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Ask HN: How to raise a seed round in a down market?
The market is difficult and many investors put new deals on hold while taking care of their existing portfolio companies.
Aside from preparing for strong growth and low burn, what other suggestions do you have for young startups?
- edgefield 4y agoUnless your team is made up of serial entrepreneurs with one or more successful exits, then the only thing that really matters is customer metrics: usage, revenue, and rate of growth.
- omarhaneef 4y agoAnd as a corollary: if you have those, and the company is investable, it follows that what changes in a "down" market is the valuation. The change is dramatic and fast though, and minds take a beat to catch up to the market.
- yogini 4y agoWhat I have been reading these days a lot, raising money is highly dependent on the type of product you are building. I think its good to approach some angels and raise pre-seed.
- p1esk 4y agoYour account is dead
- sn0w_crash 4y agoSeed rounds are largely unaffected atm. You should pitch the team and vision, with a heavy focus on your path to $1M ARR.
- b20000 4y agoyeah, and make sure you know a lot of people and go to parties all the time, because a good team and vision is not going to be enough.
- sn0w_crash 4y agoI understand why you are saying this, because I’m not from SV and have experienced this resentment But if there was ever a time that parties and vanity metrics didn’t matter - this is it.
- deleted 4y ago[deleted]
- forstmeier 4y agoAgreed. A revenue-first approach is the hypothesis I'm testing with Automated Capital. http://automated.capital/ http://automated.capital/
- bredren 4y agoBe or have a co-founder with: - an affiliation with an ivy league school - a prior notable technology or business contribution, such as authoring a protocol (or more recently an open source project) - some unusual circumstance such as family relationships that causes VC partners to care more about them than a random person - be obviously independently wealthy already - have been a founder or high level employee involved in a very successful vc-backed startup exit One or a combination of these will ease getting an initial investor and closing a seed round.
- ragnarok451 4y agothe advice nobody wants to hear but is actually true. ofc you also need to be highly competent yourself, but that is table stakes
- whatshisface 4y agoBeing competent is not table stakes, how can they tell who is competent?
- bredren 4y agoSome of the points I listed do require some level of competence. (Such as authoring a popular OS project, or not losing existing wealth through poor judgement) However, it does not necessarily mean the person has competence to be a good founder.
- rexreed 4y agoLong story short, nothing to do with your actual business or business model or innovative technology or hand-wavy "disruption" or large addressable market size or traction or any of the other things that VCs tell the plebs matter, when in reality they only matter if you don't have anything more valuable like the above. This is how companies raise ludicrous amounts of money without ever finding product-market fit, because of the Ivy league / family / prior possibly irrelevant past history matters more.
- ilrwbwrkhv 4y agoThis is a great time to weed out bullshit investors. Like BS jobs, some don't need to exist and this downturn is a great filter for them. The ones who are still investing as normal are the ones you should still raise from even when markets are different.
- HWR_14 4y agoI'm thrown by what a bullshit investor is, or how we distinguish that from, for example, a lucky one.
- dahart 4y agoBefore you pitch, see if you can find out how often the investors actually fund something. Also find out if the investors are full time investors, and how large the fund is, how large the firm is. I could be wrong, but I’d guess a first-order rule of thumb is the seriousness of the investor is more or less proportional to the size of the firm & fund. I don’t know if this is what parent was referring to, but my town has a seed fund that calls themselves “angels”, but they’re not full time investors and they have a low rate of funding anything, and when they do it’s for small amounts. My business partner liked to call pitching for them “doing dinner theater” - it was literally in a restaurant. They were fine people, but they had very little idea of how to identify a good startup, and so pitching for them was both difficult and fruitless - they also didn’t really have any good advice or connections to help. It was weird, but pitching for larger funds was way easier, the larger the easier in my limited experience. The goal posts were clear, the rejections were quick and easy and helpful(!), and they gave us real and practical advice, and btw told us exactly why we were asking for too little money. Experience pitching will reveal some things about the different kinds of investors. Aside from gauging the group of investors, probably the only other good advice I have is go around asking a bunch of people what they think about an investor, you can glean a lot from learning about people’s reputations. (Note that goes both ways - investors talk to each other and you will have a reputation soon enough, so keep your record clean!)
