is a good thing — it reduces time and legal fees to do a deal, and if you want modifications, please use a side letter.  The SAFE is meant to remain a lawyer-free template.  Templates keep the expenses down for smaller investors who cannot afford high legal fees.  Reviewing a side letter is a lot easier / faster / cheaper than reviewing a modified SAFE.

From our experience, the biggest downside as a very early investor is that QSBS tax exemption doesn’t apply to SAFEs. This is a much longer blog post, but the QSBS tax exemption was enacted in the US to encourage early stage investment.  If you hold private company stock for more than 5 years and there are other criteria met by that startup, any gains from a sale of that stock after the 5 years is tax exempt. This is amazing!  However, if you are a SAFE holder for 2 years and then you convert to equity and then the company sells 4 years later, you do not reap those benefits even though you made the investment 6 years ago.

One last corner case of being a SAFE holder is that even though you will convert to equity, if a company doesn’t raise more money nor has a liquidity event and then starts printing money and issuing dividends to shareholders, you as a SAFE holder do not get those dividends. This is a possible situation (though rare) – have never come across it myself personally.

SAFEs avoid dilution

There’s one last interesting tidbit about SAFEs – I couldn’t decide whether this is a pro or a con. I’m seeing money raised on SAFEs at the pre-seed, seed, and post-seed levels.  Let’s go back to that prior example where we invested in a company twice at two different caps on a SAFE.

Now let’s say that we invested those same amounts on two separate equity rounds at the exact same prices.  The interesting thing is that when we invest in two separate equity rounds, our first check got diluted down…  But when we invested both checks on SAFEs, we did not get diluted down, because both SAFEs converted simultaneously into the first equity round.

As we see multiple tranches of seed happen more and more, investors who write checks on a SAFE will avoid some dilution than if they were to invest in the equivalent equity rounds.

And for founders, this characteristic of the post-money SAFE is a double-edged sword.  On one hand, the post-money SAFE is great because it’s easier to figure out how much of the company a founder has sold.  On the other hand, ultimately, its founders who take more dilution on this new SAFE than on the equivalent equity rounds.  However, I think if everyone is aware of how this conversion happens, then this characteristic should just get priced into the initial cap of the SAFE.

Final thoughts

All-in-all, on the net, we, as a small fund, like the SAFE, because being able to do small deals as a small fund or an angel enables more startups to get funded. I can understand why larger funds would prefer to do large equity rounds – the reality is that often it’s the smaller investors who bubble up those deals before the large funds end up funding some of them.  And empowering smaller investors is a good thing for the ecosystem, because more startups can then have a shot at the big stage.

Featured photo courtesy of Pexels


The #1 thing most people do wrong when they fundraise

“So why do you like fundraising so much now?” 

It was a dreary day, and I was catching up over coffee with a friend of mine whom I hadn’t seen in a couple of years. And we were talking about startups and fundraising.  This friend has known me since when I had my company LaunchBit, and she knew just how much I hated fundraising back in the day.  In fact, when I was running LaunchBit, the fundraising process was super tough for me.   In fact, it took a huge toll on my health.

Back in 2011…

“We can’t find anything wrong.” said the physician.

There I was at Massachusetts General Hospital. I had been referred to a specialist to check out a problem I was having.  My problem was tough to explain – I kept feeling like someone was constantly poking me all the time with a pin. Just everywhere all over my body.  The prickly feeling didn’t stop anytime during the day – even when I was trying to sleep. It had started a few weeks before and it just would not go away.

After seeing a number of physicians who could not figure out what was wrong, Massachusetts General Hospital was the final stop.  MGH was a world premier hospital with a billion and one specialists and researchers including in fields such as the nervous system.  All these doctors appointments were a bit of a distraction for me, because I was in the middle of raising a seed round for LaunchBit. But this issue was becoming so bad that I couldn’t even sleep.  


Fundraising had been a stressful process, and I had felt so much pressure to raise a $1m round.  And, after raising almost $400,000, I decided to just stop. I wasn’t getting any more momentum on the round, and my health problems were really starting to bother me. Immediately after halting my fundraising activities, surprise surprise, all of my ailments stopped and magically disappeared. There was never any scientific explanation or diagnosis for what had happened.  The only explanation that I have for myself is that I was just so stressed that weird things were happening to me because fundraising was taking a toll on my health. Fundraising was definitely not fun to me back then.

Back to the meeting with my friend. “So why do you like fundraising so much now?” she asked.  

“Hmm…that’s a good question. Because I now understand how to do it.  And, because I’m good at it – hah!” I responded half laughing.

It was even hard for me to believe that I could get good at fundraising.

In the past 7 years, I’ve learned so much about fundraising – partly from my own fundraising experiences LaunchBit, but much more so through helping hundreds of founders I’ve backed over the years with their raises and in raising Fund 1 for Hustle Fund.

7 years ago, I didn’t understand how to fundraise. I think when we hear the word “pitch”, it almost seems to imply that we are talking at someone. But fundraising could not be further from that.

My biggest learning around fundraising is that fundraising is actually a series of dialogues – not pitches – and success is contingent upon need finding and finding the right investor match.  

The reason I think fundraising is so fun now is that I’ve learned that fundraising is more of a customer development exercise out of the Lean Startup playbook than anything else.  And that’s fun.

