I'd say 95% of founders still don't fully understand how tough the Series A/B/C markets are right now
They think they understand
But they are still too bullish
— Jason ✨Be Kind✨ Lemkin (@jasonlk) May 8, 2023
The pace of VC investing today has dramatically slowed down, especially post seed stage.
You do have to go and try harder these days. And I see founders make one key mistake. They don’t do everything they can to derisk things for VCs. This is even more important today, when VCs have significantly pulled back:
Remember that investing in start-ups is very risky — and why. Not only do most start-ups fail, but it is more than that. It’s really hard to do enough diligence in enough time, especially over Zoom:
- It’s hard to really get to know the team that well. You might have literally just met them. And often, they will have zero real track record, or close to zero.
- It’s hard to know if the handful of customers they really have, if any, will grow.
- It’s hard to know if founders might quit if it gets too hard.
- It’s hard to know if founders will spend too much of the money, too quickly.
- It’s hard to know if there might be a better competitor just across town.
There just almost never is enough time and bandwidth to know for sure if you should do the investment. Startups are … raw. And startup investment periods are often compressed.
And yet … and yet when you see a startup you think is in the top 5%, you want to invest. Often badly. And quickly. Because the great ones produce all the returns.
But that’s often a moment in time. If you stumble after, and/or the diligence gets worse, or you become even a tiny bit of a less attractive investment … that prospective investor will often fade away.
So de-risk things:
- Share as much information upfront as you can. Don’t make VCs have to guess about your churn, your burn, your growth rate.
- Prepare a set of customer testimonials. VCs will often still want to do their own customer diligence. But putting together 10 testimonials can really help a lot to get an investor 50%-90% of the way there.
- Prepare a truly great and honest competitive analysis. It doesn’t need to be 20 pages long, but something that does again 50%-90% of the homework for investors.
- Don’t hide stuff. Be upfront with the “less good” and just present a plan to address it. No VC expects there not to be some less good news in the early days especially.
- Show how the cash will last 18-24+ months. Your financial model doesn’t have to be amazing, but make sure it shows the cash will last 18-24+ months. This again derisks a potential investment. It gives you enough time to hit the milestones necessary for the next round.
What do VCs want today to actually write a check?
The Trifecta: pic.twitter.com/blNFynKL0V
— SaaStr (@saastr) May 8, 2023