It's not uncommon to hear from founders about the time-consuming nature of fundraising. Katherine Power, co-founder of Clique Media Group told Create & Cultivate Dallas audiences that as a founder you should expect to spent at least six months of your fundraising year dedicated to only. Leura Fine, Founder of Laurel & Wolf told Create & Cultivate that, "Fundraising can be an enormous time suck. It’s not a waste of time. Because bringing in great investors is really important part of building your business and the dollars are there to help you grow."
Echoing this is the fact that there has never been a better time to be an entrepreneur, or a female at the wheel of a startup. The number of seed-funded companies has quadrupled over the last four years. Top line data from Crunchbase reports that in 2009, 9.5% startups had at least one woman founder, but by 2014 that rate had almost doubled to 18%. However, Crunchbase also found that female founders are most heavily represented in seed and angel financed companies — 19% of that total. Yet their participation rate drops to 13% during the Series A or B stage of financing.
So what gives? Why the drop? And why are companies finding a harder time in their second round of funding? There are a couple reasons that you, as a founder or entrepreneur, should consider.
THE 'SIGNALING' ISSUE
It used to be uncommon for VCs to invest first (or seed) rounds. However, with tech startups its more common to see VCs come in during the seed round. There is an old saying in venture capital, “Fill your canteen when you are by the river and not when you are thirsty.”
To a new company, this initially sounds great -- you get the money you need to launch, and can move the needle forward on your business. However, if a VC that invested in your seed round does not invest in you future rounds, a thorough investor will look into why that VC decided to pull out. It signals to other investors that if VC Company X was not interested or willing to invest in the next round, something must be wrong within the company.
The first VC investor is seen as someone with insider information. Whether it's true or not, it doesn't look good for you or your business.
That's why getting to know your investors and building a relationship and terms that you're comfortable with is crucial. FROM DAY ONE. Taking a check to take a check can screw you down the line.
There is an old adage in venture capital, “Fill your canteen when you are by the river and not when you are thirsty.”
THE OVERCONFIDENT ISSUE
Many seed rounds are super fast. Laurel & Wolf was oversubscribed in their seed round within a month and a half. Their target goal was $500k. They raised $650.
[define it: Oversubscribed: Situation where a new stock (share) issue has more buyers than there are shares to satisfy their orders.]
On paper, that paper sounds great, and it worked well for Leura. However, there are plenty of startups that launch, but have a problem performing, executing, and raising money when it comes to Series A. Why? With crowd-funding and the boom of VCs raising Series Seed many entrepreneurs are heading into meetings with big VCs overconfident that they can raise. They don't understand their business model, their metrics, or their data, and according to Leura, they don't understand as founder how vital it is for them to control their fundraising process.
This makes the fundraising process significantly longer, and young startups are finding it much harder to secure a term sheet. Plus, the longer it takes to raise, the more you're prolonging the long-term goal: building a successful business. The goal should be to spend the minimum amount of time required to raise your funding goals.
[define it: Term Sheet: A bullet-point document outlining the material terms and conditions of a business agreement. After a term sheet has been "executed," it guides legal counsel in the preparation of a proposed "final agreement".]
THE WAY, WAY MORE COMPETITION ISSUE
Simply put, the more companies that raise their seed funding, the more companies that are going to be looking to raise Series A. Even though their is a influx of funds at the seed level, the same can't be said for Series A. So if five companies secure seed funding, and five companies go into Series A, the competition is that much harder.
In part, many entrepreneurs require less money to hit their first round targets, so this is also over-saturating the market.
The safest bet is to know exactly what you want, how you want to do it, and understand your metrics. That way when you go to raise Series A, you have a leg-up on the competition, and are more likely to give your company the legs it needs for the journey.
If a seed round is the sprint, you should still be prepared to go the distance. Ready, set, raise.