Raising: Deciding When You're Ready

March 22, 2021

It can be difficult to know if you’re ready to raise when you’ve never raised before. Luckily, there are some good heuristics.

Your Ruminations Are Probably Wrong

For most people, pitching people and asking them for money is uncomfortable. If that’s the case, your intuition is probably telling you there are X, Y, and Z reasons you’re not ready yet. Ignore X, Y, and Z, no matter how plausible they sound — that’s just your brain is trying to protect you against the pain of being rejected.

Unless you have already spent a lot of time around VCs, there’s a huge amount of things you won’t learn until you actually take your product (your startup) into the market (fundraising).

There Are Six Factors In Raising A Seed Round

For first-time founders, the ability to raise a seed round generally breaks down into six things: company traction, idea quality, environmental factors, personal background, location, and the quality of your fundraising process.

Company traction means users and revenue, both in absolute terms and the growth rate. There’s no “right” numbers here. No revenue but lots of users is generally fine in dev tools but a red flag for SaaS. $1M GMV for an e-commerce company is much less impressive than $1M ARR for a SaaS. And “none, because we haven’t launched yet” can be a perfectly fine answer.

Idea quality. Great ideas are rare and have an “aha!” quality to them. Pretty good ideas have plausible paths to building a big business — most funded startups fall in this category. A few ideas are bad or involve significant risk (like building a business on top of someone else’s platform).

Environmental factors are about how hot your space is as well as how hot the overall venture market is. Generally a few spaces are hot (remote work during COVID), a couple are cool (commercial real estate), and most are neither. This isn’t static — hot spaces often get crowded quickly and then cool off. In addition, the overall venture market has a temperature too, which depends a lot on the economy, the stock market, interest rates, and the existence of other investable asset classes. Right now, the venture market is quite hot.

Personal background covers both professional experience and personal relationships. If you’ve spent a couple years as a product manager, engineering manager, or senior engineer at a fast-growing startup, that’s really helpful. Relationships with venture capitalists are pretty rare; but relationships with 2-3 founders who have raised money before is much more common and can be really helpful (more on this later).

Location is also key. VC quality differs a huge amount by location. Setting aside China, the ordering is: Silicon Valley > other North American or EU tech hub > other North American or EU city > rest of world. If you’re neither in Silicon Valley, nor well connected in Silicon Valley, consider coming here for a couple months to raise your seed round.

The quality of your fundraising process is the topic of this series. It’s a common misconception that fundraising is about personal charisma. Sure, charisma can be helpful. But for most folks, a successful fundraise is about following the right process with persistence, being prepared, and staying calm under pressure.

You Can Probably Miss One Piece But Not Two

You don’t need to have every factor — but you can generally only miss one and still raise a seed round. For example:

  • You have no product but you’re an ex-Stripe PM living in SF, the market’s hot, you have a good idea, and you run a good process.

  • The market’s not hot but you have everything else and run a good process.

Two missing pieces, on the other hand, reduces the probability of a successful fundraise significantly. So if you’re missing one piece, make sure all your other ducks are in a row. For example:

  • If you don’t have traction you need to run a high-quality process.

  • If you don’t have startup experience, you need to find a way to come to Silicon Valley while raising money.

You can still raise with two missing pieces, but you’ll need to compensate with an amazing ranking in another category. For example, you can raise money without startup experience or being in Silicon Valley — but it may require an additional year (or more) of traction.

Unless You Can Make Significant Progress in 3 Months, Try Raising Now

In terms of timing, the question you should ask is: should I raise now? Or in three months?

This is a good question because it’s hard to look farther into the future than three months. There are two considerations:

First, can you make significant progress in three months working on the startup? Perhaps you can ship a v1 of the product, or line up a bunch of customers, or vastly improve and refine your idea through market research. If that’s the case, do that first, and then raise money.

Second, will you start using the money you raise in the next couple months? The clock starts ticking when you raise money. Future investors start judging the progress you’ve made based on money raised and time since raise. If you’re not going to use that money for three or six months, don’t start the clock until then!

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Written by Sam Bhagwat, cofounder & chief strategy officer at Gatsby; programmer, analyst, writer; follow me on Twitter!