There seems to be increasing VC interest in the field and we are getting contacted by multiple investors (we do realize this doesn't mean they want to immediately cut us a cheque).
We have deep technical expertise but limited fundraising knowledge.
What are the best resources to learn the fundamentals? eg:
- How much should we aim to raise and at what valuation?
- How to show financial projections in a field that evolves at such a breakneck speed?
- Should we prioritize local (Europe, Switzerland) investors or North-American ones?
Four pieces of experience.
1) The first contact people at most VC funds are entry level jobs in finance. They're young, they don't actually have the power to commit funds, and the deals they are doing are teeny-tiny. Baby realtors might move 10x the amount of money in a year. Mostly they're copying the behaviours and ideas of the more senior people in the fund, and trying to look the part. There is a lot of cargo culting.
2) Psychology and decision criteria vary enormously between funding rounds - pre seed, seed, bridge, A Round etc. are different people with different vocabularies. They're all mapping what they see in front of them to an abstract model of how a company "should look" at this stage (see: "cargo culting") and 50% of the battle is making your real world mess look like their model of how a company should be at this point. Remember: they've never worked in a successful start up, they're usually fresh out of business school. This is not true of the fund seniors, who are often wicked smart, but the front line people are usually pretty green and afraid of making mistakes.
3) The perception that 4) It's real easy if you can find a network of VCs who are all mates and say "yep, this is good, pile in." Functionally speaking I think that only happens in San Francisco, everywhere else they tend to be extremely catlike and independent to a fault. If you can find a friendly network, work it as hard as you can! Good luck!
1. How much and at what valuation?
The answer to this is harder to think about with convertible notes, so I’d tend to think about it the way the VC in your first priced round will think about it. For them, today, they’ll want to, after the round, own ~20% of the company. “Today” is important because that number will fluctuate. A year ago, when money was flowing freely, that number may have been as low as 10%. In a few months, if things tighten up further, it may get as high as 30%. But my sense of the market today is 20%.
While it seems wacky, everything else in your first question then flows from this. If you raise $1M, and the VC wants 20%, then your valuation after the round closes (post-money valuation) is $5M. Raise $2M and it’s $10M. Raise $3M and it’s $15M. Etc… to some rational limit.
So the two numbers you’re really trying to figure out are: 1) how much the VC you want to talk to targets owning in your company; and 2) how much you need to get to the next milestone. If for #1 the answer is greater than 20% then it means either VCs aren’t as excited about you or venture markets have even further seized up. For #2, once upon a time I’d probably have said think about what you need for the next 18 months. Today, as I think we’re headed into tough times, I’d probably be thinking about what you need for 24 – 30 months.
By the way, at Cloudflare we raised our first round in 2009, the last period where venture markets were really seized up. In our first round we raised $2M and sold the VCs ~30% of the company. But 10 years later when we went public, in spite of raising another $200M+, the founding team still owned 25%+ of the company and held super voting shares giving us full control. So sweat these fund raising questions a bit, but mostly just focus on building a great business.
And, again, this is assuming venture not angels. And assuming a priced round, not a SAFE (convertible debt). But it can provide a good mental model to think about what you’ll do when you get to your first VC-led round.
2. Financial projections?
Focus on costs, not revenue. Assume you’ll generate no revenue. Think about how long, with that assumption, whatever you raise will last you. Today (again, winter is here or coming soon) think 24 – 30 months until you can raise again.
3. EU or US investors?
10 years ago the answer probably was US. Today venture is much more distributed. I’d think less about where and more about who. And think about the individual, not the firm. It’s so much easier having conversations with people who “get” your space. At Cloudflare, we made a list of the top 10 cyber security investors. We then found ways to meet those 10 people. The number two person on our list offered us a term sheet within 15 minutes of the start of our conversation. Rest is history.
My advice would be not to go or try raise from VCs until you know what you are doing if you can. I would try to build something first then see if can get some user interest, then see angels that would be interested. Once VCs start to get interested then start talking to them. The reason I say this is that raising without having any kind of momentum or previous experience can be really hard but it’s very easy if you have good momentum.
