How To Successfully Fundraise In A Frothy Market

By Marc Schröder

There’s no doubt that the red-hot VC markets are currently working to the benefit of founders. With massive new funds like Tiger Global Management entering the market alongside traditional early-stage funds and the plethora of angel investors deploying recent IPO gains, there’s a wide spectrum of available venture capital to founders.

This competition among VCs is great for founders since venture funds are hungry to deploy capital, even at sky-high valuations, and this gives founders enormous leverage as well as the ability to be ultra-selective about which funds they want on the cap table.

Undoubtedly, this also gives founders the upper hand when it comes to negotiations, but this frothy new market for capital also presents new, unprecedented and complicated dynamics, which founders must successfully navigate. To get the most out of these dynamics, founders must keep a few key variables in mind.

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Tips for founders

Firstly, valuation is crucial. It’s easy to get caught up in the glamor of huge check sizes from funds that won’t interfere—for better or worse—with the business. If all of this capital is available, why not take it?

Marc Schröder of Maschmeyer Group Ventures
Marc Schröder of Maschmeyer Group Ventures

Well, the valuation problem for founders can come in many shapes and sizes—mainly dilution, growth rate and talent acquisition. Raising $5 million at a $500 million post means that founders are going to be tasked with finding astronomical growth in a relatively short period of time.

Perhaps with enough capital that’s possible, but with even moderate softening of the capital markets, serious issues can arise for founders lured into big checks at sky-high valuations.

There’s also the matter of dramatically reducing the equity of early investors and founders alike. Additionally, option packages made to top-tier developers and other talent might not pass some basic napkin math and your company’s ability to entice smart people could be diminished.

Secondly, who is on your cap table is important. Depending on the stage of the company, a growth-hacking-savvy investor with a smaller check could make all the difference in the world to the company versus a monolithic jumbo-fund that offers limited support to it’s enormous portfolio.

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For funds making hundreds of investments per year, offering founders hands-on guidance, mentorship, etc., can be vastly limited due to the scale of their operation. Instead of taking the biggest checks they can get, I always advise founders to favor high-quality partnership over capital infusion.

What the best early-stage VCs offer is expert perspective, analysis and mentorship at precise pain points of the business. Having trouble with sales? Find a VC with sales expertise. Want to attract top developer talent? Certain VCs excel at this very task. The list goes on, so founders should be keenly aware of exactly what they want out of a capital partner beyond cash.

Lastly, these investors will exist on your cap table forever, so it’s important to choose people you want to work with, communicate with and learn from throughout your journey. There’s nothing worse than a cap table ghost, so use those seats wisely.

Everyone who has invested should be actively making contributions to the future of the company beyond their capital—especially in a market as competitive as this one.

So, founders, I know it’s easy to get mesmerized by big numbers, but remember that VCs are competing for your equity, so have a clear plan for what you want out of investors and make them work for it.

Marc Schröder is the managing partner and co-founder of Maschmeyer Group Ventures (MGV), and is focused on working with world-class tech entrepreneurs and establishing the MGV legacy. Before co-founding MGV, Schröder served as the head of global sales at the Maschmeyer Group and was an investor at seed + speed Ventures. Originally from the Netherlands, he grew up in South Africa and graduated with a law degree from Bertolt-Brecht University.

Illustration: Li-Anne Dias

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