Bad advice from good investors
Below are some of the things investors say to early stage companies that are just wrong.
“Don’t take the first offer you get.” While true, this is a very misleading statement to make to a crowd of early stage founders. It’s wrong to make early stage founders believe they will get all kinds of offers from investors. The vast majority of early stage founders will receive no offer at all. We need to be honest about the failure rate and how truly difficult it is to be an early stage founder raising capital. Despite the view in Silicon Valley that failing is healthy and even ok, the actual process of failing is stressful and very taxing both mentally and financially; there is no glory in failing.
“You need a warm intro to talk to me.” I hate when VC make this arrogant statement. You have better things to do with your time than scour LinkedIn and beg your network to make an intro to a VC they barely know. Rather than spending time networking, put together a very concise paragraph about your business and reach out to VC cold. If your paragraph is concise — it explains the business, highlights 5 wonderful metrics, includes your ask and valuation, and where you can be reached — you will get a response. There aren’t enough good deals out there so if your paragraph is truly compelling, you won’t need a warm intro because VC will be all over you. By the way, my email address is firstname.lastname@example.org. It’s also on our website. Email me cold any time.
“You need to fund the early stages of the business with a credit card or 2nd mortgage.” VC love spewing comments like this because they think it shows commitment. It does show commitment, but it’s also reckless. The failure rate of startups is exceptional, so don’t compound the failure by ruining yourself financially. VC that make comments like this should be ashamed — this advice is going to place a great financial burden on many founders that fail just so a VC can see you’re committed. This is terrible advice that will lead to financial ruin for most.
“Look online at where other companies are valued to give you valuation guidance.” The information online is often wrong, grossly exaggerated, doesn’t include enough information about structural considerations, and subject to all kinds of bias including selection bias. If you’re an early stage founder, get a good local venture attorney who can tell you the structures and valuations he’s closed for similar early stage companies. Generally speaking when your business is nothing more than a business plan, you can probably value yourself somewhere between $200k and $500k. At the friends and family round you can probably land somewhere between $500k and $2mm, and at the seed stage you can expect $2mm to $5mm. Again this is a general rule of thumb for deals not on the coasts.
Fundraising is hard. Since the chances of fundraising success are so small at the early stage, try to build a real, self-sustaining business and don’t do anything that could impair you personally (debt) should the business fail.
Visit us at blossomstreetventures.com and email me directly at email@example.com. All founders and funds welcome! We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.