“Leveling Up”

I have been emailing Haystack founders a bit more often with some stream-of-conscious thoughts, and many of them have encouraged me to publish them publicly. Below, I was thinking about how relatively easy it is (in the Bay Area) to raise a seed round versus raising from larger institutional VCs, and how that’s connected to my own experienced of raising small VC funds with individual LPs but then what I had to do to make the transition to an institutional capital base. Here’s the original email, to what I add a few suggested concrete tips for company founders to consider when attempting to make this transition.

=====

Hello Haystack founders,

This a post for seed-stage founders only. It is not for founders who have gone on to Series A or those founders who don’t seek institutional VC dollars. As always with these emails, please delete, disregard, or ignore if not relevant…

Lately, I see well over 50% of seed-stage founders are taking their subsequent fundraises far too casually. I don’t just mean when they gun for that elusive Series A. I mean even when they go for an extension round, or a bridge round, or an insider round, etc. No matter what size or level, while the first seed checks to roll in are relatively easy to secure in the Bay Area, the second check, no matter the source of the money, is a b**ch.

I know a bit about this from lots of indirect and direct experience. Indirectly, I have now helped well over 50 seed-stage founding teams get over to Series A. I feel I now know of the patterns across five years and the personality of investors who provide the second tranche of capital. Directly, I can imagine how it feels having (1) been part of startups that raised outside capital, and now (2) in raising my first institutional VC fund. We all know about how hard it is for a company to raise outside capital, so…

When I set out to raise Fund III back in the Summer of 2015, with two funds under my belt, an incredible roster of my own LPs, my own investments, and even real liquidity, I thought I would surely raise $20M from institutions. My previous funds were only $1M and $3.2M respectively, but this time around I was ready. LPs subscribed to my blog, were emailing me, meeting for coffee. A bunch of famous VCs were making introductions to their LPs. Even If I didn’t hit $20M, surely I would get close, right? I knew three months into fundraising it would be a bust, but legally I was able to “fundraise” for a whole year, so I kept the fund open as an excuse to meet LPs and learn why it wasn’t going to work. I ended up closing only on $8.2M after two tech execs had to back out after the Q1 SaaS-crash.

Fast-forward to last fall, I was on a mission to put those Fund III learnings to work and hopefully correct the mistakes of the past. I tried to leave no room for error. I wrote about the details of that experience here. I know I made new mistakes in raising IV which I will hopefully address when I raise V. But, the point I want to make here is that the switch from III to IV was not just a gradual progression — it was an entire *step-function* change in how I operated, how I prepared for meetings, how I pitched, how I handled a “no,” how I tried to persuade people, and how I cajoled folks toward a close. I strongly believe these principles apply directly to company founders attempting to graduate from their initial capital raise. Yes, for 10% of you it will be easy, and for 50% of folks, the next round won’t come at all, but for the 40% in the middle, the right level of preparation, precision, and tenacity will make a difference — and investors will notice this.

[I’m adding this paragraph for the public post at the suggestion of some founders… Specifically, here’s what I did operationally to level-up, in no particular order: I retained a designer to help me craft pitch materials; I was too close to the story to tell it myself properly. I created materials for each medium and meeting (all files were PDF, .xls, or a picture) — specifically, I had something short to email or share by text image, and longer decks to present in person, as well as an appendix of slides used to answer very specific questions. I engaged with two consultants to clean the data from my previous funds and integrate my data both with eShares and a professional back-office administration provider. I took copious notes from previous fundraises and tried to understand who could be a “qualified” candidate for me based on their actual investment behavior — not just relying on what people say or their “interest” in getting together. I took notes in every meeting and followed-up based on anything we agreed to follow-up on. In some cases, I asked them for what they needed help on and tried to deliver there — most are either hiring and of course looking for their own LPs. Most importantly, I clearly communicated my start and end times in every interaction or correspondence — what I learned is that everyone needs a few reminders and, if folks actually remember, most of them will respect your process and get back to you by the time you like. All of this is a way to anticipate future pushback and to exert some control over what is otherwise a random process.]

In retrospect, I approached Fund III far too casually. I now see this “casual” attitude in fundraising from many seeded founders, whether I’m invested in them or not. Perhaps hindsight is 20/20 and I needed to have a failed Fund IIi experience in order to make the fundraise for Fund IV work. I hope the “tough love” here is helpful. Do not underestimate even how hard a bridge round can be. You’ll likely have to fight for it & “level-up” — and that is a good thing.