- kenneth 4y ago
- BatFastard 4y ago
- evilelectron 4y agoLook up JOBS act (https://www.sec.gov/spotlight/jobs-act.shtml https://www.sec.gov/spotlight/jobs-act.shtml) With a strong business plan, this could be a viable and great starting point. Good luck!
- Bubble_Pop_22 4y agoIf you hurry up maybe you can manage to raise in a non-down market. The best thing you can do is to speed up raising operations and also target new funds with lots of enthusiasm still. It's the same phenomenon everywhere, only the very elite people and entities can afford to sit out and not play, if you are a new VC fund you have to play even in a bear market, matter of fact it's an opportunity because the bear is reducing competition downstream as the bigger and elite funds sit this one out because their priority is survival not swinging at the fences.
- clpm4j 4y agoEither you have a product that customers clearly love and are willing to spend money on, or you yourself (and your team) are very impressive people in some way. The investor is ideally betting on both an impressive company && an impressive team, but at the very least one of those needs to be true to have a shot.
- kingforaday 4y agoAnother answer which you might not like: instead of focusing on raising, build a strong product offering or major feature enhancement that fills a hole for another established company looking to jump a few spots on Gartner's Magic Quadrant and get acquired or sell the IP for a quick win and save yourself some major headaches. Even in down economies the appetite for M&A is still strong.
- jacquesm 4y agoIndeed, in fact there is a clear shift from growth investing to acquisition in such markets.
- dubcanada 4y agoNot sure I understand, now is the best time to buy. If you're going to find a cheap hidden gem, it's now. Not when you're having to fight with hundreds of other investors all bidding on the next Facebook.
- bluelightning2k 4y agoDo the work. Do consultancy. Become excellent. Build a team. Bootstrap your entire development phase. Sell enough to demonstrate the market
- joschmo 4y agoThis 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 plenty of opportunities. My recommendation is to look for a SAFE and hope the market clears in 2-3 years when you go to raise your A round (this implies you need to give yourself 2-3 years of runway with your seed money and/or get to $1M of ARR faster on decent unit economics). Some very juicy seed and series A money is being thrown around ignorantly by the same people that caused the last bubble. I've had 2 close friends / family raise their seed rounds in the last 4-6 weeks. Three things to be aware of: 1. VCs will take their time doing real diligence on your market / team. This means it will take 1-3 months from initial outreach instead of 1-3 days. 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. 3. Raise as much money as you can. In 2021, this was terrible advice. Now taking 15% dilution is not the end of the world if it is how you stretch to your next raise vs the 8-10% dilution of yesteryear.
- xyzzy_plugh 4y ago> 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 the blow anyways.
- eganist 4y ago> 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.
- jacquesm 4y agoThat very much depends on where you are located. In Europe it is pretty much 'business as usual' at the moment, in the bigger cities I'd say that for the time of the year it is actually busier than usual in the start-up scene.
- mrtksn 4y agoSome of the greatest and most successful companies or products come to light at difficult times. No free floating free money also means less competition that lives off on that money and less customers who are subsidised with that money. If you have an actually good product you should be fine, just make sure to present yourself in the right light as the dynamics are changing. Things can go a bit more meritocratic.
- candiddevmike 4y agoHow does one get the kind of connections to even raise a seed round? I'm in the Midwest, and unless I'm doing AgTech or something B2B no one wants to talk to me. I have a B2C SaaS product that could take off like a rocketship if I had more resources to dedicate to it.
- junofan 4y agoMove elsewhere.
- hellcow 4y agoThis answer is short and correct. Go to events in startup hubs and meet investors and other founders. Build relationships over time on trust.
