How to survive the Hunger Games that is fundraising right now

Founders who are raising capital right now are living out a real life Hunger Games.

It’s absolutely brutal right now.

If you read 100 Twitter threads about the situation, you’ll get 100 opinions on the best way to win in this environment. The challenge I find with much of this advice is it’s written from coastal VCs or founders, and their advice is borderline irrelevant to midwestern or southern startups.

Silicon Valley’s advice doesn’t resonate in Silicon Holler.

Today I’m going to share my first-hand experience in what I’m seeing, and thoughts on how you can take action to survive and win.

First, a quick overview of the landscape

There’s no doubt, companies are failing at an increasing pace. We’re talking big and small alike. Interest rate hikes have made both borrowing and raising money much more difficult. While every company was clamoring for AI bolt ons nine months ago, investors are now becoming weary of that bubble. This is industry and stage agnostic.

Startups are struggling to transition out of seed rounds, and many are raising a second seed round instead of making the jump to Series A. In fact, the median time between seed and Series A is now 25 months when it was 14 months a decade ago.

Interestingly I’ve noticed many VCs are saying they’re investing in seed stage rounds, but they’re now expecting Series A unit economics. This is likely due to a few reasons—they’re making “safer” bets by looking for more proof in a company’s model, but they also just have the deal flow because of the volume of companies swimming in seed round pools instead of leveling up to a Series A.

Field notes

I haven’t raised a bajillion dollars, exited multiple companies or started a fund. If you’re here for big-time VC or founder advice, you’re on the wrong newsletter. But since 2017, I’ve raised $8M in Silicon Holler. I’ve raised from friends and family, angels and “small” VCs (hard air quote here because relative to coastal VCs, a $25M to $50M fund is small). I’ve swam in these cold waters this year, and here are some observations founders should be aware of.

The SAFE is out

When I started raising, the SAFE was still not a common vehicle in the midwest or south. They were usually viewed as too founder friendly if not outright whacky. A SAFE is a simple and fast way to get money into the company, and the concept is basically that holders of SAFEs are getting a deal on a future priced round. Read more about SAFEs here.

In 2019 and 2020 they had started to break through in our area though. Angels were getting more comfortable with them, and with the high volume of deal flow that was happening coming into 2021, they were common.

I still love a SAFE for early stage startups, but you should know they have once again lost favor with investors, especially among angels. Right now, angels want priced rounds or some type of debt deal. Many angel syndicates are not even considering SAFEs right now, and syndicates are a critical part of the Silicon Holler ecosystem.

Debt, baby! Debt!

I’ve seen more enthusiasm around debt deals lately than any time in the last five years. Whether you’re structuring a straight debt play with common interest, or doing a convertible note, you’re going to get more bites with this approach. A Convertible Note is a type of debt that can usually be called or can convert into equity at a later time. If you’re about to kickoff a funding vehicle in Silicon Holler, a Convertible Note is going to be far more palatable to investors than a SAFE.

If your business has recurring revenue or contracted revenue, it’s worth looking at traditional debt. There are a lot of firms and angels who are looking for these deals right now. This is going to be nearly impossible for a pre-revenue startup, but if you’re achieving consistent revenue, this can be a great way to fund the business. The rates are rich from where we were a few years ago, but consider how much cheaper 10% to 12% interest is compared to selling 10% of your company. If you’re using Stripe for payments, you should also look at Stripe Capital.

In current cap we trust

Acquiring a new customer cost 7X more than retaining a customer. That can apply to your current cap table, too. The best investors you have for funding are the ones you’re already working with, and they have a literal vested interest in keeping you alive and growing. If you’re looking at raising, I highly recommend you go hard after your current cap table before going for some new, shiny VC.

When possible, passing the hat among current investors is going to be so much faster than playing the market. I’ve never seen such a cold investor landscape. I don’t know if it’s from the deal flow they’re seeing right now, fear or what, but investors are generally much slower than normal if they respond at all. Many are taking weeks if not months to get to a “no” (the long “no” is a horrible way to treat a startup). Nothing sucks the wind from a fundraise’s sails like losing momentum. If you aren’t organized with your raise, you can get thrown into the long “no” death spiral.

Investment criteria is everything

Nearly every VC I have spoken with this year is playing scared… or maybe they’d call it safe. They may like you and your business, which can lead to more meetings to try and convince themselves, but at the end of the day if it’s not a slam dunk fit to their criteria, they’re not stepping out of their boundaries.

If you are preparing for a raise and you take nothing else away from this, just know that pursuing a loose fit VC is going to be a waste of time. VCs are not stepping out of their investment thesis for a new company right now because they have bosses, too. No one wants to gamble on a bad fit who fails right now. It’s not worth the risk—and investing is all about calculating risk.

The unfortunate part for you, dear founder, is VCs are infamously bad about being clear about what their criteria is on their website. I would wager than only 30% of VC websites actually tell you what they invest in, beyond “founders who are passionate.” It doesn’t serve the founder well, and you’re going to have to put in much more time trying to figure out if a lead is a possible fit or not. Here is a great example of a killer criteria explanation. I will refrain from sharing an example of a bad one, but it won’t take you long to drum one up.

My best advice for fundraising is just keep grinding. Keep getting pitches and giving yourself at bats. A successful round is going to be harder than it was 2 years ago—plan for the marathon, not the sprint.

Don’t give up.

4 tips for planning a successful raise in Silicon Holler right now

1) Don’t play it SAFE

2) Explore debt opportunities

3) Your current investors are your best bets

4) Slam dunk criteria fits or bust

Who I’m listening to: Jimmy Buffett

What I’m reading: For once I’m in between books — drop me a recommendation!

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