What's Below in Issue #72:
📰 - The Brutal Truth to Why You Aren't Raising Venture Capital
📊 - Q1 2024 Isn't Looking Good for Raising Priced Rounds
🎙️- Podcast #40 w/ Brady Nolan Raising $16M
💵- Premium startup resources
🆓- Free startup resources
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I'm going to throw myself under the bus on this one today...but I'll get to that point in a minute.
If you’re reading this newsletter, odds are you're raising money, have tried to raise money, or have successfully raised money. It is called Fundraising Demystified, after all. Based on our Data Corner data from Carta, fundraising has been getting harder quarter over quarter since the peak of 2021.
But what isn't clear is which stage of companies are struggling more than others—
Newsflash…it's the companies that have actually been generating revenue and serving real customers.
Surprisingly, valuations for Pre-seed and Seed rounds have been relatively flat over the last several quarters, while later-stage companies doing $1M+ are struggling the most. Why is this the case? Here are my theories as to why:
Pre-seed and seed-stage companies are still early enough and cheap enough to throw money at and hope for a great outcome because there's not enough data on whether or not the company will be the breakout winner in their category. VCs are comfortable paying, what is an unjustifiable price in most circumstances, because they're looking for 100x returns on these bets and only need one or two of their investments to work out.
If you're an early-stage pre-seed or seed company, raising money at the median valuation is very doable if you're in a big market with a great team, and some validation or traction.
If you're struggling to raise capital at this stage, it's probably because your team isn't that impressive, you don’t have breakout growth, or you're not in a sexy market where VCs are excited about 100x potential returns. If that’s the case, maybe it's time to reconsider your current pursuit of capital.
Shameless plug: Book a call with us if you'd like to explore alternative options or get a reality check on whether you can access capital or sell your company.
Now, let’s discuss companies with revenue of $1M+ that feel they check all the "VC Checkboxes" but are struggling to raise capital.
"But I've got $1M ARR, why isn't anyone investing?"
First off, congrats! $1M in annual revenue is a huge accomplishment, only 5% of companies in the US achieve this... so you deserve a pat on the back... but maybe you don't deserve venture capital. Why is that?
It comes down to your growth rate, retention, and market.
Growth Rate
If it took you 5 years to get to $1M ARR, most VCs won't give you their time once they calculate your compounded growth rate is less than 100%. VCs want sexy fast-growing companies that already show breakout velocity speed. If you're not exploding with growth...maybe you should explore other capital options. If you're growing, maybe what's growing isn't interesting to investors. Non-paying users growing... might not be sexy to most VCs or you've got a leaky bucket.
Retention
If you have what's known as a "leaky bucket," meaning you're churning through customers, VCs see that as a major red flag. As they should, churn is insanely expensive, and it's almost always a sign that something is wrong with your product or your market, neither of which VCs want to take a bet on. If you haven’t found a solution to your leaky bucket problem, you shouldn’t be fundraising because it will be a distraction from solving the root of the problem. Fix this, then figure out your fundraising strategy.
Your Market
Your market just isn't hot right now is the other major factor you might not be able to raise, even if you're a high-growth company with low churn. Markets become unsexy after there have already been Hundreds of Millions or Billions invested into a market and little money has been returned or the market leaders already have outpaced everyone else. VCs have to find new, untapped markets to plow cash into. If you didn't raise when it was hot, you'll likely never raise a normal VC round again.
If either of these variables or all of them are relevant to your company, it's time to face the music and reprice your company to offer a killer deal to investors, or get profitable fast, or shut down.
Ok, here’s where I throw myself under the bus…
I help companies figure this stuff out, why is this throwing myself on the bus? Well, I get a lot of these struggling companies coming to me. It’s the selection bias that naturally drives these founders to me, seeking help. They often aren’t aware of these issues above, among others, but find their way to Thunder seeking investors, when, in fact, they’ve been talking to investors already, just with the wrong offering and the wrong expectations.
Some traditional VCs don’t like Thunder because of this negative selection bias, so I’m calling it for what it is. At the end of the day, we work with founders who want to solve their capital problems and move on to bigger, better things with their company. Raising capital won’t make or break the founders we support, but chasing the wrong type of capital for too long is what leads to their demise.
In my opinion, there is a market for all types of deals and capital, it just comes down to narrative, opportunity cost, deal structure, and connecting to relevant deal makers.
If you could use help with your strategy for raising capital or selling your company, or just need an unfiltered opinion, please find a time with us here.
-------------------------------------------------------------------------------------------------------------------------------------------------------------Data Corner
Q1 '24 is Off to a Slow Start. It's Clear Everyone is Struggling with Fundraising
It looks like 2024 is off to a bad start when it comes to getting a portion of that "fresh powder." What's the deal?
Keep in mind these are priced rounds, this doesn't account for SAFEs and convertible notes...which have taken over in popularity in the last few years to disguise down rounds and fund bridge rounds. The moral of the story is that it's still a tough market out there, and VCs are having to adjust their pricing strategies, getting into deals, and can't pay whatever price anymore; because of this, founders are trying to delay priced rounds in hopes of better days.
In my opinion, just swallow the pill now, clean up your cap table and move on towards building a sustainable business, and stop chasing valuations.
------------------------------------------------------------------------------------------------------------------------------------------------------------Brady Nolan Shares His Experience to Grow His Company...By Getting Acquired
In this episode, Brady Nolan, co-founder of Till, takes us through his journey from real estate to a fintech, transforming rent payments, leading to Till's impressive acquisition by Best Egg after raising $16 million.
We talked about the early challenges of aligning Till—a startup that innovated how rent is managed with flexible payments—to meet market needs effectively and the tactics they used to secure early-stage funding. Brady shares how Till, which started as a simple idea to help renters manage cash flow, grew into a significant player in the FinTech space.
He also shares the acquisition process, highlighting the crucial role of strong investor relationships and the integration hurdles they faced post-acquisition, providing invaluable insights for startups navigating the financial landscape.
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