Why you're not ready to fundraise

Timing is everything in fundraising, don't waste your shot!

Could a Springboks fan ever praise the All Blacks? Would a Liverpool fan dare cheer for Man United? Can a Lakers fanatic root on the Celtics to win?

That is how I feel as a New York Yankees fan towards the Mets. The Yankees are baseball's most iconic team with the most championships and Hall of Famers.

The Mets were the lesser crosstown rival. Even as a die-hard Yankees fan though, I cannot deny one spectacular season that forever changed the fortunes of New York's second team.

The Mets were an expansion team in 1962 and for their first seven seasons, they were the worst in the league. Then in 1969, they pulled out a miracle, finishing first in the division. They carried that momentum to a surprise victory in the World Series over the Baltimore Orioles, a team that many predicted to sweep the upstart Mets.

What changed? The "Lovable Losers" rebuilt the team around an experienced manager, a young pitching staff, and a belief that they could be winners. While some good fortune fell in their favor with the demise of stronger competitors and the creation of smaller divisions, the reality was the Mets were a team ready to compete at the highest level. They earned their new nickname "Amazin' Mets".

Beware of sabotaging your fund raising efforts!

Most startups in the early days look more like the losing version of the Mets. Think about it, there is no revenue, the product is still rough, no one wants to join the team, and there is little to show in terms of "wins". The startup is not much more than some founders pushing an idea and a clunky MVP.

When things start clicking, it is still far from obvious that a startup is poised to become the next unicorn. The revenue is spiky, the cap table is messy, the product is held together by workarounds, hiring is hit or miss, and cash is forever dwindling.

As we've seen over the past two years though, even darlings of the startup world were on shaky ground. Valuations for unicorns got hammered, headcounts got slashed, and startups pulled back from their growth at all cost strategy to become cash-flow positive.

Why? Because the VC money firehose became a leaky spigot. As VC's pulled back funding, startups scrambled to stay afloat. Many already folded with more failures on the way as hyper growth startups realize they scaled before having product-market fit or profitable unit economics.

Those startups that have managed to turn their fortunes around towards sustainable growth are now contemplating scaling again. With VC firms starting to deploy capital more regularly this year, many startups are going out to fundraise this year.

And many founders are quickly realizing they are not ready to raise!

Two behaviors emerged from the funding winter that will not disappear anytime soon. One is decreased valuations at the later stages. Second is the level of scrutiny startups face from investors during due diligence. VC's can afford to be both choosier and slower in funding startups outside of the hottest and most competitive AI deals. Simply put, the VC FOMO funding frenzy is dead and the chances startups can get multiple term-sheets is significantly harder.

This means that what was an acceptable level of fundraising readiness in 2021 does not pass in 2024. Yet we are still seeing startups diving into the fundraising process not fully prepared for the current environment.

Raising capital is a significant commitment in time for a founding team. A typical raise will take six months or longer and consume bandwidth that could go towards building product and selling, a point Paul Graham emphasized recently on Twitter:

Be frugal with your time, fund raising when not ready is wasteful

You want to make sure when you make the leap, you are in the best position to capture the interest of investors. If you go out when you are not ready, you risk negative signaling and coming off as amateurs that will damage future efforts.

With that in mind, let's look at what investors are typically expecting at each stage of funding, from Pre-seed to Series B:

Pre-Seed Funding

  • Idea Validation - Have a clear, validated business idea that addresses a significantly large market problem.

  • Team Assembly - Gather a core team with complementary skills essential for your startup's success.

  • Initial Product Development - Begin developing a minimum viable product (MVP) to demonstrate the potential of your idea.

  • Market Research - Conduct thorough market research to understand your target audience and competitive landscape.

  • Bold vision - Most importantly, there needs to be a clear vision for the future articulated and why your team is best positioned to execute on that vision.

Seed Funding

  • MVP Launch and User Feedback - Launch of the MVP to early users to gather feedback and then iterating quickly on the product.

  • Initial Traction - Show some early signs of traction through user growth, engagement metrics, or revenue.

  • Business Experimentation - Start testing and analyzing different business and monetization strategies to find the most viable one for scaling, balancing customer acquisition costs (CAC) and customer lifetime value (CLV).

  • Pitch Deck - Develop a compelling story outlining your vision, market opportunity, growth strategy, and key milestones.

Series A Funding

  • Product-Market Fit - Demonstrate that your product solves a significant problem for a sizable market and that users are willing to pay or heavily engage with the product.

  • Scalable Business Model - Have a clear and scalable business model that has shown some success and demonstrates the potential for high growth.

  • Growth Metrics - Present solid growth metrics that indicate a growing demand for your product and the effectiveness of your customer acquisition strategies.

  • Expansion Plan - Outline a clear plan for using the funds to expand the team, enhance the product, and enter new markets or segments.

Series B Funding

  • Market Leadership - Begin establishing your startup as a leader in its market segment with a strong brand and product differentiation.

  • Revenue Growth - Demonstrate rapid revenue growth and a path to profitability, if not already profitable.

  • Operational Efficiency - Show improvements in operational efficiency and the ability to scale operations in a cost-effective manner.

  • Expansion and Scaling - wUse the funds to significantly scale the business through further product development, market expansion, or strategic acquisitions.

At each stage, the focus shifts from broad ideas and small product experimenting to honing in on market fit, scaling the business, and achieving operational efficiency. While you may not hit all the milestones above, you should be able to clearly communicate which milestones have been met, what insights you have gained, and how future funding will help you reach new ones.

What were some of the key metrics and milestones you used to help secure funding? How did those milestones change for you along the way?

At AWS, one of our most important values is customer obsession. It is one of the leadership principles mentioned most often by Amazonians and customers, and often being one of the key reasons customers choose AWS as a cloud provider beyond just our technology innovation and service offerings.

This is why it was so validating to see Aaron Levie of Box also citing the importance of customer focus for startup founders. While he was speaking from the standpoint of customer support, we firmly believe founders should stay as close as they can to customers throughout the life of their startup.

Aaron Levie on staying close to the customer.

One of the difficulties when scaling a startup is that additional layers of management and executive leadership shield founders from direct customer contact. While you never want to undermine the team and the executives you hire, not being close to the customer can obscure negative signals, whether in the market, competition, customer need, or quality of implementation.

We firmly believe that customer obsession should be built into your startup’s culture from the very beginning and that mechanisms should be implemented that provide direct connections between customers and founders. This way, all employees fundamentally understand the importance of listening and serving the customer, and when founders speak with customers, it is not seen as losing trust of the team or questioning the capabilities of your staff.

Basil has been super busy finalizing his new video series called That One Thing, interviewing startup founders to find out the key lesson they learned that helped them build a successful startup. We encourage you to subscribe and check out future episodes!

The AWS Startups & AI Meeting in Kuala Lumpur!

Mark is on his return back to the US now, but what an amazing few days in Malaysia meeting with startup founders! The event Wednesday night brought together over 30 founders and developers together to meet, hear about Generative AI and startup program updates from AWS, and enjoy a wonderful venue in Chinatown.

Mark meeting up with startup folks in Malaysia

Speaking of Malaysia, the AWS team is hosting AWS Startup Day Malaysia on Tuesday, April 23rd and will feature talks from well-known Malaysia startup founders, prominent investors, and our own Dr. Werner Vogels! Do join if you are in Kuala Lumpur on that date, we would love to see you there!