Exponential Growth Advisors ("EGrA")

FUNDRAISING - SEED AND SERIES A ROUNDS

Published on May 4, 2018

A few weeks back, I had the opportunity to host a panel discussion with three prominent leaders in Chicago’s venture industry: 1. Mark Achler, Managing Director at Math Ventures; 2. Rob Chesney, Partner, Chicago Ventures; and 3. Alida Miranda-Wolff, Platform Director at Hyde Park Angels (now co-founder at Ethos). The topic of discussion was around early stage funding and valuation. The panelists provided a lot of interesting facts and practical knowledge to the audience. Below are some of the highlights and my take:

State of Fundraising

1. Current funding environment: Historically, more than 70% of venture companies have not returned 100% of their investment. Everyone agreed that the current venture market is frothy and this has led investors to safer options. As a result, more capital has been flowing toward later stage companies.

2. Check-size: Check sizes have increased in the recent months and $3m-$5m is now more common for a seed round investment.

3. Investment choice: All panelists were flexible with the three common investment routes – Priced round, Converts, and SAFE. However, there was more skepticism around SAFE. Entrepreneurs should be cognizant of the fact that conversion clause can make subsequent down rounds (if any) more expensive for founders.


Steps Founders Can Take

1.  Timing: Typically, there are 18 months between two funding rounds but the panelists suggested that founders should always be raising. You don’t have to have a round open all the time but should always keep meeting investors and building a pipeline.

2.  Communication: Founders should keep the dialog open with the current and potential investors and send frequent business updates with key milestones achieved.

3.  Key personality traits: Investors look for integrity, honesty, and “coachability” in the founding team. Venture investing is a relationship business and founders should take time to build relationships with investors.

4.  Core team skills: Investors like co-founders with complimentary skill-sets. The team needs to have strong in-house tech and sales skills. If one of these is missing, there should be a good substitute with a plan to bring these in-house.

5.  Know investors and their priorities: Before meeting a VC or an angel, founders should do their research on the investors’ focus areas and priorities and demonstrate this understanding in the meeting.

Valuation

1.  High Valuation: Founders should be cautious of high valuations. Valuations not supported by business fundamentals can lead to subsequent down rounds. Down rounds can result in loss of momentum, higher discounts to new investors, some dilution for older investors, and much higher dilution for founders (specifically if the prior investors had anti-dilution clauses). Nobody wants a down round and as such its best to avoid an unreasonable higher valuation.

2.  Focus on dilution: In early stages, most institutional investors have a target dilution range for a given stage of a company. Founders should be cognizant of that and negotiate within those parameters - do the homework and if they can, maybe make a case for the higher end of that range. Be reasonable and don’t put valuation front and center in your discussions.

 3.  Do your homework: Its best if founders do their homework, build their own models, and business presentations. Investors will look at this information, question all the assumptions and analysis, but ultimately do their own internal analysis as well. Provide as much information as you can – it’s all about helping the investors de-risk your investment opportunity.

Author:

Partner, EGrA 
Business and Financial Strategy Advice for Young and Dynamic Companies