Fundraising: “Always Be Raising” vs “Heads Down”

(This is the fourth post in this fundraising mini-series: quick, simple ideas that I’ve used in various fundraising conversations over the years, that I’m sharing here, one by one) 

If there’s one tactical topic everyone seems to have a strong opinion on when it comes to fundraising, it’s whether entrepreneurs should be actively talking to new VCs *in between* rounds of financing, for relationship building purposes.

Many founders have had the same experience: something public or semi-public comes out about your company (a funding announcement, a press article, a blog post, a tweet, even a LinkedIn update of some sort…) and, voila, your inbox starts filling up with emails, typically from VC firm associates saying that they “heard good things” about your company and would  “love to catch up”. At first, it may be vaguely flattering, but as more emails pile up, it gets tedious, sometimes overwhelming. And perhaps slightly annoying: everyone says you’re supposed to get a warm intro to a VC, but then VCs can just email you cold, and somehow they expect you to drop everything you’re doing to talk to them?  Sheesh, the nerve.

The first thing to understand is that VCs are in the business of “seeing the deal”.  Venture capital is an information and salesmanship game where getting early access to the best investment opportunities is  essential to success in a hyper-competitive environment. This is exacerbated by the current market phase we are in. Venture capital used to be a small asset class, highly concentrated and local – in those days, VCs had all the power and could afford to stay in their Sand Hill Road offices until the entrepreneurs would find them.   Today, the number of funds has exploded, with enormous amounts of money chasing the best companies, and every investor is furiously searching for the needle in the proverbial haystack, and hoping to find it before other VCs do.  

So VCs have gone from reactive to proactive, and considerably ramped up their “sourcing” activities.  They use all sorts of tactics, for both identifying promising companies and reaching out to them, including:

  • Building junior and mid-level investment teams that are mostly focused on sourcing (as opposed to, say, deal support and analysis); certain firms give those team members a “Partner” title in part to signal to entrepreneurs that they are worth talking to
  • Data-driven approaches (ranging from simple analysis of employee growth rate on LinkedIn to pretty complex data models)
  • Scout programs (where well-connected founders invest smaller amounts on behalf of larger firms)
  • Investing in other funds that are earlier in the food chain

Given this, it’s no surprise that any signal, faint though it might be, will lead to some serious inbound.

So what’s a founder to do, with all this interest? 

One line of thought (typically favored by VCs) is that founders should “always be raising”.  After all, making sure that the company does not run out of cash is one of three key responsibilities of the CEO (with setting forth the vision and recruiting). 

Another line of thought (with many proponents amongst entrepreneurs) is that founders should be “heads down” in between financing rounds, focused on “building the business” (hiring, sales, product development).  All the inbound is just noise, it comes mostly from associates that ultimately don’t have decision power to invest in your company anyway. If you talk to them, they’ll keep fishing for information but it won’t help you much with your actual fundraising needs.

Let’s look at the pros and cons of each.

“Always be raising”:

  • Pros: 
    • Build a relationship and get to know potential board members over a longer period of time – particularly important considering getting a new board member is “marriage with no possibility of divorce”.  Fred Wilson has a great post on the topic recently, The Long Engagement.
    • Get early feedback on what investors like or don’t like about your business, and perhaps think about how you can course correct accordingly well ahead of your next round
    • Increase the chances your round may get preempted by an investor you like before you even start your fundraising process, saving yourself considerable time and effort (lots of nuances here, a topic for another day)
    • Considerably decrease the time and effort required when you do run your fundraising process, as you’re hitting the ground running with a number of firms
    • Opportunity to start tapping multiple VC networks for helpful intros to talent or potential customers, as the investors who are truly interested in your business will be eager to demonstrate that they can he helpful
  • Cons:
    • Major time sink
    • Distraction
    • Risk of strange or possibly nefarious VC behavior (people forming a half-baked opinion on the company without all the facts; rumour spreading; disrespect for confidential information;  risk that the VC is just trying to learn about the space and uses your time as free consulting, etc.)

