The Physics of Fundraising 1/3

A Founder’s Guide to Silicon Valley Investor Expectations

Over the last 24-months, I have experienced the same exact conversation with really smart early-stage start-up founders over and over who are just getting prepped to go out and raise their first funding for their company. In each and every one of these cases, the founders had all bootstrapped, worked nights and weekends, cajoled friends to help code and generally struggled and scrimped to get some initial product together and working and in some cases… even had initial customers using and paying for the product (amazing).

The conversation would go something like this…

Founder: ”We want to raise a $25MM Series-A, that will give us enough capital for the next three years, in year three we will reach profitability.”

> 2 issues here, I discuss the 1st below

First, there’s absolutely nothing wrong with boldly wanting to raise a big financing round and conquering the world…but here’s the thing…

Good, bad or otherwise…there’s an established framework and set of structured expectations that exists with Silicon Valley investors and with any investors who are trying to be Silicon Valley investors.

This established framework has to do with how much capital a start-up can/should raise, at what valuation, and what elements of TRACTION and MOMENTUM are required to inform or validate those levels of capital and valuation in the eyes of an investor.

What I have recently realized, as I have had these conversations repeatedly with founders in recent years, is that these basic expectations on financing STAGE, AMOUNT, VALUATION and TRACTION concepts is completely foreign to most 1st-time founders…and why shouldn’t it be this is total inside baseball that nobody would know if they haven’t been doing this for years.

The easiest way to illustrate the basic expectations on start-up funding is to show the “standard” stages of funding in a visual diagram (which I have enclosed below)

  • NOTE: Before I get bombarded by people with funding examples that fall outside these guidelines, this is the very basic rails for how investors will gauge how, how-much and what valuation your company should be raising. There are LOTS of exceptions, but do not BANK on being an exception.

Silicon Valley serial entrepreneur - Gravity Ranch Venture Fund - Co-founder 6 software companies| 4 rock-bands| 2 children| 3 acquisitions| 1 IPO