The NEW MINDSET for Pre-Seed / Seed Startup Funding
Summary
TLDRIn this video, a seasoned founder with multiple exits discusses the significant shift in startup funding in 2024. He emphasizes that the 'easy money' days are over, and the new normal favors startups with proven traction and revenue. Founders must adopt a 'relentlessly resourceful, pessimistically persistent' approach, expecting longer funding cycles and higher capital requirements. The speaker advises founders to reset their expectations, focus on building sustainable businesses, and attract investment when they don't need it for the best valuations and equity.
Takeaways
- đ The funding landscape has significantly changed in 2024, with a shift away from the conditions of 2021 that founders must recognize and adapt to.
- đŒ The speaker is a seasoned entrepreneur with multiple successful funding rounds and exits, providing credibility to their insights on the current funding environment.
- đ There is a 'flight to quality' where investors are focusing on startups that are further along, with established traction, revenue, and product-market fit.
- â±ïž The time it takes for funding to be deposited has increased from 4 weeks to 6 to 12 months, indicating a more cautious and slower investment process.
- đ° Investors are more discerning and can afford to wait, which means founders need to be more disciplined with their capital and realistic about funding timelines.
- đ The old funding model, where startups would quickly progress from pre-seed to seed to A rounds, is no longer as prevalent due to higher standards and a focus on revenue generation.
- đ Founders need to adopt a new mindset, discarding old assumptions about startup funding and embracing the 'new normal' of longer times and more money needed to achieve funding milestones.
- đ€ Founders should be relentlessly resourceful and pessimistically persistent, not taking any investment commitment for granted until the funds are securely in the bank.
- đĄ The advice for founders is to think strategically about their runway, whether it's 3 months in survival mode or 12 months for strategic planning, with a focus on extending their runway and securing funding.
- đ Founders are encouraged to build their startups to a point where they don't need investment, as this is the best time to attract investors and negotiate better valuations and equity.
- đ The speaker predicts a mass wave of startup shutdowns due to the new funding reality, with many startups unable to secure further rounds and facing financial collapse.
Q & A
How has the funding landscape for startups changed in 2024 compared to 2021?
-The funding landscape has shifted significantly, with a new normal that emphasizes a 'flight to quality,' favoring startups that are further along and have demonstrated product-market fit and revenue generation. The days of easy money and quick funding are over, with a more disciplined approach to capital required.
What is the speaker's background in the startup funding world?
-The speaker is a seven-time funding founder with two exits, having experienced success during the web 1.0 era and selling a company in 2017. They have stayed on top of trends, talking to investors daily and advising founders on the changing landscape.
What is the current time frame for checks to be written and received by startups?
-In 2021, checks would typically be received within 4 weeks, but now startups are waiting 6 to 12 months, indicating a significant slowdown in the funding process.
What does the speaker mean by 'pedigree startups'?
-Pedigree startups refer to those that have a strong foundation, are further along in their development, and have demonstrated quality, such as product-market fit and revenue generation, making them more attractive to investors in the current climate.
Why are investors taking more time in the investment process?
-Investors can afford to wait and take their time due to the market conditions, which favor a more cautious and discerning approach to funding, focusing on startups that have proven their viability and potential for growth.
What advice does the speaker give to founders regarding the mindset for raising funds in the current environment?
-Founders need to be relentlessly resourceful, pessimistically persistent, and should assume that funding will take longer and cost more. They should not rely on past experiences or expectations from previous years.
What does the speaker suggest is the best time to raise investment?
-The best time to raise investment is when you don't need it. This position of strength allows founders to negotiate better terms and valuations, and it attracts investors who are interested in a solid business with sustainable revenue.
What are the implications of the shift in funding for early-stage founders?
-Early-stage founders will need to find investors in the 'longtail' or less conventional places, as the standards for funding have reset and the focus is now on startups that can demonstrate significant progress and revenue.
What should founders do if they are in survival mode with only 3 months of runway left?
-Founders in survival mode should be relentlessly resourceful, exploring all options to extend their runway, which may include personal sacrifices or unconventional means of generating income.
How has the traditional funding round progression changed according to the speaker?
