Hot markets don’t last forever and present founders with countless challenges while they burn … [+]
At the end of 2020, the US venture capital market was booming. This “good mood” quickly spread across Europe in early 2021 and the market has gone crazy.
Whether you think it’s a bubble or not doesn’t matter. The behavior change is real. Target figures for financing rounds are ignored, ownership shares are reduced, questions are no longer asked and due diligence is dispensed with. Many funds are being forced to spray and pray to compete.
Take some recent low profile Series A funding. It started with a market standard round before 2021 of £ 10m with a pre-money valuation of £ 40m and quickly jumped to a round of £ 30m with a pre-money valuation of £ 80m as some Funds began to compete. Or the start-up whose seeds, Series A and Series B, have all been excluded with no sign of sales and with only the slightest progress in their product. There are daily examples of searching the VC Twitter virtual corridors.
For fundraising founders, a market full of capital and light on exploratory issues seems the perfect combination, but it’s more nuanced. Much like a high school dance, it depends on what category your business falls into.
Businesses get hot because there are some elements of the founders and what they do, attracts multiple investors and there is a bidding war. This is a great place from a founder’s point of view and in general they should take advantage of current market conditions, but there are risks.
The comparison between a venture capital investment and marriage is a cliché but useful. Founders embroiled in competitive multi-term sheet funding rounds today must carefully consider getting to know their partner before signing the papers or visiting the wedding chapel with Elvis in Las Vegas. The market encourages the latter, but often these shotgun unions do not end well for those involved!
Founders should also be careful when it comes to overcapitalizing the company. Well spent, capital can help a company aggressively hire and grow exponentially to gain market share. But excess cash can also cause a company to bloat, shut down too quickly, and lose the nimble edge that made it a success before increasing the funding round for Monster.
Ultimately, founders need to be confident that investors have their backs on their cap table when the market returns to normal and things don’t go according to plan – and that depends on they have strong individual relationships with each of them have built.
Reading about other companies running record breaking preventive rounds while you’re running a more typical fundraising process can be daunting.
It’s important to remember that while these hot rounds happen more frequently, they are still outliers. It’s entirely possible to build an amazing business with a normal round (or no venture capital, but that’s a whole different discussion).
Stick to the basics.
Avoid common mistakes when contacting investors and during your first pitch, and remember that a typical fundraising process takes about 6 months from start to finish.
Make sure you have a good support network both at work and in your personal life to deal with the inevitable rejection on your journey. As well as reducing exposure to negative news in general is good for our mental health, consider limiting your consumption by constantly announcing large rounds of funding.
Nobody knows when this extraordinary period of activity will slow down, but right now both venture capitalists and founders can agree that more businesses will be funded and new technology developed, which is positive for the economy and hopefully the world.