- dochtman 4y agoGet into YC?
- scapecast 4y agoWhat’s the product?
- candiddevmike 4y agoHomechart, the all-in-one household data management solution. Keep your household in sync and have all of your household data in one simple app. https://homechart.app https://homechart.app. Right now it's at this awkward stage where it doesn't make enough for it to be my full time job and I don't have the skills/budget to market it effectively. It keeps growing month over month via organic search traffic though, so I must be doing something right.
- chrismckleroy 4y agoSo many features..can you simplify? Food planning seems like feature creep
- srvmshr 4y agoSadly, in a downturn VCs seem to back their connections (most likely their alma maters) when making choices. It is a bit obvious if you think: They choose ideas which have been pitched by people within 2-3 degrees of connection if they went to same/similar known schools. Although it doesn't change quality or success chances, the proximity provides some degree of personal vetting. In my limited observation, a good number of small startups were still getting their Series B in early 2010, when most folks were still busy laying off or freezing hires. Those did have either a good university brand backing, a serial entrepreneur or both.
- whitej125 4y agoWe just closed a seed a few weeks ago. At least in my experience... "new deals on hold while taking care of their existing portfolio companies" never came up. Honestly I don't even think things like the massive tech re-valuation in public markets even came up (at least not that I recall). The convos continued to focus on team, market and GTM. I will say that from early 2022 to mid 2022 - GTM increased its weight in the discussion. Wrt/ post-raise - be smart about how you spend and leverage the fact that you probably aren't starting off with, hopefully, high burn. Lot's of companies might be operating under an assumption that there is quick cash around the corner... it's not as "quick" anymore I suspect.
- pacarvalho 4y agoAny suggestions on where new founders should look to find seed investors?
- sdesol 4y agoThe 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 https://fi.co/fast you can get a sense of how much equity you should give up. If your next questions is how to find these entrepreneurs, go to LinkedIn, TechCrunch and so forth and cold email people you find and ask them if they would interested in being an advisor.
- dustingetz 4y agoadvisors 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
- dustingetz 4y agostart with angels, look in online communities for your niche, it’s like dating
- ghiculescu 4y agoI do early stage (first check) investments in companies using Ruby on Rails. We primarily look for founders with a long term view who will be fun to work with (not nerds). Feel free to reach out, details in profile.
- jw1224 4y agoIf anyone has a similar investment philosophy for Laravel-based companies/founders, I’d love to chat too. We’re looking to raise investment at the moment, and this kind of ethos really resonates with me.
- ghiculescu 4y agoYou should add an email to your profile so people can contact you about this.
- joshxyz 4y agoDamn I really lol'd at the "not nerds" part haha.
- mjirv 4y ago> (not nerds) hfsp
- postsantum 4y agoThat sounds like you are trying to buy friends
- dang 4y agoThis is obvious, but please consider applying to YC—if accepted, it will not only give you initial funding, but increase your chance of obtaining further funding, even in a down market. https://apply.ycombinator.com/ https://apply.ycombinator.com/ Less obvious, so worth adding: if you don't get accepted, keep applying for future batches. Repeat applications are more likely to get funded. The main thing is to demonstrate progress since the last time you applied. Edit: also, YC is very invested in not overlooking applications from compelling founders who don't have any elite or industry connections. It's one place where you can prove yourself based on how good you are, not who you know. Not that YC is perfect in that respect, but it's something people here really care about and have a lot of practice with. Edit 2: these recent comments from pg are also relevant: https://twitter.com/paulg/status/1538223184679403521 https://twitter.com/paulg/status/1538223184679403521 https://twitter.com/paulg/status/1538224086123483142 https://twitter.com/paulg/status/1538224086123483142
- nivenhuh 4y agoHow often are the YC application cycles? I’m about to leave my job to work on a fashion startup with my husband. There are some technical aspects to the business that I am building into products, but my immediate focus is to get his clothing store online. I know the product(s) I want to build will be compelling, but my concern is not having enough cash to hire a small team. At what point is it best to apply? After you have a working application environment? After you have 1-2 people on your team?
