[joschmo]

This is an ideal time to raise seed money. Many funds have moved heavily down market away from the big Series B/C's of 2020/2021. You now have a lot of tourists at the seed stage who are obligated to deploy capital and even if it is at 10-20% of the previous rate, that's still five $2M seed rounds for every $50-100M series B/C that used to get done. You won't get a killer valuation like 2020/2021, but you will have plenty of opportunities. My recommendation is to look for a SAFE and hope the market clears in 2-3 years when you go to raise your A round (this implies you need to give yourself 2-3 years of runway with your seed money and/or get to $1M of ARR faster on decent unit economics).

Some very juicy seed and series A money is being thrown around ignorantly by the same people that caused the last bubble. I've had 2 close friends / family raise their seed rounds in the last 4-6 weeks.

Three things to be aware of:

1. VCs will take their time doing real diligence on your market / team. This means it will take 1-3 months from initial outreach instead of 1-3 days.

2. You should also be raising seed money from angels that are executives/fellow founders at your early customers / pilot partners. Ideally you fill a $2M seed round with ten $50-100K checks from these people and a great seed fund that will be value add-oriented.

3. Raise as much money as you can. In 2021, this was terrible advice. Now taking 15% dilution is not the end of the world if it is how you stretch to your next raise vs the 8-10% dilution of yesteryear.

[xyzzy_plugh]

> Raise as much money as you can. In 2021, this was terrible advice.

How so? If you raised a ton of cash in 2021, you should better equipped to ride out any economic downturn than nearly any other business in existence. Most businesses do not have millions of dollars in cash in a bank account. Sure, your valuation might be bonkers, but that's better than being kicked to the curb, and inflation will probably dampen the blow anyways.

[FreakLegion]

Obviously this is situational, but you expect a round of funding to carry you for about two years, less for Seed. When you raise at a favorable valuation, you have to grow into it, and the clock is ticking. Throw a collapsing market into the equation and suddenly your next round is looking decidedly unfavorable.

There are a lot of early-stage startups out there right now that raised at silly valuations 6-12 months ago, already put most of that capital to work, and now have another 6-12 months of runway ... and zero leverage in fundraising discussions. The best time to talk to investors is when you don't need their money.

[xyzzy_plugh]

Sure, but was not raising money a better alternative at any point? It sure doesn't seem like it to me.

I feel bad for companies with runways ending in the next 6-12 months, of course, but that's life. If they hadn't raised funds 6-12 months ago, they'd likely be in a much, much tougher spot.

> Throw a collapsing market into the equation and suddenly your next round is looking decidedly unfavorable.

I'm not sure in what universe an unfavorable round is worse than insolvency.

If you need to raise funds, you raise funds or die, realistically. No one knows what tomorrow brings. Anything else is trying to time the market.

If you didn't need to raise funds, but did... enjoy the privileged comfort of your war chest over the next few years.

[FreakLegion]

The choice doesn't have to be between raising and not raising. Seed rounds in particular are flexible, so you can optimize between raising at $Xm and Y% dilution. For example I raised seed money in early 2021 at $25m, but the highest valuation offered was around $32m. Why not just take the bigger number? Mainly because they wanted more of the company, but the higher valuation also comes with risk, and it wasn't worth a few extra bucks that I didn't need. I was happy with that decision a few months ago when the market was still at peak frothiness, and I'm doubly happy with it now.

> I'm not sure in what universe an unfavorable round is worse than insolvency.

An early-stage company already raising a down round and pressing on can very easily have a worse outcome than one that admits defeat and folds. You're just getting started, have years of hard work ahead, and things are already off the rails. The odds of success, low to begin with, have dropped precipitously. The business and the team are both on fire (existing equity grants blown up, employees ready to leave, lots of damage control needed). It's rough, and walking away is a legitimate alternative to buckling down for 5-10 years trying to save things.

[fauigerzigerk]

I'm not sure I understand. Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation?

The only way in which this can possibly be true is investor psychology. In purely economic terms, having raised equity capital at what turns out to be a "silly" valuation is unconditionally good for the company and its founders.

The company isn't off to a bad start at all. Investors are off to a bad start.

[FreakLegion]

> Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation?

Raising at a terrible valuation isn't the alternative.

It's easy enough to think through the mechanics of a down round:

* Why would a company accept a lower valuation at all? Desperation. They need the capital to continue.

* Is a desperate company going to get good terms? No, this is how you end up with onerous liquidation preferences, lose control of the board, get outside executives foisted on you, etc.

* What happens to the team? The company landed in this predicament by being overextended, so people will lose their jobs. Morale tanks, other people leave by choice.

* What happens to the stock? It loses a lot of value. Not only is the company worth less, but there's more dilution than a typical round (which gets compounded if existing investors have anti-dilution provisions). More morale issues. More people leaving.

On and on.

Not everyone who raised at absurd valuations will end up in this situation, naturally. If they didn't spend the money, they'll be fine. (If they raised on a SAFE where the "valuation" was really a cap, they'll just have to reset their expectations. It was never really a valuation anyway. If they misrepresented things to their team though they'll still have problems.)

It's the early-stage companies who took a bunch of money on an idea and spent most of it over the last year getting to a sellable product that are in trouble. They were only doing what they were told -- floor it, spend the money, build as fast as you can, raise more in a year -- but now things have cooled, they still need to find PMF and generate revenue, and while a year of runway might seem like a lot, it's blood in the water for investors.