A noob fundraiser will go into a first meeting, open up his/her deck, and start going through the slides.  In doing so, you don’t really know how your story is landing.  You’re not having a conversation.  But, an experienced fundraiser knows that the goal in going into your first fundraising meeting is to ask lots of questions and walk away understanding what next steps make sense. You should understand your potential investor’s pain points. Is there something you can solve for a potential investor by having him/her invest in your company? Do you have a solution for those pain points?

There are many reasons to invest

For example, let’s say we’re selling pet food – hippo pet food – and let’s say that I were raising money for this company.

There are a number of reasons why someone might like to invest in this company. It could be that an investor wants:


  1. To make a lot of money and believes that hippo pet food is an amazing market
  2. To invest in a basket of e-commerce companies
  3. To invest, because he/she believes in me personally
  4. To invest in more female entrepreneurs
  5. To invest, because he/she has a pet hippo and really loves the product
  6. To invest, because he/she believes that I have a strong network and wants to get tapped into it
  7. To invest in a bucket of Xooglers’ (ex-Googlers) companies

The list goes on and on. As you can, there are many reasons why an investor might like to invest in this business.  And my job is to ask lots of questions in a first meeting to learn what an investors’ interests and challenges are.  And can I figure out which of these reasons, perhaps, might be one that resonates with a potential investor.


I think we fixate too much on what VCs are looking for, but it’s important to note that the world is filled with many would be investors, including individuals, corporates, and family offices.

In general, most VCs are trying to maximize their dollar return in the shortest amount of time possible.  (This is reason #1) But, for an angel investor, there are many other reasons to invest, and some of those reasons may be #2 or #3 or #5 etc…

Fundraising is about doing customer development

It is your job as an entrepreneur to figure out what a potential investor is interested in in a first meeting. Can you help that person or that company achieve its goal. If the investor is trying to invest in more e-commerce companies, you’ll want to tailor your story to that thesis, and if the investor is trying to invest in more women, you may want to play up that angle.

Your job in the first meeting with a potential investor is to ask a lot of questions – ala customer development style – to understand how you might be able to tie your story to their problems and interests.  And so your pitch should not be stagnant, and although you may have created a deck before the meeting, it’s important to tie your talking points together as a solution to the problems you learn about in that meeting.

The first meeting with an investor is really about truly understanding their needs and triaging whether you think your company might be a good fit for that investor.  Your job is not to try to convince a potential investor to invest. Your job is just to triage. It is much easier for you to close an investor who is already bought into your story than it is to try to sell an investor who is not bought in. And it’s ok if someone is not a good fit.  In fact, I would just address that head on — “It sounds like this might not be a good match — you’re generally a series A investor and you’re looking for a lot more traction.  Why don’t I put you on my newsletter, and perhaps there may be a fit down the road?” Addressing things clearly and directly is the best way to communicate with investors, and it’s ok if there’s no match.

There are billions of investors

I’ve observed over the years that when founders create their list of investors they want to pitch to, they often draw from common directories.  Such as Crunchbase.  Or AngelList.  Or various Excel spreadsheets that are passed around.  It’s often the same set of hundreds of funds and about 100 angels.  These lists are a great place to start for sure.  But what I’ve found is that these lists also narrow people’s thinking.  Why do founders just pitch these people?  Why not the billions of other people in the world?  There are so many rich people or even people who are not rich but may have conviction to write a small check.  By limiting ourselves to these lists, we create unnecessary pressure on ourselves.  You end up in a weird mindset — if I cannot convince these people to invest, I’m hosed.  Right?  A bit of an exaggeration, but has anyone else had that mindset before?  I certainly have.

But this is the wrong way to think about things.  The right way to think about fundraising is with a growth mindset.  There are billions of people in the world – many of whom are rich – any of these people could potentially invest. This takes the pressure off right away.  The game changes from “How can I convince this small group of people to invest in my company” to “How do I triage people quickly and get to meet with a lot of people quickly?”

Once you have that mindset, then it’s just a matter of finding potential investors to have a conversation with, figuring out quickly whether they are a good fit, and if they’re not,  move on quickly. Instead of wasting time trying to convince someone to invest, you want to actually spend as little time with people who are not a good match to focus your energy on getting new meetings. Your job is not to try to pitch at people or convince. Your job is just to have a conversation and do need finding, triage accordingly, and then rinse and repeat.  (See my post on finding potential investors.) That is what fundraising is all about when done right.

For people who are not a good fit, you definitely want to cultivate those relationships.  Put all of these people on a monthly newsletter with your clear progress.  Much like in B2B sales, if a lead is not a warm lead, you should use automation to keep those people engaged but don’t spend a lot of time with them until they are actually interested.

When I was fundraising for my startup many years ago, I took the totally wrong approach. And you can see that by limiting yourself to some silly list that you have and putting pressure on yourself, fundraising can be a bear.  But if you can change your mindset and approach, it’s actually pretty fun.

Feature Image credit: Pexels

How I raised my $11.5m VC fund

A couple months ago, we announced that we finished fundraising for fund 1 of Hustle Fund.  Hustle Fund is my new venture capital firm, and our fund 1 is an $11.5M fund dedicated to investing in pre-seed software startups.  Eric, Shiyan, and I could not be more grateful to our investors for their support and to so many of our friends and family who helped us with this process!

I’ve written before about what it’s like to start a new venture capital fund.  But, a lot of people have asked me about how we actually raised it.  Surprise surprise – we ran our fundraising process using all the fundraising tips I give away on this blog!

