Raising Equity

Raising Equity.wav

Speaker: Jai Malik (Founder & GP of Countdown Capital)

Key Points

The #1 thing you want to optimize for with fundraising is dilution. At the beginning or at the Pre-Seed round you should budget to sell 15-20% of your company with another 15-20% at the Seed round. Although you want a higher valuation you also want fair pricing that won’t set you up for failure in the next round, meaning that if you raise at too high of a valuation it could set you up for a down round if you don’t execute. If you build a billion-dollar business you should expect roughly 60% dilution to that point. If you don’t execute or price yourself too low/high you could end up with 80%+ dilution.
When you are raising at the current valuation the investor is thinking what can they raise at in the next round and if they execute on x can they raise at 2-3x they did today? If you can 2 or 3x your valuation in 18 months it really doesn’t matter what you raise at in the current round.
The primary goal working with lead investors is to get a price. Most founders make the mistake of telling lead investors how much money to put in rather then I need a price. Lead investors are incentivized to set a decent valuation because they are funding a lot of the money early on and do not want their founders to get over diluted. Finding disciplined and great firms to come into your round is very difficult. 99% of leads are not great investors.
At the Pre-Seed round, VCs are trying to understand does this idea make sense. At the Seed round VCs are validating do customers want to use this. On the team side you must show investors that you have some sort of biz dev or customer success presence that sets you up to go from $100k ARR to $1M+. You have to display a strong customer acquisition strategy. Series B and beyond is all about growth.
When you conduct diligence on VC funds you should target companies that went through diligence but didn’t move forward. Another route is to get the take of companies that went sour and ask them how the fund supported them through the hard times. Not everyone is going to be a cheerleader even if they are on the cap table.
The dumbest mistake founders make is going to a VC and asking for too much money. Your ask will explode through customers. Ask what is reasonable that you can close on in 1-2 months. The hardest mistake is raising at too high of a valuation. If you raise too high it can set you up for failure in your next round.