The fundamental is basically that the more formidable company you can build, more easier it is raise funding. If you have no connections, no product, no traction, no experience it might be close to impossible to raise.
1. Raise the amount you need (like you need to hire 5 people and pay for some servers). If you don’t need to raise then you don’t have to. Just hack your project and raise later. Some common amounts (SV/US): pre-seed $500-750k, seed $1-4M. Ideally you sell less than 15% of the company. The valuation is then factor of amount/15% and how much interest you can get. Eg: $3M/0.15 = $20M
2. I don’t think you need financial projections at seed. Smart investors understand those projections are fantasy anyway. Obviously you should have some napkin math and make sure whatever you are doing is feasible with the amount you plan to raise.
3. There are trade offs. Generally the more west you go, more optimistic people are and more willing they are to invest in unproven companies and fields. Silicon Valley investors are generally the best and easiest, but might be hard to break in if you have no connections, have not worked in SV or generally understand how things work. Many SV investors like Sequoia now have Europe offices. Europe investors are a mixed bag. There are some smart ones but most don’t understand this kind of blue sky investing. But if you are from there then you might have better chance because you might have someone you know that can do a warm intro for you.
Re. financial projections, you should understand _why_ you are raising. It is very unlikely that your product vision as of now is going to work. The game is about failing as quickly as possible and iterating. Many startups pivot to something different from what they started with. Hence, raising should not be about how much you need to execute on your current plans, but how much you need to validate whether the plan works, with some ~2y of runway to fail fast & iterate. Once you validate that your ideas work, it will be much easier to raise a bigger Series A and execute fast.
Also, don't forget that raising isn't just about money, it's about smart money: Raising from reputable angels and funds can give you excellent connections that grant you a competitive advantage. E.g. raise from people with high reputation and connections in your target market, raise from people who are connected in the AI space, etc.
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[1]: Being labeled a "swiss startup" does give you a competitive edge re. distribution in the regional market since the swiss are into that sort of thing. It can be a worthwhile strategy to rely on that, but chances that you scale out of it are slim, so you'll at best end up with some mediocre SMB. Choose the hard path, it will teach you how to succeed.
VCs are looking for 100x companies that can return their entire fund. Great funds will have a few such winners out of the tens on companies they fund, but all investments had this promise at the time thr investments were made
> How much should we aim to raise and at what valuation?
You don't generally get to pick your valuation up front: you tell an investors how much you're raising and the lead investor prices the round based on deal heat and a bunch of other pseudoscience. If you have enough interest, i.e. competitive term sheets, you have leverage to negotiate the terms that dictate the valuation: % of ownership and amount of the raise.
wrt to the amount to raise, the classic advice is to figure out what your next milestone is and try to model what it will cost to get there and then raise it. The smarter move is to just find out up what's market for seed deals right now and ask for that.
> - How to show financial projections in a field that evolves at such a breakneck speed?
There are plenty of templates online that do this for you. IMHO, find someone who knows what they're doing and pay them a couple grand to do it well (there's a plethora of former bankers and consultants who will gladly do this). All models are wrong, but a model can quickly tell an investor you know how the game is played.
> Should we prioritize local (Europe, Switzerland) investors or North-American ones?
I'm in America and mostly pitched US base funds, but I did pitch a few funds outside of the US and don't think it was the worth the time. The US has the highest concentration of the the biggest, most prominent, best connected funds looking at the best deals - I'd just focus on them.
It’s a guide explicitly written with first-time founders in mind. Hope it helps; feedback is welcome.
The offers (from local VCs) were getting are around 100k eur for 10%. Looking at the threads here... Seem like a shit deal. Or am I wrong?
- It appears as pitches talking about training/deploying/productionizing "LLMs" and "foundation models" are amongst the most successful these days while MLOps is on the decline (which was massively hyped a few years ago, but reality has caught up)
- You should be able to somewhat justify your valuation and tell a good story around it. Usual factors on valuation are the experience and network of the founders, stage and traction of the product and overall climate of the business sector. It's a good idea to research recent founding rounds of related start-ups in a similar stage as you.
- Predicting financial KPIs with a high level of precision is impossible at your stage and everybody including investors knows this. At the same time, this does not mean that you don't need a business plan. At a higher level, the projections should represent your plans on when and how to monetize your product and the cost drivers and KPIs behind it.