First some context

I need to spend a minute explaining a bit about venture capital (VC) structures.  VCs raise money from other investors called limited partners (LPs).  These investors can be individuals / family offices / corporations / institutional funds that invest in VC funds.

Here’s how we raised our fund (and some learnings):

1) We talked with a dozen fund managers before starting 

If you are considering raising a VC fund, I would highly recommend talking with a TON of new fund managers before jumping in to a) make sure this is what you want to do and b) get tips and advice.  The single-biggest tip that I heard over and over from my peers was that they felt that they had spent a lot of time courting large institutional fund investors when they should have spent more time trying to find family offices and individuals and corporates to pitch.  We took this advice to heart and ended up only meeting about 10 institutional investors once or twice to build relationships with them – potentially for down the road.

In the startup-fundraise world, this is analogous to raising from angels vs. VCs.  If you’re super early, meeting with angels is likely going to be the more successful fundraising path.  VCs will take meetings with you, but you want to make sure you are not spending too much time with people who will most likely not be investing right now.  That being said, it can be good to build relationships for down the road.  This is a time tradeoff that every founder — both product founders and new fund managers — have to make.

2) We sized up motivations

This leads me to my next point.  It’s important to size up an investor’s motivations – and this applies when fundraising for a product startup as well.  When you’re meeting with an investor, try to understand why he/she is investing — just in general.

There are many many reasons why someone wants to invest money in companies:

  • To make money
  • To not lose money
  • To take large risk but potentially very high return
  • To get promoted / move up the professional ladder by making a good investment
  • For fame and glory and bragging rights
  • To learn about a business or industry
  • To network with other investors or the founding team
  • etc..

Points #1-4 seem similar but they are actually quite different.  Some people are motivated by making money.  Others are motivated by wealth preservation (to not lose money).  An example of this is that many large institutional fund-of-funds manage retirement plans.  Their goal is to preserve the wealth of the everyday hardworking people who entrusted their savings in them.  Think about it – if you are working for SF MUNI and put your hard saved earnings from your salary into your company’s retirement plan, the last thing you want to hear is that your retirement plan lost all your money by investing in some dumbass new fund manager who invested in dogsh*t startups!  Most retirement plans will not be investing in unproven first time fund managers.

Others don’t mind losing money if there’s the potential to make above and beyond a TON of money.  E.g. you invest $10k and it has a 95% probability of being entirely lost but there’s a 5% chance that it could make $1m.

Then, there are lots of non-ROI reasons to invest.  To learn about an industry or a new technology.  To brag to friends.  To network with other investors or the founders.  Etc.  These are all equally great reasons to invest.

Most people have a blend of reasons, but it’s important to figure out what that blend is.

In our first meetings with all the investors we met with, we tried to assess what motivated each person we spoke with to get a sense of whether an investor would likely be a good fit.  (More on this later)

3) We prioritized speed over dollars

Our focus for this raise was on speed.  According to Preqin, in 2016, it took first time fund managers an average of 17 months to close a first fund.  For us, we decided that we really wanted to raise our fund in less than a year (and ultimately closed in 10 months).  So if it meant raising only $5-10m vs $10m-$20m in twice the time, we wanted to opt for less money at a faster pace.  This essentially dictated our strategy to raise primarily from individuals, because they can make decisions quickly.

The main reason why speed mattered to us is that per SEC rules, we could not market our fund while we were fundraising.  As marketers, we wanted to start actively marketing Hustle Fund as soon as possible.

4) We iterated our deck a LOT!

Storytelling is incredibly important for any fundraise.  As a new VC, we had no brand and no product to show.  In most cases, there’s literally *nothing* that differentiates a new VC from all the other fund managers.

The first version of our deck basically talked about how we had some edge because we went to “fancy” schools, worked at “fancy” jobs and were already active seed investors.  And I remember my friend Tim Chae basically looking at that slide and saying that every fund manager on the fundraising circuit had everything we had.  And he was right.  The hundreds of new VCs who are out pitching right now all went to some permutation of fancy schools and/or worked at fancy companies and/or have done some fancy investing.  These are not differentiators!

Originally posted by various-cartoon-awesomeness

We quickly realized that we needed to be able to tell a differentiated story.  For us, our biggest differentiator is around our model of how we invest – namely, we look heavily at speed of execution in investing the bulk of our fund.  This was not only a story around being different but also around why our past experience has led us to this model and why we are uniquely qualified to invest in this way.

It took us about 20 versions of our slide deck to hit this story right.  Thanks to so many people who gave us feedback on our story and especially to Tommy Leep, who helped us get our story on the right track early on.  If you get the chance to work with him on your pitch – whether you’re a fund or a startup – do it.

5) We built momentum by packing in lots of meetings.  I personally did 345 fundraising meetings between July 9, 2017 – May 25, 2018

In the past, I’ve written about how to generate fear of missing out (FOMO) amongst investors when you’re raising for your startup.  In the beginning when you have raised nothing, it’s hard to generate FOMO.  Whether raising money for a startup or a VC, no investor wants to be first check in.  So the best way to show fundraising momentum when no money has been committed is to pack in a lot of fundraising meetings.  This makes it easier to generate excitement when potential investors hear that other investors are doing second meetings with you.  And you also want all investors to end up committing to you around the same time.

Once you get commits, then you can start talking with other potential investors about those commits, which generates even more commits.  The key is that you need to constantly be meeting with people.