-The traditional progression of funding rounds has shifted, with each stage now requiring the metrics and maturity of the next stage. For example, a startup seeking a seed round should have metrics that reflect an A-round company.
What was the 'extinction event' of 2023, and what does it signify for the startup ecosystem?
-The 'extinction event' of 2023 refers to the disappearance of 3,200 known startups, which wiped out approximately $246 billion in funding. This signifies a mass exodus and a warning of more shutdowns for companies that were built with the expectation of easy funding like in 2021.
Outlines
đ The New Normal in Startup Funding
The speaker emphasizes the shift in startup funding in 2024, noting that the easy money era is over and the 'new normal' is significantly different from 2021. Founders are advised to abandon old mindsets and adapt to longer funding cycles, now stretching from 4 weeks to 6 to 12 months. The focus has moved towards 'pedigree' startups that are further along, with a higher chance of success. The speaker, a seasoned funding founder, shares insights from investors and founders, highlighting the importance of discipline with capital, patience, and a change in the standard for funding deals. The advice to founders is to be 'relentlessly resourceful' and 'pessimistically persistent,' preparing for a more challenging fundraising environment.
đ Adapting to the Changed Funding Landscape
This paragraph delves into the changed expectations of investors, who now prioritize startups that demonstrate legitimate growth and revenue generation. The traditional 'factory model' of funding, where capital was aggressively spent on growth metrics, is no longer prevalent. Instead, investors are looking for companies that are closer to profitability and have sustainable business models. Founders are encouraged to operate as if they are one funding stage ahead of their current position, aiming for metrics that would qualify them for the next round before raising funds. The speaker warns against the entitlement mindset and urges founders to build solid businesses that can attract investment without needing it, positioning themselves for better valuations and equity in the long run. The paragraph concludes with a stark warning of an 'extinction event' in 2023 that saw thousands of startups fail, underscoring the necessity for founders to adapt or face similar fates.
Mindmap
Keywords
đĄFunding
đĄMindset
đĄNew Normal
đĄFlight to Quality
đĄInvestors
đĄProduct Market Fit
đĄRevenue
đĄDisciplined Capital
đĄResourceful
đĄPessimistically Persistent
đĄSurvival Mode
đĄRunway
đĄInvestment Rounds
đĄAssembly Line
đĄGrowth Metrics
đĄEntitlement
đĄExtinction Event
Highlights
The new normal in startup funding is significantly different from 2021, and founders must adapt to this change.
The speaker is a seven-time funding founder with two exits, providing insights from personal experience and daily interactions with investors and founders.
Checks are now taking 6 to 12 months to clear, a stark contrast to the 4-week period seen in 2021.
Investors are moving towards 'flight to quality,' favoring startups that are further along and showing more promise.
The market is becoming more selective, focusing on startups with proven traction, revenue, and product-market fit.
Early-stage founders need to find investors in unconventional places as the standards for funding are being reset.
The old rules of startup funding no longer apply; founders must adopt a new mindset.
Fundraising timelines are now twice as long, and capital is more disciplined, requiring founders to be more strategic with resources.
Being 'relentlessly resourceful' and 'pessimistically persistent' is key to navigating the new funding landscape.
Founders should not assume funding is guaranteed until the money is securely in their bank account.
The old funding model of sequential rounds (pre-seed, seed, A, B, C, etc.) is no longer as straightforward due to higher investor expectations.
Investors now expect startups to demonstrate legitimate business models and profitability before receiving funding.
The best time to raise investment is when you don't need it, as this position of strength can lead to better valuations and terms.
Many founders are struggling with the entitlement mindset that funding should be easy, which is no longer the case.
The extinction event of 2023 saw 3,200 startups disappear, wiping out approximately $246 billion in funding, highlighting the new reality of startup funding.
Founders are encouraged to build a solid business with sustainable revenue first, which will naturally attract investment.
The video concludes with a call to action for founders to adopt the right mindset and engage in serious, straightforward conversations about the funding reality.