[alasdair_]

> I'm not sure in what universe an unfavorable round is worse than insolvency.

It’s worse in any universe where the choice is between insolvency now and insolvency later, because “later” can mean wasting a lot of time and burning bridges with investors that may end up funding your next business instead.

[xyzzy_plugh]

I chuckled at this. If it's a waste of time for you to be paid and to pay your employees...

If you think what you're doing is a waste of time, you can always leave. If it's your company, you can forfeit your shares. Why throw everybody under the bus? This is wildly irresponsible.

And burning bridges... I've never heard anything so funny. As if the feelings of investors ever really matter.

It takes a special type of entrepreneur to burn a bridge by taking an investor's money. Snubbing an investment is one thing, but taking an investment and using it as intended in good faith should never result in a burned bridge. Investors are typically understanding of changes in the market. It takes a party acting in bad faith, in which case not doing business with them in the future is reasonable, but that truth is applicable generally.

[alasdair_]

If you are certain that you are going to fail then it’s absolutely in bad faith to raise more money and it’s absolutely a waste of time for everyone involved.

[parentheses]

What they meant could be:

In an up market raising too much money is a function of valuation and equity. Raising too much money as a function of inflated valuations results in inflated expectations that won’t be met in a downturn.

[eganist]

> If you raised a ton of cash in 2021, you should better equipped to ride out any economic downturn than nearly any other business in existence.

This analysis benefits from hindsight.

[bjornsing]

True. But not by very much. Anyone that googled “quantitative easing” in 2021 would have been able to figure out that the boom was likely to come to an end soon.

[vanattab]

2. You should also be raising seed money from angels that are executives/fellow founders at your early customers / pilot partners. Ideally you fill a $2M seed round with ten $50-100K checks from these people and a great seed fund that will be value add-oriented.

Wait is it normal for an executive of a company to invest in companies that thier company is paying for services. That seems like there could be a lot of conflict of interest.

[zemvpferreira]

Often at this level a corporate client is already serving as a backer/incubator for a promising service. It might even be an investor or promising acquirer from day zero. B2B is weird like that, relationships are multi-pathed and could easily be adversarial and cooperative at the same time. Corporate execs investing in the startup is standard practice as a way of lending political support inside the larger org (and hopefully profiting of course).

[blobbers]

2M for 8-10% dilution at seed? This seems ambitious, even in yesterdays market.

[joschmo]

I would say $2 at $20M post-money was a very average round last year (I think the median from the top 50 seed funds was very close to this and average was slightly higher). I was hearing a lot of $3 at $30 and several $5 at $50s.

[krashidov]

That’s insane. If you’re a founder and you own 20-90% of a 30m dollar seed stage company, you’ve essentially ballooned your paper net worth to a very nice number. A number that would be equivalent to a healthy acquisition. Obviously the founders can’t really dump those shares on the secondary market but it just feels weird for seed stage companies to be worth that much.

[bjornsing]

In a lot of ways they’re not. You mentioned one. Another is class of shares.

[Mougatine]

You could really raise money (millions?) in less than 3 days before? That sounds crazy to me.

[oofbey]

It’s not impossible to happen that fast. A SAFE takes almost no lawyer time to prepare, and sometimes investors think there’s good reason to move that fast. But the fact that it does happen sometimes doesn’t mean that’s “normal” in any way. Even great people with really solid ideas usually take weeks to really put together and close a deal like that.

[dustingetz]

a “3 day raise” can mean many things, imagine something like this: 2-3 strategic angel investors already in place; prior to “starting fundraising” is a 1 month period of pitch discovery during which your angels are introducing you to investors but you are “not fundraising yet”; during this period investors start asking to invest but you are “not fundraising yet”; once you hit like $500k in interest, you email all the investors you’re already talking to and say “i’m fundraising now and already have $500k in interest for a 1.5M round” and one seed fund takes the remaining $1M and you’re done (the three days is for diligence). or 4 famous angels follow with $250k checks and you’re done. it’s an orchestrated process

[forstmeier]

Could something like Automated Capital, a experimental side project I'm working on, reduce the turnaround for the initial due dilligence?

http://automated.capital/

[pesfandiar]

How do you reckon the market is for startups that have already raised at later stages and are profitable? Good time for M&A to consolidate market share?

[joschmo]

That's a really interesting question as I rarely think of a company from pre-seed to series C as having profitability. If they have the cash on balance sheet to do smart M&A, it would only be worthwhile if the company had the human capacity to source, diligence, and integrate without compromising the core product. Integrating is the most important part of that because that's where all of the value is generated and tends to eat a ton of everyone's time. That's going to be series C/$20M+ of ARR at the earliest usually. Even then it's buying a team or niche technology, not a complete product/business/ So the answer to M&A is a yes with a lot of caveats.

Otherwise, if you are a profitable, late-stage company, why would you raise money at all? Either spend your profits down close to 0 to achieve business goals and only raise some money if you've got non-dilutive ROI (i.e. the margins on this new spend are superior or equal to existing margins in your profitable business and you are in land grab mode). Or just be comfortable with your current trajectory because of how well-defended you are financially. From a risk management perspective, founders should be able to live with going from $10 to $20M in ARR this year at break-even instead of $10 to $30M by burning $5-20M if it means your business gets to continue existing.