Here’s a graph of all my meetings per week between Summer 2017 and Spring of 2018:

Note: this doesn’t include all the meetings that my co-founder Eric Bahn did.  We often did first meetings with potential investors individually.  So collectively, our total number of meetings was much higher than 345!

You can see this Google spreadsheet of all my meetings to get a sense of what I did week to week.

You can also see from this graph that I began to run out of leads!  This is the most important thing – don’t run out of leads!  (more on that below)

6) We started with a low minimum check size to close investors quickly and raised it over time.  

In the beginning, our minimum check size started at $25k and eventually it went all the way up to $300k (for individual investors).  We did this to generate quick commits and create more FOMO.

Product startups can do this too.  I did this with my company LaunchBit — our smallest check size back then was $5k, and then we increased the minimum.

7) We qualified investors on first meeting

As I mentioned above, we were looking for investors we could close quickly.  For individuals at smaller check sizes, this often meant just 1-2 meetings.  Much like with startup fundraising, if someone was taking too long to decide relative to the number of decision makers involved and the potential check size, then that investor was probably not a good fit for our fund.  You want to be raising from people who are pretty bought into what you are doing – not people who will be an uphill battle to convince.

There were some folks, whom we met, who just were not quite ready to invest either because they were new to/not comfortable with the VC asset class or they were not yet bought into us / Hustle Fund as a first fund.  And that was perfectly fine – the important thing was just to figure that out quickly and move on and generate more leads and meet more new people.

This is really important, because I think one of the top mistakes I made in fundraising as a product startup founder and one of the top fundraising mistakes most first time fundraisers make is in spending too much time with people who just will not close quickly enough.  It’s tempting to spend time with any investor who will take a meeting with you.  And it often seems like it’s really hard to generate new leads.  But now that I’ve done this a few times, the better approach is to try to keep looking for new warmer leads rather than to feel stuck warming up cold ones.

8) We generated lots of leads (in the beginning) using brute force

Building on my point above, I think one of the top reasons founders (or fund managers) spend too much time on meetings with people who are clearly not going to invest soon is that they don’t know where to find more leads.  If you’re a product startup and you’ve exhausted a typical list of VCs (such as this one from Samir Kaji at First Republic), you’re probably wondering, “Now what?”  Where do I go now to raise money?

When I was a founder, this was certainly the mindset I had.  My perspective now, though, is that the world is filled with infinite money sources, and it’s my job to find the right matches as quickly as possible.  This mindset also takes the pressure off tremendously.  As a founder, I felt a lot of pressure to close a particular person, because it just seemed like there was a finite pool of startup investors.  Now with a more seasoned view, I feel no pressure at all, because there are actually a lot of people who are interested somewhere in the world – you just need to find them.

This means that you have to be generating a lot of leads and doing lots and lots of first meetings (see graph above).  So how did we generate leads?

We used a pretty standard B2B sales playbook to do so:

8a) Get referrals

We started by approaching friends and acquaintances and asked everyone if they were interested in investing or knew 1-2 people who might be interested in chatting with us about potentially investing Hustle Fund.  This actually allowed us to branch out pretty quickly, because people know a lot of people! And those people know a lot of people!  So even if you are starting with someone who does not have any money or is really not interested in investing in VC, just by asking for just 1-2 solid intros, you can actually find some interesting contacts.

I want to highlight the ask for “1 to 2 intros”.  The ask is NOT, “Hey if you know anyone whom you think might be a good fit” <– NO!  People will just brush you off and not think about your ask.  You want each person you meet to legitimately think about the best-fit person in his/her network out of the thousands of people they may know.  Having a specific simple ask to just think about one person in 2 minutes is a doable / realistic ask of everyone you know no matter how close you may be to him/her.

The other thing that I think people automatically assume is that in order to have a good network, you need to be someone like Ashton Kutcher and have an amazing network.  That certainly helps!  But it’s not necessary.

These are all the people I made this referral ask of:

  • Family
  • Friends
  • Friends’ families
  • Former co-workers
  • Former founders I’ve backed either in the past or present
  • People I met at events where I spoke
  • Organizers of events where I spoke
  • Where appropriate, I even asked some founders who pitched me at Hustle Fund on their businesses!

If you think about it from this perspective, if you are in the tech industry, there are so many people you can pitch / get referrals from.  Every tech worker is fair game – do you know how much tech workers make per year?  So. much. money.  Do you know how many of them know other tech workers?  Those are the only people they hang out with.  Any startup founder you know – no matter how much they are succeeding or flailing  — knows investors who have backed them or other startup founders.

On our $11.5m fund, most of it, including all of our largest anchors — special thank you to Shanda, LINE, and Naver — came from referrals – not from within our direct network of people we already knew.  Some of our investors are referrals who had other referrals.

So how do you soft pitch someone?  (and you should be soft pitching literally everyone you meet)

You know when people ask you, “Oh how have you been, what are you up to these days?”  That’s your window to soft pitch.  “Great!  I started this new fund.  These days, I’ve been, ya know, raising some money for it.  So if you or a couple friends you know are interested in taking a look, I would love to chat!“  Gauge the reaction.  If it’s positive, then try to set up a more formal meeting to actually pitch.  If it’s negative, then ask for 1-2 referrals.

Using a Cialdini-esque approach, you want to ask for the moon.  People will either fulfill it, which is great.  Or if they can’t, they feel bad and want to be helpful and will likely help you with whatever smaller ask you have.  Referrals are that smaller ask and really were clutch in helping us raise our fund.

