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Updated September 15, 2023You’re reading an excerpt of The Holloway Guide to Raising Venture Capital, a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.
The best entrepreneurs are always raising money, yet never raising money.Unknown
This sentiment has been repeated by Mark Suster, Kleiner Perkins partner Eric Feng, and others, and there’s a reason for its ubiquity. Every minute a founder spends meeting with an investor, whether on Sand Hill Road, in Cincinnati, or in SoHo, is a minute they aren’t meeting with customers and building their team and product. The best entrepreneurs are always raising money, not because their calendars are packed with investor meetings but because they focus their time on building their business, setting themselves up for fundraising success. Nothing gets an investor excited like revenue, customers, and a big market with room to grow into.
If you’ve already assessed whether raising venture capital is right for your company and have chosen to move forward, how do you know if you’re ready to start raising? There are a few things to consider: the time you want to allocate internally, the state your company is in, and the macro calendar of venture capital. We’ll also discuss how to use your raising schedule to give you leverage.
Except in rare cases (like if you’ve gained a ton of traction by bootstrapping and investors are now selling themselves to you), preparing and running the actual process of fundraising is time-consuming, regardless of whether you’re a first-time or repeat founder.* Raising venture capital almost always takes longer than you think and will distract you and your team from building your company. A founder’s job, especially in the early days, will be hiring the team, sales and business development, building the initial product, and raising capital.
controversy Prominent investors disagree on how much time founders should allocate to fundraising. Paul Graham, founder of startup accelerator Y Combinator, advises startups to constrain fundraising to a limited time period,* while Upfront Ventures partner Mark Suster says startups should allocate a few hours every week to the meetings and activities related to fundraising, citing, among other reasons, that good relationships take time to build, and can’t develop if they’re relegated to specific times of year. Graham suggests startups with multiple founders assign only one founder to fundraising, so that the other founder or founders are not distracted from company operations.
Figuring out whether you can allocate the time to fundraise depends on how long the process will take, right? This is impossible to generalize, but everyone wants to know. So we’ll go ahead and answer this for you, but please take it with a grain of salt, because every fundraising process is different: From the moment you decide to raise venture capital through to signing a term sheet, the process takes an average of three months. If you’ve founded four companies already and your newest one is really hot, it could take two weeks and you won’t have to lift a finger; investors might flock to your door. If you’re just starting out building your network from scratch, it might take closer to six months.
Startup coach Dave Bailey is adamant that founders wait to raise venture capital. In a blog post, “The Dangers of Raising Venture Capital Too Early,” Bailey provides valuable insights into how venture capital can strap founders into a plan that will keep them from iterating and improving. When your company is still working out the details of its big idea, venture funding can be a mistake because it pressures founders to build a team and a business model before they fully understand their product and customers. If it’s possible to bootstrap your way to some amount of customer revenue, do it.*
Skills are your leverage at the early stage, not money.Dave Bailey, CEO coach*
Most investors agree it’s far easier to have confidence in an individual or team if you can see a trajectory of progress. But at the same time, many founders wait too long before meeting investors. If you feel like you aren’t ready to ask investors for money, it can still be a great time to meet them to begin building a relationship—you are, after all, signing up for a multi-year journey that potentially involves millions of dollars. “You ask for money, you get advice; you ask for advice, you get money” is another quip heard frequently in the startup ecosystem.*
danger Don’t fundraise right after a major failure.*
If your industry is cyclical, time your fundraising for the part of the year when your company makes the most money.*
important However you approach the logistics of fundraising, money has the power to distract you from everything else, especially when you really need it. Actively looking for investors can slow down growth, so be mindful of your resources.
It’s usually recommended to avoid fundraising when partners are offline for the winter holidays or during the summer.* Some periods, especially the Thanksgiving to New Year’s Eve stretch, can mess up your momentum with a firm. You may be able to get one meeting with an investor just before or after Thanksgiving, but if they want you to meet with the full partnership, you’ll have to deal with everyone’s holiday schedules. You don’t want the collective excitement around your company to die down or have anyone forget the details of your pitch. That said, there’s not as much seasonality to venture funding as is sometimes assumed.
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Source: Crunchbase*
important Having more interest in your company than you can possibly accommodate is a highly valuable situation for any founder. Generating more demand for your round than you have room for—that is, creating a sense of scarcity—helps you gain leverage by increasing the urgency with which investors approach your company. When you decide to raise a round is crucial, and the way you schedule meetings within that round can greatly affect whether investment in your company is seen as scarce—something investors will fight to be part of.
