RTC #38: The essentials on early-stage fundraising

Hi everyone, here is today’s issue at a glance:

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📢 My favorite links of the week

👉 The latest essay from Y Combinator founder Paul Graham, which received over 12m views in just 24 hours (!) (Link) - My favorite this week

👉 What founders think is an advantage vs what VCs think is an advantage (Link)

👉 Founders should only pay themselves $60k/year - VC flying private to France (Link)

👉 Here's what data tells us about the perfect fundraising presentation (Link)

👉 How to build a unicorn without VCs (Link)

👉 5 frameworks that every VC looks for in a startup (Link)

👉 Latest Y Combinator cohort: These European startups made the cut (Link)

📖 Report of the week

What KPIs do venture firms care about across stages?

• Aumni analyzed over 10’000 data points to find out what metrics investors want to see

• Have a look and see what metrics are the most relevant for your stage

The essentials on early-stage fundraising

Why do many founders fail to raise early-stage capital for their startups?

Because they often get the basics wrong.

Well, what are the basics?

• WHY do I raise capital?

• WHEN do I raise capital?

• HOW MUCH do I raise?

Geoff Ralston (former president of Y Combinator) gives a perfect overview and explanation in one of my favorite fundraising pieces.

BTW, this is a must-read for each founder planning to raise capital.

So, let us cut to the chase on his basics…

WHY do I raise capital?

Let us start this with the (my) definition of a startup:

“A startup means a company that is built to grow fast”

And it is as simple as that: without funding the majority of startups will not survive. There is much more capital needed to reach profitability than the founder (and friends & family) can finance.

This is the thing with fast-growing companies (“high growth companies”), they almost always need to burn capital to sustain their growth prior to achieving profitability.

WHEN do I raise capital?

Early-stage investors need to be convinced about three things to invest in a startup:

• Is the idea compelling?

• Can the founders execute this idea and vision?

• Is the opportunity real and large enough?

Feeling ready to tell a (proper) story about these three questions?

You tick the necessary boxes to go out and raise. 👏

I just need to tell a story?

The truth is if you are a (successful) repeat founder with a strong reputation, then “yes”, the story will most likely be enough.

I often hear founders asking what a “good traction” is.

As Ralston states but even more important today, even early-stage investors expect to see evidence of product-market fit and actual growth.

Go out once you have identified the market opportunity and target customers and developed a product that effectively meets these customers' needs, gaining traction at a notably rapid pace.

What qualifies as rapid growth? It varies, but a growth rate of 10% per week over several weeks is considered impressive. And to secure funding, founders need to be impressive.

HOW MUCH do I raise?

• Raise enough to reach profitability: Aim to raise sufficient funds to achieve profitability, so you avoid the need for future fundraising.

  • Example calculation: Determine how many months of operation you need to reach this and budget the monthly cost. For example, for an engineer, you would assume EUR 10.000 per month. To fund 18 months with an average of five engineers plus a few admin costs, plan for approximately EUR 1.0m. Adjust estimates for different positions, but keep it as a rough guide.

• Some startups require follow-on rounds: Startups that need additional rounds, for example, hardware companies, should aim to raise enough to reach their next "fundable" milestone, typically 12 to 18 months later.

• Trade-Offs when deciding how much to raise: Consider multiple factors, such as:

  • How much progress can you achieve with the amount raised? You need to achieve the next step of “value”.

  • The credibility gained with investors.

  • The dilution of ownership. Ideally, aim for no more than 10-20% dilution; avoid going over 25%.

A couple of months ago I had an RTC issue on this topic - have a look:

Interested to learn more about early-stage fundraising?

Here are more “must-reads” from Paul Graham (Y Combinator)

➡️ A Fundraising Survival Guide

➡️ How to raise money

➡️ How to convince investors

💸 New funds launched in August 2024

• Balderton Capital, based in London, has raised two funds, including a $615 million Early Stage Fund IX and a $685 million Growth Fund II, totaling $1.3 billion to invest in European tech startups from the seed stage through IPO (Link)

• Redalpine, based in Zurich, has closed its oversubscribed $200 million Capital VII fund to support 15-20 early-stage startups across Europe, with a focus on sectors such as energy, health, and food (Link)

• Sunfish Partners, based in Berlin, has launched its second fund and will continue to invest in pre-seed and seed deep tech startups based on the CEE region (Link)

• Araya Ventures, based in London, has announced the first close of its Super Angel Fund at €9.8 million, with a goal to raise a total of €22.5 million (Link)

• Carbon Equity, based in Amsterdam, has launched the Climate Infrastructure Fund, raising €10 million from existing investors with a goal of securing €50 million (Link)

• Clean Energy Ventures (“CEV”), based in Boston, recently closed an oversubscribed second flagship fund of $305 million to back innovative solutions in clean energy (Link)

• Waad Investment, based in Riyadh, is a newly launched $200 million investment firm backed by Gulf investors and family offices to support growth-stage regional startups (Link)

• G Squared, based in Chicago, a growth-stage venture capital firm, announced that it has raised $1.1B of committed capital for its sixth flagship fund, G Squared VI (Link)

Thank you for reading today’s issue. If you enjoyed it, leave a like or comment, and share it with your friends. Follow me on LinkedIn to never miss updates again.

Have a great week,
Stephan 👋

Issue #38 | 03 September