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Ask HN: How to raise a seed round in a down market?

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Re: Ask HN: How to raise a seed round in a down market?

#111

Post by FreakLegion »

fauigerzigerk wrote: post #102
FreakLegion wrote: post #96

Earlier quoted context omitted.

The choice doesn't have to be between raising and not raising. Seed rounds in particular are flexible, so you can optimize between raising at $Xm and Y% dilution. For example I raised seed money in early 2021 at $25m, but the highest valuation offered was around $32m. Why not just take the bigger number? Mainly because they wanted more of the company, but the higher valuation also comes with risk, and it wasn't worth…

I'm not sure I understand. Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation? The only way in which this can possibly be true is investor psychology. In purely economic terms, having raised equity capital at what turns out to be a "silly" valuation is unconditionally good for the company and its founders. The company isn't off t…

> Are you saying that a down round after having raised at a "silly" valuation is worse for founders than a seed round at a terrible valuation?

Raising at a terrible valuation isn't the alternative.

It's easy enough to think through the mechanics of a down round:

* Why would a company accept a lower valuation at all? Desperation. They need the capital to continue.

* Is a desperate company going to get good terms? No, this is how you end up with onerous liquidation preferences, lose control of the board, get outside executives foisted on you, etc.

* What happens to the team? The company landed in this predicament by being overextended, so people will lose their jobs. Morale tanks, other people leave by choice.

* What happens to the stock? It loses a lot of value. Not only is the company worth less, but there's more dilution than a typical round (which gets compounded if existing investors have anti-dilution provisions). More morale issues. More people leaving.

On and on.

Not everyone who raised at absurd valuations will end up in this situation, naturally. If they didn't spend the money, they'll be fine. (If they raised on a SAFE where the "valuation" was really a cap, they'll just have to reset their expectations. It was never really a valuation anyway. If they misrepresented things to their team though they'll still have problems.)

It's the early-stage companies who took a bunch of money on an idea and spent most of it over the last year getting to a sellable product that are in trouble. They were only doing what they were told -- floor it, spend the money, build as fast as you can, raise more in a year -- but now things have cooled, they still need to find PMF and generate revenue, and while a year of runway might seem like a lot, it's blood in the water for investors.

Re: Ask HN: How to raise a seed round in a down market?

#112

Post by dustingetz »

sdesol wrote: post #70
pacarvalho wrote: post #49

Earlier quoted context omitted.

Any suggestions on where new founders should look to find seed investors?

The easiest way is to reach out to entrepreneurs that have raised before and see if they are willing to be an advisor in exchange for equity in your company. If you have something they believe in, they won't hesitate to introduce you to investors they know in exchange for equity in your company. If you go through the advisor agreement at https://fi.co/fast you can get a sense of how much equity you should give up. If…

advisors who provide intros should be invested, not compensated. the social capital gain of making a great intro is enough. compensate advisors for their time spent coaching you

Re: Ask HN: How to raise a seed round in a down market?

#113

Post by bjornsing »

eganist wrote: post #60
xyzzy_plugh wrote: post #54

Earlier quoted context omitted.

> Raise as much money as you can. In 2021, this was terrible advice. How so? If you raised a ton of cash in 2021, you should better equipped to ride out any economic downturn than nearly any other business in existence. Most businesses do not have millions of dollars in cash in a bank account. Sure, your valuation might be bonkers, but that's better than being kicked to the curb, and inflation will probably dampen th…

> If you raised a ton of cash in 2021, you should better equipped to ride out any economic downturn than nearly any other business in existence. This analysis benefits from hindsight.

True. But not by very much. Anyone that googled “quantitative easing” in 2021 would have been able to figure out that the boom was likely to come to an end soon.

Re: Ask HN: How to raise a seed round in a down market?

#114

Post by bjornsing »

krashidov wrote: post #84
joschmo wrote: post #78

Earlier quoted context omitted.

I would say $2 at $20M post-money was a very average round last year (I think the median from the top 50 seed funds was very close to this and average was slightly higher). I was hearing a lot of $3 at $30 and several $5 at $50s.

That’s insane. If you’re a founder and you own 20-90% of a 30m dollar seed stage company, you’ve essentially ballooned your paper net worth to a very nice number. A number that would be equivalent to a healthy acquisition. Obviously the founders can’t really dump those shares on the secondary market but it just feels weird for seed stage companies to be worth that much.

In a lot of ways they’re not. You mentioned one. Another is class of shares.

