The most important fundraising advice I have for new founders:
- Get a top tier institutional investor from the Seed, even if it means a hit to valuation.
- In this climate, it can be tempting to raise endless rounds from angels. But institutions set the company up for success
- Stripe, Airbnb, Snapchat, Coinbase, Robinhood, Uber and Figma all had a top 15 institution lead the seed. Your company is not the exception.
- In fact, it is difficult to find a single successfully backed VC company that wasn’t institutionally backed at seed.
But how does one implement this in practice?
1. Every top VC firm should at least see your company until you find a lead.
2. Don’t price out top VC firms with price insensitive angels. Much better to get a Top 5 Fund at 10m valuation than a random angel at $40m.
- Top VC firms have ownership targets. Previously, it was closer to 20%, but these days it can be 10%.
- You may as well give away 10-20% of your company when it’s just an idea than when you have serious traction.
- Then you have them for your entire journey!
- Institutional investors also de-risk a company from a legal standpoint. For example, they will always make sure the company is properly incorporated, there is founder vesting and there is IP assignment.
- A small angel investing on a SAFE is not capable of doing that.
- Some founders may push back and say that “they are not interested. I can only raise from angels.”
- There are so many great firms that perhaps 1) find more institutions to pitch 2) you should change the plan/improve the metrics (tough pill) before giving up on firms
- At pre-seed, it can be good to raise from angels, especially if they help package and introduce to institutions at seed.
- After an institution is involved, by all means include angels.
- YC Is great but doesn’t count as institutional. Nor “rolling/scout funds”
- Being a founder is hard enough. Don’t make it harder by going in a different direction to 75%+ of successful startups!