“Heads down”:

  • Pros:
    • Recapture some time, less distraction, less context switching
    • Focusing on the fundamentals of the business arguably gives founders more of a chance to get to the type of traction and metrics that investors want anyway
  • Cons:
    • Start the next fundraising effectively as a cold start – likely to take longer and require more effort.  
    • Possibility that your preferred firms may be distracted by something else at the specific time you want to talk to them, and ignore you because they don’t know you.
    • Less history with whoever you end up partnering with, higher risk of bad marriage

My thoughts:

  • There’s a bit of an emotional trap here, where founders feel that the inbound is a sign that their company is highly desirable to the VC community.  You’ll see a regular flow of tweets from founders along the lines of “I told them all no, but they still keep emailing me!”. Inbound should certainly be viewed as encouraging, but keep in mind that in this market, just about any other company that broadly fits the venture criteria is getting the same volume of inbound (often from the same firms).  Inbound should be viewed as VCs doing their job.
  • As most things in fundraising, there’s a little bit of “it depends”.  Mostly – if you’re crushing it and have all the metrics investors will want to see and then some, you’re not taking much risk by being heads down, other than selecting the wrong  individual partner or firm because you don’t have history with them (admittedly a big risk). If the business is performing less than perfectly (which is the case of most startups), then it is a much tougher choice in my opinion
  • There’s probably a “just middle” between the two extremes we described so far, and my sense is that most startups end up falling somewhere on that spectrum.  Meaning that founders say no to most but take a handful of meetings here and there, based on a firm/partner reputation and/or directly relevant industry experience.  A religiously enforced “we don’t talk to anyone” strikes me as short-term thinking.  
  • If you decide to speak with a handful of firms or individuals, then the exercise becomes about how you filter through the noise.  
    • Everything else being equal, inbound from partners is better than non-partners (but see some more thoughts below)
    • The quality of the email (how specific and tailored to you it is) often tells you a lot
    • If you have existing investors (whether VCs or well-connected angels), they may be able to offer helpful guidance.  VCs spend a lot of time with other VCs, and will likely know the inbound firm, directly or indirectly
  • Timing matters and not all VC inbound and conversations are created equal:
    • Right after an announcement (especially a funding one) is when you get the highest noise-to-signal ratio.  It’s probably fine to ask for a little of time then. There will be a little bit of natural selection as some firms will let things fall through the cracks and not follow up again, which is often all you need to know.
    • If you’re within 6-9 months of running out of cash, you can’t have non-transactional, get to know you conversations with VCs.  Whichever coffee meeting you have effectively becomes part of your process 
  • Lastly, you often hear that you should ignore VC inbound that’s coming from associates and other non-partner types.  I have mixed thoughts on this:
    • Most of the scar tissue around this has come from a history of private equity firms whose model revolve around armies of straight-out-of-school junior analysts that will literally call any company under the sun
    • Most VC firms are much smaller in size than those big PE shops, and associates work closely with partners, sometimes on a 1-on-1 basis.  In that case, associates should very much be considered as an extension of the partners 
    • Founders should remember that the associates of today will be the partners of tomorrow, and they will remember their interactions with every company.  It is entirely possible that the associate you interact with in the context of your seed round becomes the partner you hope to raise money from for your Series C or Series D round. 

2 thoughts on “Fundraising: “Always Be Raising” vs “Heads Down””

  1. Thanks for all the great insight, Matt!

    Three questions:

    1. What about the conventional, traditional wisdom that you should always/only raise money when you DON’T need it?

    2. Where’re your board, current investors, mentors, and advisers on this matter? Should you be deciding on your own what funding path to pursue, seeking their advice, getting their permission, etc.? How confident are you they they don’t already have expectations about how future rounds will be handled? Should funding status be a regular board meeting agenda item?

    3. Should you be choosing VCs and early investors based on their ability to do more of this work for you?

    1. Thanks for the comment Jack:

      1. Lots of nuances here, but generally true. Certainly the worst time to raise if when you’re truly running out of cash. As to whether you should be raising when you 1-2 years of cash in the bank… depends a bit on the circumstances – are there enough investors circling around that you can do a quick process? Are the terms attractive? Will you really be able to put that money to work efficiently?

      2. They should be very involved. Helping filtering the inbound, making introductions, advising on the process, etc. Funding certainly is a regular board item.

      3. That’s certainly one criteria. Everything else being equal, a strong board (with strong VCs) should help immensely with the next rounds of funding.

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