Series A: How to prepare for the first round of investment

After the birth of my first child, a friend of mine gave me a book, The Blessing of a Broken Knee, [Eng. The blessing of a skinned knee ]. The book is full of conflicting advice. While the innate instincts of young parents tell them that for the good of their children, they need to remove all obstacles from their way, eliminate any source of potential harm and help children avoid trouble, the author warns that you shouldn’t abuse it.

In particular, she argues that perseverance and courage are extremely important skills, and it is very important that people learn to overcome difficulties (as in the case of a broken knee) at an early age. So they will be ready when they are faced with trouble at a later age.
')

Now is the right time to become an entrepreneur.

The number of companies attracting seed investments has increased 4 times over the past 4 years. More than 200 microventure companies attracted more than $ 4 billion in total for early investment.

AngelList and FundersClub are becoming increasingly popular. As a result, an ideal environment is created for start-up entrepreneurs. If earlier the attraction of seed investments took weeks or months, now we see how in some cases it takes only a few days.

Incubators and accelerators produce a huge number of companies, and many make deals in a matter of hours after the product is shown to investors.

Oddly enough, it seems to me that the current "sowing wave" inadvertently complicates the attraction of the first round of investment. The ease with which seed investments are attracted gives many founders a false sense of confidence. As President Y Combinator Sam Altman recently tweeted:

“... today it is so easy to attract sowing investments that the founders believe that they can easily get even more money when they want ...”

Not so long ago, I worked with a team of young and talented founders who received seed funding without any effort. They had a choice between investors (I am grateful to them for choosing us), and they received twice as much investment. They decided to move on to the first investment round about six months later, but they were deeply disappointed.

As a result, they didn’t get as much as they wanted, it was much more difficult than they expected, and it took them several months to figure everything out. As the CEO admitted:

“Our sowing round was very fast and hypercompetitive, and then we went to the first round, and [investors] began to study our data in detail. There was a feeling that we had just graduated from school and immediately went to college. ”

Many founders and start-ups that I have encountered both inside and outside of the First Round community have this feeling. In our field, it seems to me, too much investment in the hands of startups at an early stage is a real test of strength.

You can call this situation a turning point or something else, but it plays a crucial role in the long-term success of the company. Judging by this trend, I believe that the main thing is to spend money economically and rationally, as soon as you receive your first money.

What the founders can do to be in a mess

Today, the amount of seed investments is much larger, and it is much easier to get them compared to what I have seen throughout my career. Oddly enough, but this only complicates the situation. Young and inexperienced entrepreneurs are expected to have quite high results.

The problem is that the volume of investments attracted in the first round was NOT changed, it did NOT increase. So, if 4 times more companies received seed investments, it means that 4 times more players will fight for the same money ... complicating, thus, attracting the next round of investments 4 times compared with 5 years ago.

As one of the managers of a startup, with whom I spoke:

“If in the sowing round your idea and team are evaluated, then in the next round of project funding, attention is paid to indicators. We didn't track cohorts and all that. We had no idea about such indicators as LTV and CAC, and did not know what to say about scaling. We were inundated with questions to which we were simply not ready. ”

[Note that in the case of the FRIA Accelerator, the situation is quite different, and we share our recipes for working with metrics and the results of graduates of our accelerator.]

The reason this happens is that the founders confuse the usual communication with venture capitalists with the discussion of their intentions. The founders take a lot of letters and calls from venture capitalists and think it’s time to start raising funds, otherwise it will be too late.

This can lead (and leads) to thoughtless actions, the consequences of which the founders may be completely unprepared for. Investors want to be sure that the founders will “call” for them, when they begin to attract funding, and therefore they try to communicate more often in order to always be in touch with them. And such communication leads to the fact that the founder makes false conclusions about the interest of potential investors.

Investors are always trying to establish contact with the company before any formal procedures, since it is almost always in their interests to get ahead of their competitors and provide you with their resources. That is why they are actively trying to start negotiations as soon as possible. But the new founders see a lot of letters in the list of incoming messages and conclude that they will be able to attract another round of investments without any problems, and often (erroneously) decide to start the process of attracting investments too early.

The main danger of starting negotiations earlier than you planned is that, perhaps, you have not yet reached the necessary stage of the project’s development and did not have time to form an investment strategy. After the sowing round, each startup should think about the indicators that it should achieve in terms of growth, income, etc., to show what kind of success (customer satisfaction, virality, high income, loyalty, etc.) they are going to achieve in further.

More than ever, it is important to achieve your goals, because today investors have a choice.

In a startup community, information circulates very quickly, and the process of attracting investments often turns into specials. an operation. If the venture company knows that 20 others have already refused, the matter is bad. How many of you would dine in a restaurant if 20 of your friends said that there was not tasty food?

Of course, there are some venture capitalists who do not listen to others, but even with them you will probably find it difficult to begin negotiations. This does not mean that you can no longer attract investments; it only means that it will be much more difficult. In this situation, you should pay additional attention to your business indicators and make another attempt in the next 9-12 months.

[Continuation of the translation we will publish soon]

[Read more about the reasons for the success and failure of startups told Dmitry Kalaev, director of the Accelerator of IIDF ]