- pmohun 4y agohttps://www.ycombinator.com/faq https://www.ycombinator.com/faq
- pacarvalho 4y agoThey have 2 batches a year and accept applications from any stage.
- jjeaff 4y agoYou might consider pitching to https://amplify.la https://amplify.la They are based in Los Angeles and I believe have had a few successful fashion startups. LA being a global fashion hub probably doesn't hurt. I have had experience with Amplify in the past and they were always helpful and not too pushy.
- productceo 4y agoHow did you determine that you really need to raise a seed round?
- randomsearch 4y agoYou’re at Point A and you need to get to Point B, and to do so you need cash.
- musha68k 4y agoFrom where do you have that information? The circles I know of are all increasing their investments at the moment. Way too much capital lying around even before heavy inflation hit; keeps rotting even more rapidly now.
- yieldcrv 4y agoThis is a rich man’s game, the rest is just windows dressing for the LP’s to invest in a particular fund more SPAC’s were your best bet, past tense
- dinvlad 4y agoDepends on what the startup is about. If you're in the business of hardware, biotech etc. that _requires_ an initial investment, just don't. Particularly if you're building SaaS, I'd seriously consider bootstrapping. Just build your MVP yourself, possibly with a couple co-founders if you need help on the tech/business side. Then validate the hell out of it. This way you will both prime yourself strongly for success, avoid unnecessary dilution and come out stronger with truly useful skills, without relying on a whim of VC bullshit.
- jimmySixDOF 4y agoI can't help thinking that one of the long-term utility applications for DAO's is to present additional avenues to projects entering seed stage especially now as funding drops. They may be a tangled mess of experimental trials and error in the present state with rug pullers and crypto maximalists crowding out other voices -- but as a way to harness the power of a user community to both generate and participate in value using a project coin/token without outside influence -- when looked at this way then using a DAO model for bootstrapping could offer projects a nontraditional way through the downturn while sharing the risk with a community who believe the risk is worth taking.
- Joel_Mckay 4y agoSimple answer, don't rely on other people to fix a broken plan... =) 0. Have integrity, people who manage money spend a lot of time dealing with professional liars and thieves. This doesn’t mean volunteering information that weakens your negotiating positions, but rather a warning that any BS will be uncovered eventually. 1. find a product/service niche unique to your physical geographic area, as this helps keep competition to a minimum while you grow (off the public web? Even better) 2. provide value to a happy customer 3. make small revenues in an early profit-mode, and try to stay liquid (cash, and not credit) 4. start small, but keep your legal, accounting, and customs positions clear 5. never table your own assets… debt-financing is foolish when they are often predatory loans 6. find the grants, tax credits, and labor assistance programs… The American Chamber of Commerce has many great people that often provide US state business advice for free 7. Early equity is worthless if your product is still theoretical, and dividing up imaginary space-cash is a fools errand… listen when senior people without an interest in your firm give you advice. Also, when working with academic/institutional incubator programs be aware of the legal traps. I have seen many stakeholders get nailed by nasty legal loopholes that claw-back or dilute company shares before an IPO or asset transfer. Usually it is developers/engineers/managers getting legally robbed, but sometimes it is the early investors too. Again, this alludes back to #0, and why people avoid bandits. 8. Always make it more profitable to cooperate with your team, than rip you off. Most large companies know a soft target when they see one, and will often renege on small companies/contracts as policy given the legal power asymmetry. Consumer and small B2B is a hard market too, but the risks are lower than dealing with a firm above a $3B market cap. Note, this is one reason service based companies tend to survive better, as they have limited risk-exposure per customer. 9. Never get emotionally attached to physical locations (keep your office a sparse coffee/laptop space). If you can’t find a free startup incubator space in your area/school, than you may have to lease or rent dev space. In general, sooner or later these commercial leases are always a rip-off, and this is the second biggest money drain after labor. Get your legal people to explain the lease before you sign, and think worst-case scenario here... I have seen viable firms bleed out due to con-leases, and this is especially dangerous to retailers. “The only winning move is not to play”… putting cash in the pockets of a bunch of young people crammed into their garage or warehouse is a good tradition. 11. Avoid recurring expenses and subscriptions, as a company one needs to plug as many cash leaks as possible. Once, we had to pay $9k for a legal journal no one used because some trademark lawyer passing through the previous year wanted it for something (replace L exisN exus with something less draconian, and you will make money for sure). 12. Finally, ask yourself if you would advise your parents to invest in your friends business if they were a competitor. If you have to second guess this question, than you probably don’t have a sustainable business plan yet. YMMV, just remember business mistakes always cost money.