Transcripts
we need to talk about how funding has
changed in 2024 is because I've got a
lot of Founders that I'm meeting on a
daily basis that come in and they have a
mindset that it's still 2021 those days
are over there is a new normal we are
not going back to 2021 and there's a
good reason for it which I'll explain to
you in just a moment before we continue
I want to qualify myself here I'm a
seven time funding founder with two
exits I had my Hayday during web 1.0 and
then I sold my second company in 2017
it's been a while but I've stayed on top
of all the trends I talk to investors
every single day and they're giving me
new information I also talk to a lot of
Founders who are telling me their
stories what they had to deal with and
things are completely changing for
example in 2021 when I used to see
checks being written and get into the
bank in 4 weeks now we're waiting 6 to n
months I talked to an investor just at
the beginning of this week and they
grilled me grilled me everything seemed
positive and everything's at a
standstill because they can afford to
wait and take their time that's what the
market it's doing what's happening is
that there's a big movement into
startups that are pedigree meaning
there's a flight to Quality we're
talking about startups that are much
further along and they're the ones that
are getting the funding right now and if
they're successful that pattern is going
to continue yes the market will get
frothier and frothier and yes there will
be money sitting on the sidelines and
people will start to get a little
anxious there'll be fomo on the
Investor's part and they'll start
allocating to a little bit riskier
Ventures but there's going to be a new
standard of all the deals and as soon as
y com Ator a16z Sequoia all these other
companies start showing the results of
investing in companies that have been
waiting a little longer showing more
traction Revenue have working products
product Market fit is already in place
everybody's going to want to invest in
that type of startup and early stage
Founders are going to have to find
investors in the longtail in those
little sneaky places because again the
standards are being reset so here's the
mindset that I want you to put yourself
in everything you learned about about
startup funding up until this time you
need to just put it out of your mind and
say the rules have changed because it's
lagging there are lagging indicators
you're reading news about startups that
are getting funded and you go to Tech
Crunch and you can see the funding
rounds happen in 2021 but now you're
seeing those companies file for
bankruptcy they are leaving the scene
they are exiting stage left because they
were funded during really good times and
they didn't have the same environment to
contend with and if you're raising funds
and it takes you a lot longer you're
going to be more discipline with your
Capital but that mindset has to change
everything is going to take twice as
long and cost twice as much in terms of
time the money to establish your MVPs
the equity that you're going to give up
just to get your project up and going or
get your venture to the point where it
is fundable everything's going to take
twice as long and twice as much money
and there are two things that you want
to be thinking and reminding yourself
this is what I teach to my Founders all
the time be relentlessly resourceful
stole that from White combinator by the
way and pessimistically persistent
meaning that it doesn't matter if an
investor gives you all the good signals
and say we're going to send you the LOI
it's coming don't worry about it the
check's in the mail you want to be a
pessimist and act like it's not going to
happen until that check is deposited
clears and is in your bank account and
you can start drawing against it I know
Founders that were promised large chunk
of money like $12 million and they were
given the first half $6 million and told
to do all this stuff with the capital
move to another location and then start
a big Factory and start spending all
that money cuz the next $6 million is
coming and guess what that $6 million
did not come and now the founder is
sitting there going what did I do all
that for this is not a good situation to
be in everything has changed so be
relentlessly resourceful and
pessimistically persistent relentlessly
resourceful leave no stone unturned keep
plugging away keep grinding make those
phone calls find out if you can get
conversations with investors and ask
their advice and ask them to refer you
to other investors and pessimistically
persistent act like nothing is set in
stone nothing is a done deal until it is
a done deal and you keep being
relentlessly resorted F by the time you
get there don't be a negative person and
be down on yourself the whole time but
you want to have a very measured and
realistic view of what things are going
to take if you sitting there and you
need funding and you only have 3 months
of Runway you're in survival mode be
relentlessly resourceful and start
grinding away and do what you need to
just to survive and extend that Runway
whether you have to go drive an Uber or
you have to do personal things get out
there and do it you should be thinking
strategically when you have 12 months of
Runway But first you got to get those
checks in the bank you got make sure you
have the runway to begin with the other
thing is if you're looking at the
different funding rounds it was the
factory assembly line way back in 20121
and the years before you went and got
pre-seed you found it somewhere you got
