The first half of 2021 churned out record high VC funding, up a whopping 95 percent compared to last year.
But more money doesn’t mean a healthier startup ecosystem. With a bigger pot going around, founders are eager to rapidly cash in on deals that previously would have been too good to be true.
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Not only are we seeing less diligent processes, there are proportionally fewer hands dipping into the $288 billion in global VC money invested in the first half of 2021. A larger amount of money is going to a smaller number of companies, with so-called “mega-rounds” and follow-on rounds becoming more common.
What does this mean for founders? With larger rounds come greater responsibilities—and it’s often not the right path to take, neither for your startup nor your mental health.
Founders need to recalibrate to the new realities of the VC world and ensure their psychological and physical health aren’t sacrificed under the weight of new money coming in.
1. Don’t ask for too much—set yourself limits
I don’t usually bring up my guilty pleasure—the TV show “Silicon Valley”—in my advice to businesses. But the producers of the show spent a good amount of time understanding the dynamics of the Valley (including an afternoon of interviews at the offices of the Founder Institute, the pre-seed accelerator I co-founded) and the plotlines have a heavy dose of realism.
In the second season, the founder of Pied Piper is advised not to take the mammoth $20 million Series A round he was being offered. Why? The growth goals they would have to achieve to justify the round and ensure a successful next round of financing would be nearly impossible to hit.
More is not always better when it comes to funding. The more money you take, the higher the bar, and the less time you’re giving yourself to get there—which comes with a bigger risk of burnout.
Don’t think of closing your next round as the endgame, but as a means to an end.
What kind of company do you want to build? What growth do you want to see, and at what speed?
Once you know, the best way to figure out how much money you need is to reverse-engineer the process. Decide what your main goals for the company are over the next few years, identifying the clear business milestones you’ll want to hit along the way.
Then, determine what you need to reach milestones. Honestly, you might not even need capital to get there. But presuming you do, calculate roughly how much you need, add another 20 percent to 30 percent as a cushion, and do not raise more than that amount.
2. Find investors who are aligned with your definition of success
You and your investor(s) need to have a shared definition of a “successful outcome” for the startup.
Getting a sense of whether or not this is a case comes from asking direct questions, but not only to the investor. Look up other companies your prospective investors have funded and talk to those founders.
First, a healthy company doesn’t necessarily mean that the founder is also doing well. Ask if they felt undue pressure from their investors to scale, exit, hire, or other. See if their investors were supportive if the founder ever had to take a step back or reduce expectations.
Then, look at the companies that have not done well. You’ll learn even more discussing why they failed, and whether or not the investor’s role played a part. Back-channel this outreach rather than going through the investors themselves, using resources such as Crunchbase.
3. You can’t outsource fundraising, but you can outsource the rest
I have never met a first-time fundraiser who wasn’t shocked at how much more time the process took than they initially thought. At Founder Institute, we run an intensive post-program for portfolio companies seeking funding. Most founders initially roll their eyes when we tell them that No. 1, the absolute minimum time needed to fundraise is 24 hours per week for three months, and No. 2, they will need to absorb at least 50 nos.
You’ll need to do due diligence on hundreds of angels and VCs, and seek warm introductions as many as possible. So, you must make sure your company is ready for you to step away while you focus on the fundraise.
As founder or CEO, you will have to be the one facing investors. But the day-to-day running of your company must be passed on to other team members and employees.
If you’re spinning too many plates, some will fall—and your mind also risks spinning out of control. You have to remain mentally resilient not only for yourself, but to be able to handle the onslaught of nos you’re bound to run into. Those nos are normal, good even. But they could very well exacerbate the strain on your mental health if you’re being stretched in too many directions.
4. Separate fundraising from your personal—and work—spaces
Entrepreneurs have always had a hard time separating their personal life from work. Now that it’s normal to work at home, people aren’t doing enough to separate their spaces for X, Y and Z.
It’s critical to make sure that work—and the consuming journey that is fundraising—are not present in every part of your waking time.
Set up a completely separate space for your fundraising activity, one that makes it clear to you that it won’t cross over into the daily workings of your company, nor into your downtime. You can do that at home, even if it’s just a separator on a desk, or a different corner of your office with a different table and work board.
Protecting your mental health should be just as important to you as a founder as your next raise, and your next milestone. If you tend to yourself, that journey will always be a smoother and more successful one.
Jonathan Greechan is co-founder of the global pre-seed accelerator Founder Institute, which runs programs in 180+ cities across the world. He previously wrote about startups finding a moral compass for Crunchbase News.
Illustration: Dom Guzman
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