I soft pitched everyone at every party I went to.  I soft pitched my optometrist during my eye appointment.  Under Obamacare, you now get basically a free meeting to pitch a health professional while getting a checkup.  Your doctor / dentist / optometrist / lawyer / accountant – these are all people you can pitch or ask for referrals from when you meet them (and they all have money 🙂 ).

We asked some of our closer friends for a TON of referrals (way more than the 1-2 that I mentioned above).  They were *so incredibly helpful*.  I probably owe them my first born child, but I’m not sure they would really appreciate the tantrums.

This referral strategy is a lot of work and requires a lot of meetings, but it’s a way to get started and get tapped into networks you don’t have.

8b) Throw parties / brunches / dinners / events

Some of our friends were a bit uncomfortable doing introductions for the purpose of fundraising.  Money is a funny topic that people don’t like to talk about very much in the US.  Some people view investment opportunities as opportunities and other people view them as liabilities (as mentioned above).

So, an alternative approach we used sometimes to get referrals was to ask our friends to throw parties / dinners / brunches and invite people we wanted to meet.  So, if your friend is connected to someone you want to meet, an alternative ask is to ask your friend to throw a dinner / brunch (and you pay for it) and invite both you and that person you want to meet.  Then you can soft pitch directly the person you want to meet without your friend having to feel awkward.

Interestingly enough, I found that entrepreneurs and investors were very comfortable doing direct introductions for us, while my friends who have always worked at big corporate jobs (and have never raised money before), were less comfortable.  And that’s ok.  The party / dinner / brunch route is an alternative path to the same result.  We ended up attending a lot of lunches / dinners / events that are not reflected in the meeting-count on the graph above.

In addition, we also threw a lot of dinners / talks / parties / events ourselves, and we invited both people we were talking to and committed investors to those events.  These events were helpful in closing investors as well.

Talks at conferences were also a good way to show off knowledge and give people a sense of how we thought about investments.  We have ended up meeting a number of potential LPs from events and conferences where we gave talks.  Events allow you to be “thought leader”.

8c) Do your own pattern matching

Once we started getting investors, we noticed some patterns emerge.  Even though we had focused our raise primarily in the Bay Area and didn’t travel much, a lot of our investors are from outside the Bay Area.  We conjectured that there might be much stronger interest outside of the Bay Area, where access to tech startups, is limited.

As it would turn out, almost half of the money in our fund comes from Asia (not Asian Americans but from Asia-Asia) even though we didn’t make any trips out there.

But patterns can also be thesis-driven.  Another pattern we found for Hustle Fund was that anyone who had been a mentor for or a manager of an accelerator really resonated with our thesis and invested in our fund.

It might be worth honing in on a pattern and trying to find as many people who fit that pattern.

Speaking of patterns, one interesting side note observation is that we had really poor success in converting female investors (despite actually investing in a lot of female founders both in the past and with Hustle Fund).  In Hustle Fund 1, < 5% of our investor base is made up of women.  (Defined as: we spoke with a woman from that entity or household). But we have pitched both men and women.  I’ve had many other friends who have raised money for funds or startups who have noted similar observations – women are seemingly much more conservative with their investments.

Just as a side tangent: it’s fine if people – men or women – don’t want to invest in Hustle Fund per se.  But, if professional women with some level of means are not taking some financial risk, they won’t achieve the same level of financial success as their male counterparts.  Think about this – we talk everyday about how women don’t make the same amount as their male counterparts at all these tech companies.  But we don’t talk at all about how women are left behind on investments.  Every rich person knows that you don’t make money on salaries – you make most of your money on investments.  If you were in the seed round of Dropbox or Google with just a few thousand dollars invested, you wouldn’t even be concerned about a salary.

8d) We made a video

We made a video (see to explain who we are.  This was a bit of a gamble, because we spent $13k(!) all in on producing this video.  That being said, we thought it was worthwhile, because we believed we could stand out if we did the video well.

This gamble has paid off in spades.  In part, I think it’s because no other VC (that I know of) has a video on their website.  So it may be worthwhile to pay for an asset that no one else has in order to stand out.

9) Your richest contacts are not necessarily your biggest checks and vice-versa

Building on a prior point about soft pitching anyone and everyone is that it turns out there was no correlation between wealth and check size.

This was an interesting learning for us.  In the beginning, we made a list of our richest friends and how much we thought each could invest.  We were so wildly off in meeting these numbers.  On the flip side, some of our friends who are not super rich surprised us and invested substantially.

There are so many reasons for this.  a) Making a lot of money in itself doesn’t mean that people have a lot of money.  They could have a big mortgage.  They could spend a lot of money.  They could have a lot of capital tied up in other projects or investments.  b) There are also a lot of people who don’t make a lot of money but are very good at saving it and investing it and secretly have a lot of wealth.  The Millionaire Next Door is a good illustration of both of these points.  c) Some people come from wealthy families and you just have no idea that they do.  d) People also have varying levels of bullish-ness on you, your thesis, and your asset class.  People also have varying levels of risk / reward tolerance.

It’s also important to note that sometimes people who are not / don’t seem like angel investors can become angel investors for you.  Andy Cook talks about how he brought in new investors who had never invested in startups before into his round.  We did the same as well.  Just because someone isn’t already an angel investor doesn’t mean that he/she couldn’t be.

This is why our grassroots strategy of taking so many meetings worked so well – we just never knew who would actually be interested in investing.  And we could not find any way to qualify people apriori.  This is why it’s so important to pitch anyone and everyone – it’s hard to know who will bite and who won’t.

