The journey of startup fundraising is a process of risk removal. At each Series, certain risks are expected by investors, certain risks diminish, and the company gets more valuable as they do. With enough foresight, founders can leverage the timing of their raises and control the answer to the age-old startup question, “What are we worth?”
For our first Outlandish Speaker Series, we hosted serial founder and venture capitalist Eric Feng to tackle the importance of timing in fundraising. With a background in computer science, Eric has successfully built and sold three companies and loves investing in the consumer, media, and commerce sectors. He previously led e-commerce at Facebook, led early-stage consumer Internet investments at Kleiner Perkins, and was the founding CTO and Head of Product at Hulu. As of this Field Guide, he is the co-founder and CEO of Cymbal and a General Partner at Gold House.
Here’s how Eric Feng advised founders to think about and time their next round of funding. 👇
Startup founders wield a key advantage: controlling when their company is priced. Private startups have no publicly traded shares, so their valuations are determined during fundraising rounds. Timing is a significant factor, especially during economic uncertainty or downturns when securing funding and higher valuations is difficult. With this foresight, founders who manage their runway well can control the timing of their raises and the context of their company’s valuation, laying a sturdier foundation for future funding rounds.
Fundraising prices fluctuate with assumed risk. Now for the other half of the equation: the check writers. In exchange for their capital, investors receive equity or partial ownership in a startup, the price of which is based on the company’s valuation and assumed risks. From an investor’s perspective, the early days of your startup are when the company is least valuable: too many risks and very few assets. As such, early-stage investors invest in higher-risk companies at lower prices. As your startup grows, your risks begin to diminish, your assets grow, and the company becomes more valuable. Growth-stage investors invest in lower-risk companies at higher prices. As such, founders must continue to remove risks as they grow.
In between rounds, use your runway to remove risks and grow value. At least, this is the expectation of your current and future investors! Now that you’ve raised capital, there are six general categories of startup risk you can tackle to grow your value:
Team Risk: Can the founder(s) recruit a team to execute their vision?
Implementation Risk: Can the team build the product they desire?
Market Risk: If the product gets built, will anyone use it?
Monetization Risk: If people use the product, will anyone pay for it?
Scale Risk: If a few customers are paying, can you grow to lots of customers and lots of revenue?
Profitability Risk: When you have lots of revenue, can you turn that into profits?
At each Series, focus on minimizing stage-appropriate risks. Investors focus on different risks depending on the stage of your company. At the Seed stage, the unknowns around profitability, monetization, and market fit are normal risks, but investors want to feel bought into your vision and founding team. At Series A and B, it’s normal not to have revenue, but investors will want to see a working MVP and product-market fit. At the Series C+ stages, it’s okay not to be profitable if you demonstrate that your business model can scale to profitability.
Plan for your next raise immediately after closing your current round. Don’t wait until you’re running low on cash to think about your next round. Instead, consider what investors will expect from your company the next time you raise capital and prioritize your efforts accordingly. As you map this out, keep a buffer of ~1 year of runway before your next raise to account for any unknowns and prepare for the raise. Great founders are always “fundraising,” even in between raises. In the interim, keeping current and potential investors informed as you diminish risks and grow value is an excellent way to prime them for your inevitable next raise.
If you lose control of runway, you lose control of fundraising. Regardless of stage, your most important asset to manage is runway. If you burn through your runway too quickly, there are only two options: raise additional capital or shut down. Instead, try to raise more than you need to remove risks and grow value, and always spend less than you raise. Otherwise, you may find yourself with 6 months of runway left, and you’ll be forced to raise capital whether you want to or not. And if you’re forced to raise before addressing stage-appropriate risks, investors will be less willing to take a gamble on your venture, which can impact both your potential valuation and capital raised.
Marc Andreessen says, “Running a startup is also how I think about raising money — it’s a process of peeling away layers of risk as you go.” And as you peel, always keep your next raise and its potential investors front and center. Investing your energy and runway into minimizing stage-appropriate risks allows you to control the timing and context of your startup’s price.
Join us for the next Outlandish Speaker Series to ask our guest experts all your startup Qs! Check out our Events page to learn more.