- Where you raise depends on your preferences and business context. For example, if you should have a high focus on data protection and privacy, it would fit greatly into your story if you had only local investors since some customers in Europe immediately see a red flag if US or Chinese people are involved.
Usually this goal/need has some eventual outcome of generating revenue (whether directly or indirectly) and in doing so, paying its investors back.
Are you asking how to “raise funds” for some specific purpose or because you’ve built “an app” that uses “hot” tech to see how many thirsty “investors” you can get to send you money?
I’m not necessarily saying you can’t “raise funds” just for the sake of doing so (without any clear use for the funds and without any revenue) but unless you have experience/reputation for building valuable businesses/ip, connections to cc’s/capital who trust you’ll make good on their investments, id be kinda surprised if you get any checks.
That said, do lmk if you score - I’ve got a retired mining rig turned gpu farm for SD running with custom (locally trained/tuned) models as well as all of the 4chan/Reddit/etc ones as I’m sure many HNers have :)
Best of luck
We work on photorealistic image generation
More info about our models (incl some open-source ones): https://nyx-ai.github.io/stylegan2-flax-tpu/
It will help you to clarify your vision and where you want to be.
It might not be relevant at this stage, but I recommend reading Value Proposition Design [0]. Since you're technical founders, you might fall into the trap of building without validation. This book will give you the framework to understand what are you building, for who, what pains are you solving, and what gains customers should expect. Any investor will ask you these questions, so being prepared will increase your chances.
Good luck.
[0] https://www.strategyzer.com/books/value-proposition-design
I've been raising pre-seed for a no-code platform for about a month now so very much in the trenches, happy to chat and share my learnings. Email me at paul (at) railsrocket.app
If you really believe there is a revenue generating business there the worst thing you could do is give equity away at a value far below what you believe it’s worth
Some of them will bullshit you, others will give honest advice. Figuring out which is which is a skill that can't really be taught, you've just got to take meetings and practice.
Not affiliated in any way, just a fan. We've sent several clients their way and they've always been helpful.
yc startup investor school 2018 on youtube
There’s no substitute for running the gauntlet yourself. ;) The best way to learn the fundamentals is to do it and make mistakes, but you can prepare, and you can keep learning; try to always stay open minded during this bumpy ride.
Learn as much as you can about the perspective that VCs have, and how they work and how they think. If at all possible, find some VCs to talk to who you’re not pitching to. Nothing will help you more than this, if you want to raise VC money. They generally don’t care very much about your technology or understand it or get excited by it, and a few one hour meetings won’t change that. They, like you, are having an exchange with you over money, and they are motivated to learn about your tech enough to see if you have an advantage over other companies. Some VCs are playing the odds, and others believe in their investments.
Pay the most attention to whether VCs can help you with anything other than money. Networking, business and marketing advice, and even technical issues (consider that some might know a lot about your competition, and that some can help you with thing like patent filing.)
> How much should we aim to raise and at what valuation?
Start with : how much do you need to be profitable? You might not know, but you should take a real effort stab at estimating it (which could take weeks or months to research, depending on how far along you are). How quickly do you need to raise money? How long can you go without any investment? How long can you go with investment? How many people do you need in 2 months, 6 months, 1 year, 2 years…? How many times do you expect to raise money? How much of the company are you willing to sell?
Last time I was pitching, the best investors I talked to told me I wasn’t asking for enough money, because they could easily see it didn’t give me enough growth and runway to succeed or even make it to the next round.
> How to show financial projections in a field that evolves at such a breakneck speed?
FWIW, this question is a red flag. Your business plan needs to be able to succeed in spite of technology’s progress, and you need to be truly confident about that by understanding how you’ll weather new technologies and smart companies that adopt new technologies. If you view technology as a risk, then VCs will look at it that way too. BTW, technology is (of course) always a risk in a tech company, but look around for how successful companies deal with this and make their business depend primarily on people and not technology, and take note of how many tech businesses are not running on the latest developments in their field. VCs might be happiest if you have some kind of unfair advantage that cushions and buffers you against technology risks.