FOMO may be an obnoxious acronym, but it’s a very real thing. The fear of missing out influences how investors think about opportunities. When an investor hears about a company that got funded in a space they’re interested in, but didn’t know the company existed before hearing about the deal, it’s immensely frustrating. Given the power laws of venture capital, investors really need to make sure they don’t miss out on a good investment. When they miss a deal, it can make the investor question their skills. This desire to see all relevant deals, even if only to pass on most of them, comes partly from FOMO. For this reason, investors are said to have a herd mentality. While FOMO isn’t a good reason for an investor to invest in a company, it influences investors when a highly competitive deal—one in which many investors are interested in investing—comes along.
Investors’ not-so-well-kept secret is that it’s really hard to pick the winners early on, which leads to significant fear of missing out. Venture capital depends completely on outliers with very high returns. This means good deals in venture capital are scarce. The realities of FOMO should help motivate you to reach out to any and all investors who could realistically invest in your company (and who you would be excited to work with). Your goal is to convince investors that your company is one of these scarce good deals.
Parallel fundraising is the strategy of setting up meetings with investors at different firms within the same time period. Parallel fundraising is designed to tilt the fundraising process in favor of founders by creating a sense of scarcity and forcing investors to make decisions without input from or collaboration with other investors. By contrast, serial fundraising, in which founders set up meetings with different firms during different periods, gives the advantage to investors by allowing them to set the schedule and enabling them to talk to each other about whether a company will make a good investment. Aaron Harris of Y Combinator coined the term in his 2018 post about process and leverage.
Founders who fundraise serially meet with investors whenever they can. They may take first meetings with two different investors four weeks apart. In practice, parallel fundraising means a founder sets up all first meetings with every firm they want to meet within the same one- to two-week period. Second meetings happen in week two or three, partner meetings in week three or four, and negotiations happen in week four or five.
In this way, parallel fundraising creates a sense of urgency among VCs to invest in your company. As Harris describes, parallel fundraising means investors won’t have the advantage of knowing which other investors are interested in your company, as serial fundraising allows, so they have no way of knowing whether or not a company is hot. Their safer bet, given FOMO, is to get in now, just in case the company turns out to be on fire. With parallel fundraising, every investor you meet with has the same information about you and your company—they can’t share it with each other or with investors you have not yet met with or spoken to directly, and that makes the information scarce. In parallel fundraising, two investors who know each other met the founder at the same time. In serial fundraising, the investor who meets the founder after the first investor passed has to wonder why someone else passed on the company. If one investor has three meetings worth of information, and another investor finds out that they said no, they think, “Well, maybe I can skip having another meeting with this person.” With parallel fundraising, you have more shots on goal.
important We strongly recommend every founder read Harris’s post when planning out a fundraise. Harris differentiates between “pre-fundraising” meetings, where founders are exploring a group of investors they might want to work with, and official fundraising meetings. While meeting informally with investors as you’re building your target list can be a wise use of your time, we recommend considering all meetings with investors, whether or not you are ready to take on investment, as pitch meetings of one degree or another. In any context, you are being evaluated.
The easiest way to raise money is to build something that investors use.Rahul Vohra, founder and CEO, Superhuman*
controversy Some founders recommend only meeting informally with investors, never “officially” raising or trying to set pitch meetings. The theory goes that if you’re building an exceptional product and spending time on traction and users, investors will come to you. If you’re really lucky, VCs themselves might be some of those early users, as in the case of Superhuman founder Rahul Vohra, who has described his raising-without-raising strategy with The Business of Software (quoted above) and on audioThe 20-Minute VC. This strategy can work if you’re a really hot commodity. But that’s not likely to be the case with your first company, and unless you’re an ex-employee of Uber or Airbnb catered to by firms run by other alumnae, it’ll be hard for any founder to raise a seed round without actively seeking investment.*
This section was written by Rachel Jepsen.*
Systemic bias as well as implicit or unconscious bias—which can be coupled with outright discrimination and harassment—keeps underrepresented founders from receiving equitable treatment in the venture capital ecosystem. Prejudice makes it difficult or impossible for some founders to participate in the networks that help others connect with VCs, and secure funding.
Anyone seeking venture funding or considering whether venture capital is right for them needs to be aware of the massive discrepancies in funding, as well as the efforts by some VCs, founders, and organizations to right the balance. The more you know about the biases, discrimination, and harassment that many founders continue to face when trying to raise venture capital, the better equipped you will be to stay safe in your own fundraising journey, and to work with investors who will be your allies and reflect well on your company.