- dustingetz 4y agozoom has made capital more accessible than ever to outsiders who have something
- gkapur 4y agoFull time investor here. There have been some clear changes in the market that others have pointed out: 1. Diligence windows have increased. Nobody is rushing to deploy capital. 2. Series A and beyond feel fairly frozen at this point in time. 3. Seed valuations have compressed a bit towards pre-seed. 4. Your average joe feels poorer and is concerned about the market and future funding. I always encourage every company that is raising to start by establishing to lay of the land for them. Are they vastly outperforming? Amazing traction? Is there team extremely credentialed? Well connected? Hot space? If you have some of those, you go the the VCs who invest in your market (research companies in your space but not directly competitive and see who funded them) by getting connected through your network and you have a reasonable shot at someone being interested at some price. You then try to use that pricing (if you think it is unfavorable) to drive other investors to a decision -- investors feel FOMO. If you don't have this, you normally simultaneously build while either: 1. Joining an accelerator. 2. Meeting people about town until you find a believer. The slight difference in this market is that angel investors may be less likely to invest on their own because follow-on funding is an existential risk. So you likely have to find a true believer who can write a bigger check or is comfortable with that risk.
- lpolovets 4y ago(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 hand, some later stage investors are now more active at seed because that lets them keep investing while putting less capital at risk. - assume valuations will be closer to what they were ~2 years ago. Earlier this year, the median seed valuation felt like ~$20m post, and we saw a number of $30m-$40m post money valuations. Right now we're seeing more valuations in the teens, and seed round sizes are more frequently $2m-3m instead of $4m-$6m. - longer runways are favored. The fundraising climate over the next year is uncertain -- especially for Series A and beyond -- so the typical "raise for 18+ mo of runway" advice has turned into "raise for 24-30 mo of runway." - cash efficiency and faster time to revenue are favored over growth in this climate. - capital intensive businesses will be much harder to raise for. - investor diligence is shifting away from FOMO and rushed decisions, and back toward normal diligence processes. Assume that investments decisions will take an extra 1-4 weeks for each investor. It's not all bad news: - anecdotally, it feels like hiring is a little easier. - historically, recessions have been a great time to start big companies. - there's still a LOT of capital waiting to be deployed into startups. - "fundraises are looking like they did in 2020" is still pretty good, since 2020 was already a great year to be fundraising as a founder.
- sbuccini 4y agoGreat to see you here! Thanks for sharing your insights.
- cynusx 4y agoIs this US or EU advice?
- hubraumhugo 4y agoThanks 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.
- cheerioty 4y agoAs a startup founder but also angel investor I’d say: Just do it the way you normally would. I’ve written down the experience + template from our last round (before the market went down) and how to do it efficiently here: https://www.questmate.com/fundraising-for-startups https://www.questmate.com/fundraising-for-startups .. Happy to help you with your round.