10) We used a CRM to manage our process

This process requires a CRM, because you need to make sure that leads are not being dropped through the cracks.  We invested in using a CRM right away to track conversations to move people through our pipeline.

This also made it easier for Eric and me to divide and conquer – we would take our own meetings with individuals and regroup for second meetings and beyond.  And we could both see who was talking with whom so that we didn’t start different conversations with different people from the same fund or approach the same people.

More importantly, it was critical that we maintained discipline over all those months to keep the CRM up-to-date.

11) You’re not hot until the end

This applies to both startups and funds.  Fundraising is always a slog in the beginning, because you’re trying to generate lots of leads and qualify them.

This is a graph of what our fundraising looked like:

The blue line represents our soft commits over the months (verbal / written email commits).  The red line represents money we actually closed legally (signed docs).  As always, “soft commits” are a bit more ambitious than actual commits, but in the end, they should converge (or come close).

As you can see, we averaged getting about $1m per month in soft commits for the first 6-7 months to get up to around $6.5m in commits, which we closed in Dec 2017.  If you follow the red line, you can see that there is a surge of $5m at the end, which literally came together in the last couple of months of our fundraising process!

Like almost every raise I’ve seen, you’re just not hot until the end.

12) This all sounds easy but it takes hustle AND a village to do this!  

The fundraising process I’ve outlined above is executable and accessible for anyone.  And it actually sounds easy.  Just do a bunch of meetings and ask everyone for intros or money, right?

But wrapping up this post, I’ll leave you with a couple of final thoughts.

12a) It takes lots of hustle and lots of meetings to get this done. 

Last July (2017), when my new baby was about 7 weeks old, I decided to quit my prior job in the middle of my maternity leave and started Hustle Fund shortly afterwards.  That summer, during the day I would leave him with my parents, and I would go from meeting to meeting, stopping to pump milk in SF parking lots or at large tech companies’ mothers’ rooms.  At night, I would work on decks and update our CRM.  I would sleep about 4 hours a night sporadically as the baby would wake up every 2-3 hours to drink milk.  I got through most days on lots of coffee and adrenaline.  But no matter how tired I was, it was important to go into each and every meeting just as excited as ever.

I don’t mention this schedule to “brag about my hustle,” but just to paint reality – it really does take a lot of work to do lots and lots of meetings.  It’s important to work smart, but for some things, as smartly as you work, there is no shortcut for just lots and lots of hard work.  And know that as hard as it is, you’re not alone.

12b) It takes a village to really go anywhere. 

To start this fund, I leaned on a TON of people.

While this small section here doesn’t do justice to my gratitude, I did want to highlight just how many people my awesome co-founder Eric Bahn and I roped into this raise.  (I’m also incredibly grateful to have a fantastic co-founder in Eric and now Shiyan Koh!)

  • Our ~90 investors in our fund (they occupy way fewer LP slots but there are at least 90 individuals / spouses / family members / companies and people with a stake in this)
  • Past founders I’ve backed who have introduced me to their investors; one successful founder even generously offered us her PR agency and offered to foot the bill!
  • Current founders who went through their rolodex in trying to help us connect with their other investors / VCs / rich friends
  • VC friends who supported us with personal investments / investments from their funds / intros to their investors
  • Friends and family who came over to my house to cook food / bring over take out / buy us food – it was pretty incredible not to have to worry about food for a while
  • Friends and family who housed me in their spare bedroom or their couch on my fundraising trips since we have limited budget
  • Friends and family who introduced me to all kinds of rich and well-connected people
  • My blog readers who introduced me to their network
  • My own immediate family who took care of my kid(s) every week for months!
  • And big props to my spouse JJJS as well as Eric’s spouse and Shiyan’s spouse for really bearing the brunt of all the work that goes into starting a fund.

There were literally hundreds of people who helped us get this thing up and running (and we are just at the beginning).  And I’m so very thankful to all of them for their generosity.

Fundraising is hard.  And it takes a long time.  But don’t give up.  Happy holidays!

Should you raise money or bootstrap?

Should you raise money or bootstrap?  (By bootstrap, I actually mean raise < $250k from individuals or angels).

Having run a startup that raised money and now in running a VC, ironically, if I were starting a product company today, I would start out with the mentality of bootstrapping for as long as I could.  And, maybe, just maybe, I might consider raising more money under a few limited circumstances.

I would raise more than $250k if I had a company that:

1. Was growing 30%+ MoM in sales and my operations could not keep up to fulfill those sales

I’ve noticed for operationally-heavier companies (i.e. not SaaS businesses but generally tech enabled services or similar), it can be easy to grow your sales quickly, but often these companies need to throttle their growth because they do not have enough people to fulfill these services.

2. Was a marketplace with high engagement

Marketplaces tend to be “winner take all” businesses because they are only valuable if both the supply and demand sides are both liquid and efficient.  This happens when you have a lot of supply and demand, which means to really thrive, you need to be willing to invest in a land-grab on both sides.

This is why you see companies like Bird and Lime raise so much money.  They need to saturate cities with scooters and with users (basically buy you as a user). In some sense, their businesses are “easier” on the supply side than the current ride-sharing market because they can manufacture more scooters and don’t rely on people to drive them.  They can create infinite supply.  In the ride-sharing market, supply is basically a zero-sum game.  In other words, someone who is driving for Uber right this moment cannot be driving for Lyft or a food delivering company or what not.  That person’s time is occupied.  The ride-sharing market will change over time with self-driving cars, and that will also become a marketplace with infinite supply which is easier than trying to grab two sides of a market.  But you still need tons of money to manufacture a lot of vehicles.

