Are you too broke for VC backing?

Fundraising Demystified: Issue #81

by Thunder

You can expect us to share a new weekly topic relevant to fundraising successfully! 

What's Below in Issue #81:

📰 - Are you too broke to be VC-backed?

📊 - How much founders are selling in SAFEs 🎙️ - Podcast #49 w/ Chris Gldwin; from dotcom crash to $1.4B acquisition

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Data Corner

How Much Equity Founders Are Selling In SAFE Rounds

Last week we focussed on how SAFEs were becoming increasingly popular in early-stage rounds, beating out priced rounds. This week we look at the terms in the SAFE agreements and how much equity founders are giving out in exchange for funds.

The folks at Carta found the following:

• <$250k - The median startup raising less than $250K sells 3% of the company. 75% of startups raising this amount sell 9% or less of the company. Make sense, $250K is not a lot of cash in the grand scheme of the startup world.
• $𝟮𝟱𝟬𝗸-$𝟰𝟵𝟵𝗞 - founders sell about 7% of the company • Distribution still focused on the lower percentages
• $𝟱𝟬𝟬𝗞-$𝟵𝟵𝟵𝗞 - 11% sold or so • The most variation in the range. So highly dependent on the kind of founder, their experience, and the type of investor (have you moved beyond angels to real pre-seed funds here?)
• $𝟭𝗠-$𝟮.𝟰𝗠 - 16.4% median equity sold • Kind of a seed round but also slightly small
• $𝟮.𝟱𝗠-$𝟱𝗠 - 21.4% sold on a median basis • Very similar to the 20% we see for priced seed rounds

Are you too broke for the VC game?

Most founders get into venture building because they have an idea they believe will make them money, but if your venture is going to put food on the table, you should already have enough to eat, or else you won't make it. As I've said before, success in the startup game requires persistence and grit. More than having runway as a company, founders also need to have personal runway as it may be years before you're in the black- can you afford to keep yourself going until then?

We've all seen the memes talking about how ex-Ivy Leaguers are more likely to get funding from VCs. Perhaps this is because, by the time you get into an Ivy League school, you have already shown yourself to be in the top 1% and this sets you apart. But I know good founders from all backgrounds, and we've all heard the famous dropout stories a la Bill Gates and all.

Why is it that most founders come from these schools then? Because, and this may be hard to hear if you don't have this background: money begets money. Odds are, if you could get into an elite school, you come from money. As a founder, this means you probably have better access to startup capital- from family or friends, and you are also better able to weather the hard times in the early days and pay yourself a livable wage as you build your venture.

School isn't the only determinant in whether you might be too broke to seek venture backing. The cost of building, launching and incorporating a venture alone can be thousands of dollars. Just to get things off the ground, you will need starting capital. You may be able to get this from angels or early-stage support systems like accelerators or grants, but only a tiny percent of applicants get accepted. If that's not you, then you need to have your own float to get things off the ground.

Also, money is more than just actual cash. "Rich" entrepreneurs have a higher propensity to: 

• Have better networks that can be used for recruiting, sales, and fundraising
• Know the rules and conventions, such as how to speak with, persuade, and influence investors
• Have an impressive career, pre-startup, which bolsters investor confidence.

The intangibles may not be the same for a founder with less financial means. Wealthier entrepreneurs have a distinct edge over poorer ones, all else being equal, which makes the latter less likely to receive funding.

How can you broke-proof your founder journey?

Networking: It's been said a million times but your network really can determine your net worth. If you mingle in the ecosystem and build relationships with investors before you're fundraising, you have that many more backers to approach warm rather than cold.

Building wealth beforehand: Sure, serial founders can be more attractive to VCs than first-time founders, but it's also valuable for your financial well-being to start off working a regular job. Build your nest egg that can keep you fed as you take on building and launching your startup. It could be months before you start to see revenue or get that first check, so having some personal runway could keep you from living in your car.

Bootstrapping: VC works, we know this, but many founders (myself included) have bootstrapped their way to success. With VC investment come VC expectations. The stakes are higher and you have less control. So if you don't want to deal with the big risk or give up equity, then bootstrapping may be for you.

Most of us are driven to get into the startup game to make money- passion for our solutions alone won't pay the bills, unfortunately. This doesn't make VC unfair, it's just life- so while anyone can fundraise, your odds are better when you have money. All the best!

Dotcom Crash To $1.4B Acquisition With Chris Gladwin: Now in Episode 49

In this episode, we're thrilled to talk with a true tech veteran, Chris Gladwin, a serial entrepreneur and currently the CEO and co-founder of Ocient. Chris shares his journey through multiple successful ventures, including Cleversafe (acquired by IBM for over $1.4 billion) and MusicNow. He provides valuable insights into raising capital, navigating market cycles, and building resilient tech companies.

Check It Out

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