In this day and age, up-and-coming entrepreneurs can get caught up in the glorification of startups. Too often, first time founders are glued in front of their screens reading TechCrunch and Term Sheet, to learn about the latest funding round announcements. Unfortunately, what many don’t realize is that the work for that funding round happened long before the announcement, and the real results for companies don’t always come in the form of press.
At Corigin Ventures, we too often have first time Founders pitch us that are too early to be raising a seed round. While some are pre-launch or pre-product, others just haven’t yet found their groove or learned enough. And while I know we live in a free market in which they may be able to raise VC capital, I’m here to say that it’s not always the best decision to raise venture early, both for for the founder OR for the business.
Thus, I’d like to throw out 5 reasons why it’s better to wait until there is a product in market before raising a seed round, in most instances (clearly some exceptions!).
A Strong, Loyal Team
As a Founder you need to grind things out. One of the hardest things to do is to recruit a strong, talented team before you have the piles of cash to guarantee them a great salary for the next 18 months. Because of this, if you’re able to get people to buy into your vision before the cash is in the bank, then you’re more likely to find early employees that are more committed, loyal and in it for the long haul. These people aren’t doing it for the money. They’re doing it for what you’re creating, their belief in you and their belief in the future. If you’re able to pull off finding the right people, it will pay dividends in the long run as, not only will you have a stronger core, but the VCs will love the fact that you’ve now shown an ability to recruit under-less-than-perfect circumstances.
Finding Product Market Fit
Finding product market fit before a seed round will give you a higher level of confidence to take institutional capital. The feeling of knowing that people want and love a product vs. thinking that they want and will love a product is a huge difference. By having less to “figure out”, you’ll be more committed to certain decisions moving forward (key hires post-seed, marketing/distribution channels, etc.), which will give you more peace of mind.
There is a huge difference between having $1,500,000 in your bank account and having $150,000 or even $50,000 in it. If your company is pre product market fit and you’re still testing various critical pieces of the business, then you’ll be making less expensive mistakes and pulling the plug on things faster. Ultimately having to hustle in non-scalable ways to get things done and show initial traction is good for everyone, and because of that, it’ll make you more resilient in the long-run. Resourcefulness is another data point that makes VCs more confident in your ability to execute with our capital.
Quicker Fundraising Process and a Higher Valuation
If you try to raise when you’re not ready, you’ll end up having 100+ conversations with investors, lose focus on the day-to-day activities of your business, see growth/momentum stalling, and end up physically and mentally exhausted. Although you can’t spell fundraising without fun, it’s definitely not a fun process. And we get that. So for the sake of saving time and your sanity, make sure the timing is right for your seed round. If it is, then the fundraising process should be quicker. It’s all about momentum.
Moreover, if your company is doing well then you’ll have more demand for your round, raise at a higher valuation, own more of the company and have more control over the terms. This matters as some VCs are known for putting less than fair terms (e.g. unfair liquidation preferences) in the funding docs and removing Founders if they’re not performing.
P.S. If you’re thinking about fundraising soon, give this First Round Review post “The Fundraising Wisdom That Helped Our Founders Raise $18B in Follow-On Capital” a read.
Access to Better Investors
When the timing for a fundraise is right, and your company is doing well, it’ll provide you with access to better investors. Simply put, the top tier VCs have very strong first filters and often times only give one shot. So, as a first time founder, if your company is on fire and ready for the big leagues then you’ll have a better shot of getting the big guns on board, otherwise you may have just gone too soon. Venture Capital is a profession with a lot of emotion in it and first impressions are huge.
Starting your first company is a difficult and epic journey. It’s one that includes incredible learnings and plenty of ups and downs. Advice is plentiful, but make sure that you surround yourself with the right team, advisors and support system that can provide you with good advice so you’re being put in the best position to succeed.
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This post was first posted to Medium here.
Street Art Artist credit: MTO.