2 tips on fundraising in hard times

Something happened this week that hasn’t occurred in months:

Investors started cold reaching out to me.

I remember back when this first started to happen for us, as our product was getting some traction and we were starting to show up on some of the tracking platforms like Pitchbook. Then, through the madness of 2020 through early 2022, this was a regular occurrence to the point we ignored them or kicked requests down the road for the next round.

It slowed in 2023, and essentially dried up in Q3 and Q4 of last year, as investors hunkered down to weather the storm I’ve written about several times. 

Here’s the thing—nearly every single investor reaching out to me is coastal capital. 

I’ve harped lately that while coastal investors seemed to be toeing back into the waters, Silicon Holler investors would be slow to return. I still think that’s the case. 

I’m not beating that particular drum today. 

Today is a lesson in getting what you ask for, because most checks aren’t going to fall in your lap. 

The ask

If you’re raising right now, it’s going to take far more at bats to get a home run. It’s critical to know this walking in. All of the adages you’ve heard about needing “six months to raise” are still useless. Plan on at least eight months, and plan on pitching two or three times more investors than you did in your previous rounds. 

Fed officials are discussing cutting interest rates, but haven’t committed to any timeline. Once rates start dropping, investors will certainly become more active. Some will hedge bets that rates are going to drop, but keep in mind first-mover investors usually get this wrong. Until a rebound happens, Silicon Holler founders have to be ready to grind. 

To do that, you have to be ready to ask. 

When we were in an accelerator in 2019, my cofounder Zack and I were turning up far more angel investor leads than some of our peers at the networking events. Another founder asked me how we were finding so many angels in a crowd of founders, strategic partners, and vendors, all with some angels sprinkled in. Specifically, this founder said “how do you know if someone invests?” 

“I just ask.”

As a fresh founder, learning to get over this fear of asking people for money is critical. Your No. 1 job as founder (and likely, CEO for a fresh startup) is to capitalize the company. If you’re too bashful to even ask if someone invests, how can you have the confidence to close an investment? It only gets tougher from there, with investors pressing you on valuation, check size, runway, burn rate, run rate, and whatever other rate they can think to ask about (as they should). 

Now when Zack and I attend networking events, I make it a goal to find at least three or four people who I think are potential investors. After a bit of chit chat, if I think they may be a fit, I have no problem asking if they do much angel investing. It’s a networking event—it’s a totally appropriate question. If they say yes, I ask them if we could meet sometime so I could share what we do. If they say no, then no harm. Sure, sometimes says to follow up and I get ghosted the next day. But I have a good track record at turning a convo over drinks into lunch the next week.

The upsell

One thing nearly all early stage founders struggle with is the check size. Everyone starts off thinking they’ll raise $500K from five investors. Then you start getting investors interested, but they offer $25K checks. It’s hard to walk away from that money—especially in tough times—but there are a few things to consider here.

The first is to just do the math. To get that same round done with $25K checks, you’re going to need 20 investors. While the quick $25K feels like a win, you have to realize that once you set that precedent that you’ll take $25K, it gets tougher to say you’re only accepting $100K on the next one. Investors talk, then their buddies want in for the same amount.

Alternatively, once you change your own expectations, you start targeting smaller investors, even if subconsciously. I encourage you to try and stay focused on larger check sizes if at all possible. Even though it may feel easier to get a $25K vs. a $100K, you have to realize it’s going to take more work in the long run to get the cash you need. It’s nearly always better to stay focused on the investor archetype (larger angels who can stroke the larger check, have better connections, are more strategic, for example). 

And funny enough, once you land one $100K investor, he or she often has a buddy who wants in for the same deal.

I mean this no insult to smaller investors—we’ve taken our share of small checks at GoWild, and many of them have surprised me to come back with much larger checks in the next round, which is something to consider. But as a founder, you should remember that if you’re taking on 20 investors in your first round, 10 or 15 in your next round, and then another 10 or 15 after that, you’re going to get a very “midwestern cap table.” 

This is going to catch up with you in a Series A. 

Venture investors do not want to see a cap table with 50+ investors on it for a lot of reasons. Your later rounds will become more difficult if your cap table gets too big, and especially if you get too diluted. Volume of investors doesn’t correlate to dilution exactly, but keep this all in mind (honestly, this is a newsletter in itself). Overall, your best method to protect your cap table is targeting larger investors. 

Instead of giving in to the $25K check, you can upsell. When it comes to angels, I do not mean asking investors to put in more money than they’re comfortable with, but there are some creative ways to deal with this. Smaller check investors can do what’s called a “Special Purpose Vehicle” (SPV), where they effectively group together to form an LLC to invest in your company. It’s a simple process, and a lot of investors even have existing LLCs specifically for this purpose. 

If you’re dealing with a smaller fund who is looking at putting in a smaller check than you had hoped (say a $100K when you were expecting $250K), don’t be afraid to ask. Some funds have a typical amount, but many have a window or range. The entire investment is a negotiation, which includes not only valuation and terms, but also the check itself. You may be able to sweeten the terms to get the money you need from one investor vs. chasing two or three more. 

Remember, it’s not just interest rates

It’s a presidential election year. The markets could be volatile. We have multiple wars going on, and more brewing. AI is still dominating investments. And there are dozens of other factors at play. All of this to say, the market will likely continue to be sluggish for investments. And this doesn’t even mention the fact that funds are struggling to raise just like you are. 

If you have more tips, drop them in the comments or post on LinkedIn and give me a tag! Let’s start a conversation. /

Who I’m listening to: Sam Beam

What I’m reading: “Demon Copperhead” by Barbara Kingsolver

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