The NEW MINDSET for Pre-Seed / Seed Startup Funding

Summary

In 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

• 🚀 The funding landscape has significantly changed in 2024, with a shift away from the conditions of 2021 that founders must recognize and adapt to.
• 💼 The speaker is a seasoned entrepreneur with multiple successful funding rounds and exits, providing credibility to their insights on the current funding environment.
• 📈 There is a 'flight to quality' where investors are focusing on startups that are further along, with established traction, revenue, and product-market fit.
• ⏱️ 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.
• 💰 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.
• 🛑 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.
• 🔄 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.
• 🤔 Founders should be relentlessly resourceful and pessimistically persistent, not taking any investment commitment for granted until the funds are securely in the bank.
• 💡 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.
• 📊 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.
• 📉 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

00:00

🚀 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.

05:01

🛑 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.

Keywords

💡Funding

Funding refers to the financial support or capital provided to startups or businesses, typically from investors or venture capitalists. In the video, the speaker discusses how the landscape of startup funding has changed significantly in 2024, with a shift towards 'flight to quality,' where only startups with strong pedigrees and proven success are receiving investments.

💡Mindset

Mindset is the established set of attitudes held by an individual or group. The video emphasizes the need for founders to change their mindset from the more lenient funding environment of 2021 to the new normal of 2024, where they must be more disciplined and strategic with their capital.

💡New Normal

The term 'new normal' is used to describe the current state of affairs that has become the standard after a significant change. In the context of the video, it refers to the altered funding environment where the easy money of 2021 is no longer available, and founders must adapt to more stringent funding criteria.

💡Flight to Quality

Flight to quality is an investment strategy where investors move their funds into higher-quality investments, typically during times of market uncertainty. The video mentions this as a key trend in 2024, where investors are prioritizing well-established startups with a proven track record over early-stage ventures.

💡Investors

Investors are individuals or entities that provide capital to startups in exchange for equity or other returns. The video script discusses how investors are now more cautious, taking longer to commit funds and focusing on startups that demonstrate clear potential for success.

💡Product Market Fit

Product market fit is a term used to describe a situation where a product meets the needs of a particular market or audience effectively. The speaker in the video stresses the importance of having a product with established market fit before seeking investment, as it is a key indicator of a startup's potential for success.

💡Revenue

Revenue refers to the income generated by a business from its operations, excluding any outside financing. The video highlights the importance of startups demonstrating revenue generation as a sign of viability and attractiveness to investors in the new funding environment.

💡Disciplined Capital

Disciplined capital refers to the careful and strategic use of funds by a business, ensuring that expenditures are justified and contribute to the company's growth. The video encourages founders to be disciplined with their capital, especially in the context of a more challenging funding environment.

💡Resourceful

Being resourceful means using one's initiative and available resources effectively to achieve goals. The speaker advises founders to be relentlessly resourceful, exploring all possible avenues to secure funding and grow their businesses.

💡Pessimistically Persistent

Pessimistically persistent is a mindset of maintaining determination and effort despite negative outcomes or uncertainty. The video script uses this term to suggest that founders should act with caution and persistence, not taking any investment commitment for granted until it is fully realized.

💡Survival Mode

Survival mode refers to a situation where a business is focused on immediate survival, often due to limited resources or challenging conditions. The video mentions that founders with only a few months of runway are in survival mode and must be resourceful to extend their operational time.

💡Runway

In a business context, runway refers to the amount of time a company can continue its operations based on its current cash reserves. The video discusses the importance of having a sufficient runway and being strategic about extending it to ensure the survival and growth of a startup.

💡Investment Rounds

Investment rounds are stages of financing where startups raise capital, typically labeled as seed, A, B, C, etc., with each round representing a more advanced stage of the company's development. The video script explains that the expectations for each round have increased, and startups must meet higher benchmarks to secure funding.

💡Assembly Line

The term 'assembly line' metaphorically describes the previous method of moving startups through sequential funding rounds in a systematic manner. The video contrasts this with the current situation where the bar for funding has been raised, and startups need to demonstrate more maturity and success at each stage.

💡Growth Metrics

Growth metrics are quantitative measures used to assess the progress and expansion of a business. The video emphasizes that investors are now more interested in startups that not only show growth but also have legitimate, revenue-generating businesses.

💡Entitlement

Entitlement refers to a feeling of deserving privileges or special treatment. The video script mentions that some founders have developed an entitled mindset, expecting easy funding, which is no longer the case in the current environment.

💡Extinction Event

An extinction event is a term usually used in biology to describe a widespread and rapid die-off of species, often due to catastrophic changes in the environment. In the video, it is used metaphorically to describe the significant number of startups that failed in 2023 due to the changed funding landscape and their inability to adapt.

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