If the first rule of being a venture CEO is “Never Run Out of Cash”, the first corollary is “Always Be Fundraising” — with an obvious nod to Glengarry Glen Ross.
This came home to me during recent conversations with several CEOs of my portfolio companies. This blog post from Tomasz Tunguz of Redpoint brings up a concerning point: most companies that raise seed funding won’t be able to raise a Series A round. A separate study from CB Insights suggests that more than 1000 seed-funded companies will be orphaned. This flies in the face of a lot of the commentary about easy money chasing deals across the industry. The few lucky entrepreneurs who have been showered with lots of money are at risk of teaching the rest of the class the wrong lessons. In fact, raising your next round, whatever it is, is a long hard process that you should have started yesterday.
As an early stage investor, fundability is now at the top of my list of concerns when I evaluate companies. Of course, I always look at the team and the opportunity but my sense of the company’s ability to raise the required capital is on the same plane.
Over breakfast at the Mayfield Bakery in Palo Alto (which may be competing with Bucks in Woodside as the preferred VC breakfast spot), I had an interesting conversation with one of my CEOs. We were primarily there to celebrate his successful completion of a new round of funding at the end of a long, hard process. However before our food was even on the table, our conversation turned to how we were going to raise the next round in eighteen to twenty-fur months. He had a great description of the VC process: “I feel like the guy who just won a pie eating contest only to discover that the prize is more pie.”.
He’s right. Fundraising is a grueling, lousy process for most CEOs. But it’s also essential and it’s the one piece of a CEO’s job that is impossible to delegate. With each round of funding that a company receives, the goal post (an exit) moves a little further away and the rules change. For seed funding, the objective is usually a viable product and proof of audience acceptance. The usual question is “will the dogs eat the dog food?” When they go out for the A Round, most likely the score card will be revenue with many variants such as growth rate and revenue per user. That’s not to say that they don’t need a great product and lots of users. They do. But product and users are necessary but not sufficient to raise the next round. The CEO mindset needs to be that they money that he just put in the bank is fuel to get his company safely to the next funding event without running out of cash. There is an intricate triangular calculation of cash burn versus time versus milestones. How much can you spend to accomplish growth over that period of time? The objective is to create the maximum amount of value prior to an exit or the next funding event.
One of the exercises that I have always found useful is starting to visualize what the pitch deck for the next round will look like. What are the main talking points? What are the likely objections? It’s never precise — GoogleGlass doesn’t have a crystal ball feature — but its great from a directional perspective.
The best CEOs are always fund-raising and always playing the venture game two moves ahead.