Series A: How To Prepare To Attract The First Round Of Investment

After the birth of my first child, a friend of mine presented me with the book “The Blessing of the 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 path, eliminate any source of potential harm and help children avoid trouble, the author in turn warns that this should not be abused.

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

Now is the right time to become an entrepreneur.

The number of companies that have attracted seed investments has increased 4 times over the past 4 years. More than 200 micro-venture companies raised a total of more than $ 4 billion to invest in the early stages.

AngelList and FundersClub are becoming more popular. As a result, an ideal environment is formed for beginner entrepreneurs. Previously, attracting seed investments took weeks or months, but now we see how in some cases it takes only a few days.

A huge number of companies produce incubators and accelerators, and many enter into transactions in a matter of hours after the product is demonstrated to investors.

Oddly enough, it seems to me that the current "seed 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 Y Combinator President Sam Altman recently tweeted:

"... today it is so easy to attract seed 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 that they chose us), and they received twice as much investment. They decided to move to the first round of investment about six months later, but they were deeply disappointed.

As a result, they received not as much as they wanted, it was much more difficult than they expected, and it took them several months to figure it out. As the CEO admitted:

“Our sowing round was very fast and hyper-competitive, and then we moved on to the first round, and [investors] began to study our data in detail. It felt like we had just graduated from high school and immediately went to college. ”

Many founders and startups experience this experience, which I have encountered both inside and outside the First Round community. In my area, it seems to me that 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 get your first money.

What the founders can do to keep things on track

Today, the volume of seed investments is much larger, and getting them is much easier compared to what I saw throughout my career. Oddly enough, but this only complicates the situation. From young and inexperienced entrepreneurs expect quite good results.

The problem is that the volume of investments attracted in the first round did NOT change, it did NOT increase. So, if 4 times more companies received seed investments, then this means that 4 times more players will fight for the same money ... making it more difficult, therefore, to attract the next round of investments 4 times compared to 5 years ago.

As one of the startup leaders I spoke with said:

“If in the sowing round they evaluate your idea and team, then in the next round of project financing they pay attention to the indicators. We did not track cohorts and all that. We had no idea about indicators such as LTV and CAC, and did not know what to say about scaling. We were inundated with issues for which we were simply not ready. ”

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

The reason why this happens is that the founders confuse ordinary communication with venture capitalists with a discussion of their intentions . The founders receive mountains of letters and calls from venture capitalists and think that it is time to start attracting financing, otherwise it will be too late.

This can lead (and leads) to rash actions, the consequences of which the founders may not be ready at all. Investors want to be sure that the founders will “call” them when they start attracting financing, and therefore they try to communicate more often 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 contact the company before any formal procedures, as 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 early as possible. And beginning founders see a lot of letters in the list of incoming messages and conclude that they can easily attract the next round of investments, 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 desired stage of project development and have not yet managed 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 success (customer satisfaction, virality, high income, loyalty, etc.) they are going to achieve in further.

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

In the startup community, information circulates very quickly, and the process of attracting investments often turns into a special one. operation. If the venture company knows that 20 others have already refused you, it’s bad. How many of you would dine in a restaurant if 20 of your friends said it tasted bad?

Of course, there are some venture capitalists who do not listen to others, but even with them you will probably find it difficult to start negotiations. This does not mean that you can no longer attract investment; it just says that it will be much more difficult for you. In this situation, it is worth paying extra attention to your business indicators and making another attempt in the next 9-12 months.

[We will publish the continuation of the translation soon]

[More about the reasons for the success and failure of startups was told by Dmitry Kalayev, director of the IIDF Accelerator ]