This is reposted from here as I see this all day:
Why I cringe when you say you’re raising a $1.5m seed round…
“We’re raising $1.5m.”
I cringe. There’s nothing inherently wrong with raising $1.5m…UNLESS you have not thought about your raise strategically (99.9% of entrepreneurs I meet with).
Most entrepreneurs understand on some level that fundraising is all about messaging. But, most people only think about this in the context of storytelling. But, messaging how much you are raising and for what specific milestones are equally important.
Let me give you a concrete example. Here’s a tale of two companies. Same business but different raise-amounts.
-Raised a seed round of $500k
-Now raising another seed round of $2.5m to expand the business
-Raised a seed round of $2m
-Now raising another seed round of $1m to expand the business
Should both companies successfully raise, they would’ve raised the same total amount of seed money – $3m.
BUT, Company B’s situation yells RED FLAGS all over the place. As an outsider, it sounds like they burned through a hefty $2m and now are short of Series A milestones that they need another $1m to bridge them through. And, no investor wants to sign up for a desperate situation like that.
Company A’s situation sounds much more appealing. They raised a small seed round – perhaps to get them to some initial milestones, flesh out the idea, get some initial customers. And, now, they are ready to grow based on what they’ve learned.
Notice we know nothing about these businesses, but I’m already making assumptions about their scenarios. Why? Because this is commonly what you see in the trenches as an investor. And even if Company B is truly growing quickly and is only just a couple of months away from gearing up for a strong Series A, I know lots of VCs who won’t even take a meeting with Company B to hear them out. That’s just how it is. Just poor messaging.
As an entrepreneur at the seed level, you need to think deeply about the signaling (and what to do) if you are not able to hit milestones for the next round. If you are planning on raising $1m-$2m on this round, you had better hit your Series A targets (or get to profitability on this round). In fact, I call $1m-$2m raises “No (wo)man’s zone”. You should consider what happens if you fall short of Series A targets, because you will have a super tough time raising from external investors. Do you ask your current investors to re-up? Can they? Can you bootstrap to Series A milestones? Think about all this BEFORE you end up in a tough situation.
Seasoned entrepreneurs, you should be especially cautious. As an experienced entrepreneur, the natural inclination is to think, “Oh I can totally hit any milestone – I’ve done this before. No problem.” I know – because I’m that person too and think that way too. But, in my short time as a VC (just 1 year), I’ve seen multiple companies whom I met with at the beginning of my VC career already go out of business or take a terrible acquisition (or are about to), because they didn’t raise enough money but they raised too much to get them another seed round. In fact, many of them had businesses that were just beginning to take off, but because of poor fundraising strategy, their companies went under. They could’ve been amazing businesses.
Additional things to consider:
- Series A milestones go up ALL the time and are only going up – for example, I met with several B2B SaaS companies a year ago who were able to hit $1m runrate within a year on fast growth but died / were acquired for cheap because Series A milestones were higher than they had expected.
- Spaces become competitive – when many companies enter a space, investors get very nervous about whether they are backing the right horse; so, you must show above-and-beyond traction to suggest you are the winner; it’s not just about hitting milestones if you’re in a competitive space
So, if you’re super early – i.e. still building product, very much pre product-market fit, don’t have a handle on your unit metrics, don’t know your customer persona inside and out, etc, you should strongly consider raising a smaller round (say < $1m) such that your next milestone is to hit post-seed milestones rather than a series A milestones. Be strategic and message your raise well.