3. Was growing net revenue 30% MoM for many consecutive quarters where I felt confident to really pour big money in marketing channels

If your business gets past a certain threshold – call it past the $2m runrate (series A territory) – and you are still growing at a fast clip using a repeatable marketing channel or two that works, then it likely makes sense to step on the gas.

The caveat is that many companies have a difficult time crossing the $10m runrate – this is very difficult to do (series B territory).  So you are gambling that, with more cash, you can get to series B metrics.  It’s just really hard to keep growing 30% MoM with large revenue numbers.  Also, running a company at that level involves a large team, and it’s tough to manage a larger team.  Despite those risks, I would still raise money in this circumstance too.

So what are good bootstrappable companies?

I think the perfect profile of a boostrappable company is a SaaS company. There are often little to no network effects, and so your competitors affect you less. In other words, company A using product X doesn’t affect company B’s decision to use it most of the time AND company B being on the platform has no affect on the user experience or value that company A gets out of product X.  There are low operational costs; software has high margins, so you can often pour profits back into the business to keep growing (at least to a good level).

I also think events businesses are good bootstrappable businesses.  VCs don’t like to invest in these, and so it would likely be impossible to raise VC money at any point in time with this type of company.  But, as I’ve mentioned, events businesses can actually have really low operational costs despite what most people think.  If you can get the venue, food, staff, and content all free, then the costs are just marketing and your own salary.  On the revenue side, you get your money upfront when people buy tickets or sponsors send you money ahead of the event.  Plus, you can often pay vendors on a net 30 basis.  You get money upfront and pay costs later in most cases.  People often cite scaling as a stumbling block, but if you look at the truly efficient events companies – Web Summit comes to mind – they basically print money and have a scaled playbook to do events all around the world.

We have a lot of Shin Ramen in our office as a micro VC too. Originally posted by hipster-vegeta

I think people often equate bootstrapping with low growth or “lifestyle” businesses (which somehow investors seem to equate with “no money” but not always true).  But, I think that’s false.  With the right conditions, bootstrapped companies can be super high growth, high revenue companies.  It’s actually not true that you need VC money to grow really fast.  With high margin and low cost businesses, you can grow really fast without much or any external funding.  At the end of the road, you can decide what exit you want to take (if even).  You have control over your own destiny in a way that most VC backed companies cannot.

I also think that people think raising VC money is sexy.  It’s like a stamp of approval.  The truth is, VCs are wrong most of the time!  Most of their startups end up failing.  The flip side is that there are a lot of great businesses that don’t need VC money to grow really quickly (for all the reasons mentioned above).

I think ultimately, very often entrepreneurs end up raising money for the wrong reasons or raise money too early.  They think life will be easier if they raise money – the salary would be better and having more help would be better and pouring more money into marketing would be better.  On the surface, I’d say that all of this seems better – of course we all want more money!  But unless you have found fast growth channels, your people and marketing dollars end up not being put to very efficient use, and you are actually no better off than if you had bootstrapped your company but you have given away more of your cap table.

So from seeing things as both an entrepreneur who has raised money before and now being a funder of many startups, this is what I would do if I were starting a product company today.

Pre-seed is the new seed

A few months ago, I was talking with a friend of mine who is a successful serial entrepreneur.  He has done incredibly well financially on his past two startups, and he’s now building his third company.  When we were talking, he expressed frustration in raising his series A round.  This was surprising to me.  I asked him about his metrics, which are good, but they were not at series A level.  I asked him who he was pitching, and he rattled off a list of usual suspects on Sand Hill.  All of those investors told him that he was too early.  It turned out he was going after the “wrong” group of investors. People he would have pitched 3 years ago had all moved downstream now that they had raised much larger funds, and he really needed to be pitching “post-seed” funds.

Every blog post needs a gif of a stuck kitty… Originally posted by kittiesaresuperserial

It struck me that a lot has changed about the fundraising landscape even in just the last three years.  So, I thought it might make sense to take a step back and talk about all the stages of early stage fundraising here in the Silicon Valley.

In early stage investing, at least in Silicon Valley, there are basically 4 stages: pre-seed, seed, post-seed (or pre-A), and series A.  In the “old days,” there were only seed and series A, and before that, only series A!  All of these changes have created a lot of confusion.

Here are my thoughts on these stages:


This is really the old “seed.”  Very typically at this stage, little to no traction is needed, and investors are looking for lower valuations than seed investors for taking on extra risk by going in so early.  Another consideration here is that, in the minds of pre-seed investors (who are very often small funds and will be allocating most of their capital in the first round or two), valuation matters a lot more to them than a larger fund who might invest in you at this stage as an option for later. If a startup comes to me looking for a $3m effective pre-money valuation vs another company who comes to me looking for a $7m effective pre-money valuation, basically what is being suggested here is that the latter company has to have a 2x+ greater exit in order to be just as good of an opportunity as the former.  The outcomes of both companies are, of course, unknowable, but that is essentially what goes through the minds of investors who are looking at lots of companies with different valuations.

