Raise your first institutional capital wisely.
And more advice from Laurel Touby and Jenny Friedman of Supernode Ventures. Supernode invests in entrepreneurs who help transform the way people live, work and socialize. Their HQ office is in New York City, and they invest primarily in early-stage companies across California and New York.
1. Raise your first institutional capital wisely.
We consistently give the same advice to anyone setting out to start his or her newest venture: bootstrap for as long as possible to have as close to a product market fit with legitimate KPIs and metrics to show to investors when you go out for your first raise. Though very difficult and not feasible for every founder, it is infinitely easier to attract attention from VCs if your cap table is clean and you already have steady MRR numbers rolling in (for example with a SaaS business).
One of the biggest challenges we see with entrepreneurs, first-time entrepreneurs particularly, is the way they think about their first institutional capital raise and how to efficiently budget for the next 12-18 months of runway. A common pitfall early on is founders often misjudge how much to raise and from whom.
If you raise too little, you may find yourself a year or so later looking for additional capital for a bridge round or a seed extension so your company can hit those anticipated (yet missed) milestones and look attractive for the next round of financing. In our experience, the notion that a bridge round is “a bridge to nowhere” is applicable in more instances than not.
On the other hand, if you raise too much and moreover over-inflate the value of your company, you will likely have a difficult time gaining interest from later investors who are unconvinced that your business warrants that set valuation. We caution founders to stay grounded even if top tier VCs lead them to believe their company should be priced well above market. The signaling risk associated with having to go out and raise a subsequent down round can be extremely detrimental -- and potentially fatal -- for your company.
Understanding these businesses are at the very infancy of development and nearly each one will go through pivots and reworkings, it is so crucial to be as thoughtful and diligent as you can at the onset of your capital raise. If you misjudge projections for the first period in which you are allocating cash, investors may become skeptical of your ability to successfully execute with additional capital and resources later on.
2. Be careful about dilution.
We see a lot of first time founders overwhelmed by the fundraising process and moreover accepting many convertible notes and SAFEs early on without realizing the impact these securities are having on their cap tables. Founders are sometimes completely taken aback by their ownership (or lack thereof) at such an early stage. Be sure you understand investor terms and dilution before and after a new financing round.
3. Always be selling.
We like to make sure our founders have the interpersonal skills and hustle and are going to be aggressive and determined to close a deal from the get-go. The interactions we have with them from our introduction meeting to the day we sign a term sheet – including persistence and salesmanship -- are directly parallel to those they’re having with potential enterprise customers, investors, etc.
4. Dot Your I's And Cross Your T's!
We read tons of decks filled with misspellings and horrible grammar. Your deck should serve as an outline with talking points for an introduction meeting: 10 pages is very ideal. Very dense, long decks risk losing an investor’s attention. The design is important, too. There is a certain class of founder, the highly technical founders, who err on the side of just making gobbledygook, extremely technical presentations with no design sensibility, as if it doesn't matter because it is a B2B product. All marketing materials need to have an eye towards design. Every customer appreciates good design, no matter what type of customer. We are the customer when it comes to raising capital. We are your first customer.
5. All investors talk. Don't fudge your committed capital.
Some founders will say that they have secured soft or hard commits for a lead or a syndicate, regardless of whether or not that’s the truth. The VC community is actually quite small and investors like to trade thoughts on overlapping deals – even across coasts (and seas!). Recently, an entrepreneur claimed to have had a sizable commitment from a fund with whom we co-invest and respect. I reached out to this fund excited to learn about the GP’s thesis behind backing this particular company when I learned this GP had actually passed on the deal. When we find out that a company is misrepresenting anything, it is a huge red flag and a non-starter for us as investors. There are so many deals out there that it makes it very easy to pass. Definitely, don't shop around false traction from other investors if it’s not there!