Lessons from founders raising their first round in a bull market

For Manu Bansal, founder of Lightup.ai, raising a seed round from a16z was not a very difficult journey. His previous company, Uhana, launched in 2016, was backed by NEA and had been acquired by VMWare in three years.

So he had demonstrated ability when it came to not just building a product, but building a company, attracting a team, generating revenues and most importantly, getting it to a good exit.

But a challenge came up in 2021 as he was raising the seed round — the venture funding market got white-hot. In 2016, total VC investments in the U.S. were about $80 billion. By 2020, the capital deployed had ballooned to $164 billion, according to PitchBook NVCA. By all means, 2021 will top this trend.

Indeed, startups have never had it so good. The list of superlatives describing this insane bull market is getting longer. Silicon Valley is the Walmart on Thanksgiving Day sale.

Founders can raise money fast, really fast. Ask Bansal, inundated by investors and ready to do a preemptive up round just three months after he closed his seed round.

But this can be a gotcha, he warns.

The vicious preemptive trap

As the supply of capital grows, competition heats up, especially for people like Bansal. The number of unsolicited inbounds grows, with each attempt to get the founders’ attention getting more crazy. Often, the easiest way investors get the founders’ attention is to pump up the valuation. Up round, anyone?

But the dark side of this market can become a vicious preemptive trap, a cycle where an A round happens too early and a B round follows within a few months and the C round is not far behind.

“A company’s metrics cannot move materially in such short spans. As one of my investors says, figuring out go-to-market (GTM) has time constants involved,” said Bansal.

“You can’t speed up GTM with more money. If valuations go up astronomically, I remind myself that I have to deliver performance,” he added.“If I cannot show traction, sooner or later this beast will come back to haunt me. I’d rather avoid the price runners.”

Fads versus fellowship

In a bull market, it’s especially hard to understand people and their value systems. The pandemic does not help us engage, understand culture, nor help build a human connection.

“As a CEO, I know I have to deliver numbers to my investors. But we are all human beings, and early investments are like a marriage — I need to know my investors will stand by me in the good times and the bad,” said Oren Arar, founder of Cyrus, a personal privacy and security platform that is getting ready to raise its Series A round.

“A sophisticated investor does not follow a fad or measure your progress against generic templates,” said Bansal. “Each business is an exception.”

How do savvy founders raise in a bull market?

Find founder-investor fit early

“I believe there is such a thing as founder-investor fit: A partnership based upon commitment,” said Bansal. “All money is green. For me, the investors who are experienced across multiple economic cycles, understand our specific customer problems and are willing to roll up their sleeves and be a part of the solution are worth a lot more.”

I have only 24 hours in a day and need as much horsepower to get to my metrics for the next round. They show that not only do they empathize with the CEO’s challenges but are able to stand shoulder to shoulder and play the game. Both sides have done enough soul-searching to be in this partnership, and thus, we can weather inevitable challenges.”

Partner with investors who add value preemptively

Instead of being preemptive on term sheets and throwing money, investors should step up their game and start adding value preemptively. The notion of adding value after the investment is no longer acceptable, and founders want to see performance from VCs much before they let investors join the round.

A recent study by Forward Partners showed that 47% of founders believe their investors had little knowledge of the sectors they are investing in. No wonder that when it came to adding value, the stark difference of VC value-add hype versus ability to deliver are further highlighted:

92% of VCs interviewed self-described as value-add investors.

61% of founders rated their value-add experience “below average.”

The report states that some VCs “tried to deliver value, but failed.” Indeed, an employee would be fired if they tried but failed. But a founder really cannot do anything to get rid of a “non-performing asset” in the form of an investor.

Put values over valuations

One of the hardest parts of this market dynamic is ignoring the price hype and overcoming the envy that creeps in as other startups raise big rounds.

Each day comes with a dozen announcements, but raising money is not always a proxy for business acumen, and valuations aren’t a proxy for performance.

“We just closed our Series A after crossing 70 customers. I feel great about our team, our culture, our deep-rooted care for customers. These are the values we live by.” says Justin Beals, CEO of StrikeGraph.

In a bull market, a founder should always wonder how an investor will treat them when the markets turn.

There is no easy way to know if investors will remain steadfast when the music stops, but founders can look at their past behaviors and make reference calls with CEOs — especially those who did not make it into the unicorn club.

“One of the reasons we decided to work with a16z is that people like Marc Andreessen not only extol the virtues of founders, they have built an entire services firm that is driven by the “founder first” ethos. And Marc and Ben have weathered some seriously tough economic cycles, so I have battle-tested partners on my side,” said Bansal.

So the next time a hedge-fund-turned-VC comes your way, check on that side of the house, will you? Because in a bull market, we all become invincible — we confuse external market conditions as indicators of our own skills, which can inflate our sense of self. To our own detriment.

Disclosure: The author has invested in Cyrus and StrikeGraph.