Also, to be clear, pre-seed doesn’t mean that one just thought up an idea yesterday and has done nothing.  There’s a lot of work to do to prepare to raise money at this pre-seed stage.  It could be building an early version of the product,  or getting your first set of customers, or even doing pre-sales or lead generation well before having a product.  In fintech or health, it could be in dealing with regulations or getting particular approvals even if you’re not able to launch.

Investors at this stage are very much conviction-investors, meaning they either bought into you and your thesis or they did not.  It’s very difficult to convince an investor at this stage to change his/her mind.  This is a bit of a crap shoot because even if a pre-seed investor has bought into you as an awesome operator, if he/she has not bought into your thesis, it will be difficult to land an investment.

These rounds are typically < $1m in total.


Today’s well-known seed investors may have previously invested at an earlier stage with smaller checks, but because many of these funds have now raised $100m+ funds, they are now writing much larger checks.  Typically this is $500k-$1m as a first check.  This means that they have to really believe in you and your business-thesis in order to pour that much capital into a business. As a result, this stage has created a fairly high traction bar.  It can be upwards of $10k-$20k per month or more!

Seed rounds today are quite large – typically $1m-$5m!  I believe that some of these seed rounds are way too large, and there’s a looming market correction on the horizon for everyone.  I’m of the belief that early ideas can never effectively deploy $4-$5m in a very cost effective way.

Post-seed (pre-A)

This is a stage that was created because the bar for the series A has gone sky high.  This really is what the series A used to be.  A few years ago, people touted that in order to raise a series A, you needed to hit $1m runrate.  Now, you typically need a lot more traction to raise a series A round.  This magical $1m runrate number is now the rough benchmark for the post-seed stage, but it’s not series A investors who are investing at this stage. New microfunds have cropped up to invest here.  They are looking for $500k-$1m runrate level of traction.  This was my friend’s problem; he wasn’t quite at series A benchmarks and needed to pitch post-seed investors.

These post-seed rounds are also quite big these days, sometimes upwards of $5m+.

Series A

This is really the old series B round, but Sand Hill VCs who are known for being Series A investors are serving this stage.  This is typically a $6-10m round.  Companies typically have $2m-$3m revenue runrate at this point.

If you do the math, VCs are buying roughly 20% of a startup, so valuations can be upwards in the $50m+ range for today’s series A rounds!  On the low end, I haven’t seen a valuation of < $20m, and that would be for a really small series A round.

Some additional thoughts:

1. There are lots of caveats around traction.

If you’re a notable founder, have pedigree, are in a hot space, or you run your fundraising process really well, it’s possible to skip a stage.  I’ve seen some really high flying series A deals happen lately with friends’ startups, where they are not quite in series A traction territory, but they have so many investors clamoring for their deal that they can raise a nice big series A round. They’ve run their fundraising process well, and they generally have great resumes and are in interesting spaces.  Same with the seed round – if you are notable or have pedigree, you can often raise a large seed round with little to no traction on your startup.

2. Sometimes the line between post-seed and series A is quite blurry, but the valuations are very different.

I have a few founders I’ve backed who are just on the border of post-seed/series A metrics and are able to get term sheets from both series A and post-seed investors.  There’s a huge difference in valuation.  The post-seed deals tend to be $10m-$20m effective pre-money valuation, and the series A deals are at least $20m+ pre-money if not much much higher.  So, if you’re on the border, running a solid fundraising process is especially important in affecting your valuation.

3. Large Sand Hill VCs are doing seed again – selectively.

Sand Hill VCs who tend to invest at the later stages have now found series B to be too competitive to win.  They are now starting to do series A deals and seed deals to get into companies earlier.  In many cases, the deals they are doing at seed are large deals with little to no traction.

You may wonder, “Doesn’t this contradict what you just wrote?”  What’s really happening is that the world of early stage investing is becoming bifurcated. If you have pedigree and are perceived to be an exceptional high signal deal, you can raise a lot of money without much of anything.  These are the deals you read about in the news that make people think fundraising is so easy. “Ex-Google product executive raises $4m seed round.”  This goes back to point #1.

If you don’t have that pedigree, then you basically need traction to prove out your execution abilities at the seed, post-seed, and series A levels.

4. Lastly, with the definition of “seed” expanding, more fundraising is done on convertible notes or convertible securities.

I’m now seeing more rounds get done with convertible notes and securities for much longer.  This is actually good for founders because it means you have a much larger investor pool to tap.  In the “old days,” if you couldn’t raise a Series A from the, say, 20-50 Sand Hill VCs out there, you were dead in the water.  Now, you have a lot more flexibility to raise from angels and microfunds without a formal equity round coming together.  I think this is a really good thing for the ecosystem because at this stage, it’s still not clear who is a winner based on metrics.  There’s still a lot of pattern matching around who gets funded at these early stages.  By the time you get to the series B level, it’s pretty clear who is on a tear and who is not, and that is much more merit-based investing.  Short of that, the more angel investors we can bring into the ecosystem of startup investing, the more companies will get a shot to prove themselves.

You may wonder, “Well, are there actually companies that are being overlooked by VCs in earlier rounds who later are able to hit series B metrics and raise a VC-backed series B round?”  Having looked at a lot of data around this, the answer is definitely YES!  While it’s true that the vast majority of companies who end up raising a series B round from VCs previously had notable institutional VC backers even as far back as their seed rounds, VCs still end up missing a number of companies at the earlier stages.  These actually go on to do well without them and end up coming out of left field and raising money from late stage VCs.

Header photo by Ross Findon, Unsplash