seed and the whole purpose of seed was
to spend it and grow so they could sell
you into the A and with your a round you
find product Market fit and then you go
B C D and then you go public or you get
acquired that was the factory model and
pretty much all investment was about
managing the portfolio it was all about
just getting it down the assembly line
and investors would tell you to light
the capital on fire 20 cents of every
dollar that comes in needs to go to
growth Google AdWords and Facebook ads
and all the PID traffic that you can
possibly get because you want those
growth metrics and then you're going to
turn on Revenue that's the mindset that
happened back then it's no longer today
investors want to see that you've
legitimately built something and that it
is making money and you are using your
Capital like it's the last funding round
if you are in a pre-seed spot and you're
trying to raise money you need to be
thinking like a seed company that's the
inflection point so if you're preed you
want to get to the point where you can
get a seed round and you're not going to
get funded until then goone to the days
where people would just give you Capital
the institutional money anyway just to
figure things out and to build a
prototype or an MVP that's not going to
happen anymore if you're not generating
revenue and revenue that reflects a seed
round you're not going to get preed and
keep going if you are at seed round and
you want to raise money like a seed
company you need to be at the a stage
you need to have metrics that reflect an
a round before for what got you a round
is not going to be that anymore we're
going to keep going it's a b round now
you see how everything is moving one
stage later if you are at seed act like
you want to get to an a level in terms
of your metrics then start raising once
you hit that inflection point that means
Revenue your MVP is out there you're
starting to show signs of product Market
fit and believe me if you can do that
then you are going to have investors
knocking down your door let the
investors come to you but until then get
yourself in the right mindset relentless
resourceful pessimistically persistent
and keep working away and just assume
that you're not going to get funded and
if you are it's going to take twice as
long and twice as much money to get
there that's the mindset you want to be
in the days of easy money are over and
unfortunately I see a lot of Founders
that have gotten into the mindset and it
hasn't done them any favors I'm not
going to say that Founders are lazy but
Founders are a little entitled and start
acting like funding should be easy and
then they get incensed when it doesn't
happen they get mad at me as the adviser
and say investors aren't contacting me I
heard that you could get me all these
investors maybe in 2021 I could pick up
the phone and get you a few meetings but
today I get the same questions how much
revenue are they making what stage are
they at what are their growth metrics
are they on the path to profitability
what do you think about those things and
I have to look the founders in the eye
and have that realistic conversation to
figure out how we're going to get them
there it doesn't mean you can't raise
funds you might be able to raise a preed
round with a very very generous angel
that comes through friends family and
Associates I will help you with that
I'll help you with your pitch decks I'll
help you get everything lined up but I'm
going to be more focused on what are you
building how are you getting that
traction and how can we get you to the
point where investors are contacting you
because you got Buzz going on and you're
in the best spot if you can be get here
that you don't need investment best time
to raise investment is when you don't
need it and you say to the investor yeah
you know what pitch me because I don't
need the money right now we're going to
be fine we're going to build a solid
business with sustainable revenue and
and if I need your money it's going to
be for growth if I even want to grow I
could be happy just building this to a
$510 million company get the investors
pitching You by building a great company
first and if you do that trust me your
valuations is going to be better you're
going to have more Equity so you can be
richer in the long run versus these
horror stories where a company raises
$300 million and the founder Works in
there for 10 15 years only to break even
make $150,000 a year and just hope that
everybody breaks even these horror
stories exist and they're coming more
and more rampant as we're getting into
this Mass Exodus there was an Extinction
event in 2023 where 3,200 startups that
we know of went away wiping out
approximately $246 billion dollar of
funding and all these companies that
were waiting for their ABCDE rounds
building companies like it was back in
2021 those are going to go away and
you're going to see this Mass wave of
shutdowns mark my words I'm recording
this right now and you're going to see
this start to happen it already is
happening I don't need to chal ball to
tell you it's just common sense
financial principles of what happens in
startups so finally put yourself in the
right mindset let me know what you think
give me your comments and we're going to
have some serious straightforward in
yourface conversations because as an
adviser I want to help you get to that
other side let's do it together thanks
for hanging out with me on this video
like comment subscribe it's always
helpful I'll see you in the next video
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