This is the companion piece to You Only Need Two Investors. Once you have your main seed and venture investor, the question is, when and how do you fundraise? Investors can bring two different values to a company— cash and guidance. If you have already taken care of guidance by finding a solid seed and venture investor, all you need is cash to grow. My opinion is you should get cash with the least amount of work, so you can stay focused on the business.
Two big changes to fundraising in the last few years have a significant implication on what high-momentum founders do for cash. First, there is 10–100x more capital coming from angels and late stage funds trying to get access to the best companies, at whatever stage they can get in. Second, although SAFE notes began for seed investing, they are now also an extremely easy way to execute any financing post Series A.
So what is a founder to do?
What I hear a lot of investors tell founders is — ‘Stay focused. Raise a priced round when it’s time to raise a round, run a process, don’t do one-offs.’ I think this advice is often wrong. As any SaaS founder can tell you, the easiest sale is an inbound inquiry. The buyer has strong intent, has researched you, and is ready to buy. The same is true in modern fundraising.
The most valuable asset to a founder is time. Historically, fundraising after seed stage was done in priced rounds, and when the process of raising was happening, the founder/CEO would spend almost all of her time raising it. That is extremely disruptive to the business, and resulted in yet more preferred preferences stacked on your current ones.
My advice is to always keep your door open. If an investor is credible, give them thirty minutes. If either the amount they want to invest is meaningful (extends your runway 12 months) or the investor has a brand or connections that may be useful, take the money. Be very consistent on your process. First, you should be willing to share the latest financials and do up to one hour more of Q&A, but state that you are not willing to do any formal due diligence. If they want to do more, they can wait until you run the process for the next priced round. Second, do these inbound financings on SAFE notes at 20% discount to next round and no cap.
From the investor standpoint, for companies doing well, waiting until the next priced round to participate is pretty risky, because modern lead investors have an enormous amount of cash and want to buy every share for themselves. So, more than likely, a good chunk of your inbound interest will convert to discounted uncapped SAFEs. Companies like Lambda, Outschool, Maven, and GetSetup have executed this strategy very well in many transactions.
What does this mean for you, the founder? First, you are going to do fewer priced rounds and accumulate fewer preferred share preferences. Second, your priced rounds are going to be at higher prices if you use that SAFE cash to grow the business before the next priced round. So, of course the SAFEs are dilutive, but with uncapped SAFEs, the SAFE investor is willing to bet that you are going to continue your momentum and is implicitly willing to lend you money with almost no cost for the right to get into the next round. Third, the best time to raise is when the business has momentum and investors are knocking on your door. Continuous fundraising allows you to capitalize on momentum without getting distracted. And finally, you are going to spend less time fundraising overall, which is very good for your business.