Why Early-Stage Founders Should Be Wary Of Big VC Checks

By Fernando Dal Re

Global VC investment is exploding. In the first half of 2021, capital increased by at least $288 billion compared to the previous year. Checks are getting bigger, founders are closing deals faster, and VCs are scrambling over one another to secure the top startup picks.

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But before founders get caught up in the rush and succumb to the charm of deep-pocketed VCs, they need to consider what their early-stage business really needs to thrive long-term. Capital alone isn’t sufficient. Young startups need the added value of an investors’ expertise, connections, mentorship, and time. Accepting hefty investments that emphasize rapid growth can expose a startup to the risk of an early flop, as its foundations aren’t yet strong enough to sustain the pressure.

So, sitting on the edge of the fast-flowing investment stream, the most successful founders are the ones who dip their toes before diving in.

A founder’s first ticket from VCs should be a small, very early investment that comes with the promise of tight investor-founder relations. Whereas traditional investment often sees VCs deal and depart, founders should be demanding that their first investors commit to accompanying them as they find a solid footing in their niche.

These more frugal first tickets can help startups build in more cost-effective ways, honing in on user testing, product development, and iterations, and creating early traction – all of which make for a healthy, longer-lasting business. It’s also a smarter way for VCs to back companies, as it helps de-risk the investment.

Here’s why asking for a smart first ticket, paired with close investor accompaniment, is the real golden ticket for emerging startups.

Focus on working lean

Overspending is a real threat for startups that are handed large sums. With more money to play with, startups aren’t encouraged to adopt a lean mentality and have a higher risk of scaling prematurely (one of the main reasons why startups fail). It’s also easier for them to lose focus of business priorities and gravitate toward “sexy” innovations that don’t meet real user needs.

Take Pets.com. The startup had raised roughly $110 million from investors, including Amazon and Hummer Winblad Venture Partners, but went into liquidation in 2000, in part because of an overspend on advertising.

When first tickets are smaller in size, it teaches startups how to do more with less, and in turn, develop the skills to scale in a sustainable way. That typically means hyper-focusing on product development in response to frequent user feedback and starting to build organic engagement with the brand. It should also train founders in applying savvy financial principles from day one, preparing them for inevitable financial challenges at a later stage.

Raise smart money, scale when ready

Later-stage VCs are increasingly participating in early-stage deals so as not to miss out on their growth rounds. But for founders, the rush could encourage them to skip ahead to raising big money before they’ve finessed the product-market fit.

Raising smart money is far more beneficial in the long run. First, it will dilute founders’ equity less, as they’ll be raising only what they need to nail the product-market fit. Second, it equips them with real value-added in the form of product, tech, growth or data experience that is so necessary to achieving product-market fit.

Third, smart money will send the right signal to future investors, as it reassures them that the startup has taken the time to perfect its product-market fit before launching into top dollar investment rounds. It shows that the startup has entered the race with a quality, not quantity mindset. This mentality doesn’t mean going slow either – startups that test and iterate regularly can find their product-market fit faster, and cut the time to when they are resourceful enough to raise bigger rounds and scale.

Tap into a network of seasoned investors

In the past, investors have been known for taking a hands-off approach with startups after signing on the dotted line. It’s long been the mentality that investors merely provide the fuel, while startups have to build the engine. But this dynamic doesn’t work well in early stages, when the most successful founders understand that they don’t know everything and could use the guidance of seasoned operators.

When VCs pay more attention to their investments, business experts suggest that more successful experimentation takes place. This can encourage startups to innovate at an appropriate speed.

Many investors who offer first tickets have been entrepreneurs themselves, so they bring their first-hand experiences to the table. Founders might consider pitching for first tickets earlier in their journey in order to leverage these operator investors as soon as possible, as they are likely to empathize with them and dedicate more time and energy to their startup.

And with their first ticket, founders should be requesting that investors nurture the startup at every turn and provide them the know-how to resolve initial challenges. In particular, they should request support in areas of product, data, growth, culture, fundraising, and operations. First-ticket investors have the experience of operating businesses at their earliest stages, and founders that tap into this specialty will be best positioned to grow.

A founder once told me that first-ticket investors are like having a team of sherpas guide you to the summit of a mountain. They help navigate the terrain, avoid pitfalls, and scale the safest manner possible. Whereas traditional investment tends to only provide the mapped route, setting standards for a first ticket places a seasoned sherpa by founders’ side from the very first step.

Fernando Dal Re is the First Ticket EMEA Partner at operator-led international investors TheVentureCity.

Illustration: Li-Anne Dias.