The first half of 2021 produced record venture capital funding, up 95 percent from last year.
But more money doesn’t mean a healthier startup ecosystem. With a bigger pot underway, the founders are eager to quickly cash in on deals that previously would have been too good to be true.
Not only are we seeing less diligent processes, but there are proportionally fewer hands dipping into the $ 288 billion in global venture capital money invested in the first half of 2021. More money goes to fewer companies, with the increasingly common so-called “mega-rounds” and follow-up rounds.
What does this mean for the founders? With bigger rounds come greater responsibilities, and it’s often not the right path to take, neither for your startup nor for your mental health.
Founders must recalibrate to the new realities of the VC world and ensure that their psychological and physical health is not sacrificed under the weight of new money coming in.
1. Don’t ask too much, set limits
Usually, I don’t mention my guilty pleasure, the “Silicon Valley” TV show, in my business advice. But the show’s producers spent a fair 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 plots have a heavy dose of realism.
In the second season, the Pied Piper founder is advised not to take the gigantic $ 20 million Series A round he was being offered. Why? The growth targets they would have to achieve to justify the round and ensure a successful next round of funding would be nearly impossible to achieve.
More is not always better when it comes to financing. The more money you take, the higher the bar and the less time it will take to get there, which carries a higher risk of burnout.
Don’t think of closing your next round as the end of the game, but as a means to an end.
What type of company do you want to build? What growth do you want to see and at what speed?
Once you know it, the best way to find out how much money you need is to reverse engineer the process. Decide what your top goals are for the company in the years to come, identifying clear business milestones you’ll want to achieve along the way.
Then determine what you need to reach the milestones. Honestly, you may not even need capital to get there. But assuming you do, roughly estimate how much you need, add another 20 percent to 30 percent as a mattress, and don’t 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 an idea of whether or not this is a case comes from asking direct questions, but not just the investor. Find other companies that your potential investors have funded and talk to those founders.
First, a healthy company does not necessarily mean that the founder does well too. Ask them if they felt undue pressure from their investors to scale, exit, hire, or others. See if your investors supported you if the founder ever had to step back or lower expectations.
Then look at the companies that have not done well. You will learn even more about why they failed and whether or not the investor’s role played a role. Channel this reach rather than going through the investors themselves, using resources like Crunchbase.
3. You can’t outsource fundraising, but you can outsource the rest
I’ve never met a first-time fundraiser who wasn’t surprised at how much longer the process took than they initially thought. At Founder Institute, we run an intensive post-program program for portfolio companies seeking financing. Most founders initially roll their eyes when we tell them that No. 1, the absolute minimum time needed to raise funds is 24 hours per week for three months, and No. 2, they will need to absorb at least 50 us.
You’ll have to do due diligence on hundreds of angels and VCs, and seek out as many warm introductions as possible. So you need to make sure your business is ready for you to walk away while focusing on fundraising.
As a founder or CEO, you will have to be the one facing investors. But the day-to-day running of your business needs to be passed on to other team members and employees.
If you are spinning too many plates, some will fall off, and your mind is also at risk of spinning out of control. You have to remain mentally resilient not only to yourself, but to be capable of handling the attack from us you are bound to meet. Those are normal to us, good even. But they could very well exacerbate the strain on your mental health if you are stretched in too many directions.
4. Separate fundraising from your personal and work spaces
Entrepreneurs have always found it difficult to separate 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 ensure that work, and the consumer journey that is fundraising, is 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 will not intersect in the day-to-day running of your business, or in your downtime. You can do it at home, even if it’s just a divider on a desk, or in a different corner of your office with a different table and worktop.
Protecting your mental health should be as important to you as a founder as your next raise and your next milestone. If you take care of yourself, that journey will always be smoother and more successful.