- fitzrocks 4y agoI raised a seed round in March 2020. The market later in 2020 + 2021 went kinda haywire, but between March and July 2020 it was pretty rough out there. We started fundraising a week before the country went into lockdown from COVID-19. I wrote about it here, which I recommend you read: https://www.freshpaint.io/blog/anatomy-of-a-seed-round-during-covid-19 https://www.freshpaint.io/blog/anatomy-of-a-seed-round-durin... Some additional thoughts ~2 years later: 1. Wait if you can. Even just a few months. VCs tend to freeze up in the face of macro uncertainty. This happened in Q2 2020 when COVID was very new – nobody knew what was going to happen, so investors just paused for a few months. Then things really took off. I think we're in that "I'm not sure how things are going to shake out so I'm just gonna pause/slow down for now" period right now. Investors will get used to the conditions – regardless of what they are – after a few months. The summer is also a terrible time to raise money, so I'd suggest you wait till the fall regardless if you can. If you gotta go out now, read on... 2. If you can't land a bigger check because those VCs have cold feet (they often freeze up during market uncertainty), then you gotta raise from small checks. 3. Small checks is a numbers game, just like B2B sales. We pitched 160 investors to raise $1.5m 4. Seek momentum wherever you can. Getting forward progress from a handful of $10-25k angels is really important for your mental state, and that will flow into every new investor pitch. And it often becomes easier to raise with the more momentum your round has. 5. Be super realistic about your valuation expectations. It's not a thing worth losing a good investor over by over-optimizing on valuation. You're better off taking a little bit more dilution now and staying alive than never getting going. 6. Ignore the advice of anyone who hasn't raised in bad conditions or isn't an investor. Everyone else doesn't know what they're talking about. Even then, don't run your business off of what one person on the internet says. I feel qualified to give advice here because I raised $1.5m in March 2020, and just raised a Series A 3 weeks ago. Just don't run your business based on what I (alone) say. We did YC as well. Think about applying if you haven't!
- kenneth 4y ago> 1. Wait if you can. Even just a few months. VCs tend to freeze up in the face of macro uncertainty. This happened in Q2 2020 when COVID was very new – nobody knew what was going to happen, so investors just paused for a few months. Then things really took off. I think we're in that "I'm not sure how things are going to shake out so I'm just gonna pause/slow down for now" period right now. Investors will get used to the conditions – regardless of what they are – after a few months. The summer is also a terrible time to raise money, so I'd suggest you wait till the fall regardless if you can. If you gotta go out now, read on... I don't agree with this advice. Sure, looking back at March 2020, you'd be right. But this time we won't have the Fed to print unlimited money and artificially stop the crash in its track, create a surplus of capital to deploy, and destroy the value of the US Dollar in the process. This newer downturn is us having to pay the price for the foolishness of spring 2020. And it will be far more expensive than it would have been just dealing with it back then. The dollar will never recover this destruction of value – and all we've done is transfer a massive amount of wealth to those who had capital invested in growth assets from those who didn't. (i.e. from the poor to the rich) If you need capital at all, start raising it now and don't wait. Nobody knows how bad things are going to get, and there's no savior bailing us out in a couple months this time. (Am a seed VC)
- danielmarkbruce 4y agoFind a great market, understand it in depth, understand what product will be extremely valuable, and a plausible way to get to market. Make some progress building the product and getting customers interested. Make a nice pitch showing all these things. Make the pitch to 100 people.
- rg_ceo 4y agoImho people always say crisis times. I have not seen research that the number of deals has decreased
- TruthWillHurt 4y agoHave paying customers.
- thinkpad13 4y agoif we take a seed money is it means we also need to do a series a b c d? is there any investor that acts like a bootstrap? I mean they only expect you to raise a seed no need for a b c d
- forstmeier 4y agoI feel like focusing on building revenue should be the focus of pure SaaS founders and then reach out to investors to leverage growth - something that can be done more easily once they've hit "proof of market". That's part of my hypothesis behind Automated Capital. http://automated.capital/ http://automated.capital/
- redmen 4y agoStop shilling
- kemmishtree 4y agoWe are the weirdest and most underestimated startup on the planet. Reverse pitch us, and bring your A game. www.molecularreality.com