Re: Ask HN: How to raise a seed round in a down market?

#115

Post by vanattab »

joschmo wrote: post #21

This is an ideal time to raise seed money. Many funds have moved heavily down market away from the big Series B/C's of 2020/2021. You now have a lot of tourists at the seed stage who are obligated to deploy capital and even if it is at 10-20% of the previous rate, that's still five $2M seed rounds for every $50-100M series B/C that used to get done. You won't get a killer valuation like 2020/2021, but you will have p…

2. You should also be raising seed money from angels that are executives/fellow founders at your early customers / pilot partners. Ideally you fill a $2M seed round with ten $50-100K checks from these people and a great seed fund that will be value add-oriented.

Wait is it normal for an executive of a company to invest in companies that thier company is paying for services. That seems like there could be a lot of conflict of interest.

Re: Ask HN: How to raise a seed round in a down market?

#116

Post by zemvpferreira »

vanattab wrote: post #115
joschmo wrote: post #21

This is an ideal time to raise seed money. Many funds have moved heavily down market away from the big Series B/C's of 2020/2021. You now have a lot of tourists at the seed stage who are obligated to deploy capital and even if it is at 10-20% of the previous rate, that's still five $2M seed rounds for every $50-100M series B/C that used to get done. You won't get a killer valuation like 2020/2021, but you will have p…

2. You should also be raising seed money from angels that are executives/fellow founders at your early customers / pilot partners. Ideally you fill a $2M seed round with ten $50-100K checks from these people and a great seed fund that will be value add-oriented. Wait is it normal for an executive of a company to invest in companies that thier company is paying for services. That seems like there could be a lot of con…

Often at this level a corporate client is already serving as a backer/incubator for a promising service. It might even be an investor or promising acquirer from day zero. B2B is weird like that, relationships are multi-pathed and could easily be adversarial and cooperative at the same time. Corporate execs investing in the startup is standard practice as a way of lending political support inside the larger org (and hopefully profiting of course).

Re: Ask HN: How to raise a seed round in a down market?

#117

Post by hubraumhugo »

lpolovets wrote: post #73

(I'm a seed stage VC.) In general, seed stage is less affected by the recent downturn than later stages. Which makes sense, since the time to exit for a seed stage company can be the better part of a decade, so today's macro climate has less impact. A few tips and observations: - from what I've seen, most seed funds are still investing, although on average at a 20-40% slower cadence than 6 months ago. On the other ha…

Thanks for the insights; this was exactly the sort of answer I was looking for! I sent you a DM on Twitter in case you're open to taking a closer look at my startup and fundraising plans.

Re: Ask HN: How to raise a seed round in a down market?

#119

Post by ghaff »

lpolovets wrote: post #73

(I'm a seed stage VC.) In general, seed stage is less affected by the recent downturn than later stages. Which makes sense, since the time to exit for a seed stage company can be the better part of a decade, so today's macro climate has less impact. A few tips and observations: - from what I've seen, most seed funds are still investing, although on average at a 20-40% slower cadence than 6 months ago. On the other ha…

>anecdotally, it feels like hiring is a little easier.

On the one hand, some companies are trimming and many others are hiring much more selectively. On the other hand, there are a lot of people out there with comp expectations set by big tech large RSU inflation and bonus levels, much of which will likely come down to earth.

Re: Ask HN: How to raise a seed round in a down market?

#120

Post by dustingetz »

Mougatine wrote: post #87
joschmo wrote: post #21

This is an ideal time to raise seed money. Many funds have moved heavily down market away from the big Series B/C's of 2020/2021. You now have a lot of tourists at the seed stage who are obligated to deploy capital and even if it is at 10-20% of the previous rate, that's still five $2M seed rounds for every $50-100M series B/C that used to get done. You won't get a killer valuation like 2020/2021, but you will have p…

You could really raise money (millions?) in less than 3 days before? That sounds crazy to me.

a “3 day raise” can mean many things, imagine something like this: 2-3 strategic angel investors already in place; prior to “starting fundraising” is a 1 month period of pitch discovery during which your angels are introducing you to investors but you are “not fundraising yet”; during this period investors start asking to invest but you are “not fundraising yet”; once you hit like $500k in interest, you email all the investors you’re already talking to and say “i’m fundraising now and already have $500k in interest for a 1.5M round” and one seed fund takes the remaining $1M and you’re done (the three days is for diligence). or 4 famous angels follow with $250k checks and you’re done. it’s an orchestrated process
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