Be Ready to Get Your Seed Stage Valuation Cut by 50%
Something changed over the last few months, and founders have to deal with that. 2020-2021 will not come back easily; it was an anomaly that comes once in 30 years.
Listening to founders pitching their ideas weekly, I’ve understood that people are not listening to what’s happening since 2022 started.
The time of Seeds, Mango Seeds or Coco de Mer Seeds is over. It’s time for startups to get healthy again.
In 2020 and 2021, we have been exposed to a unique period in startup history: rasing was much more accessible than before, and dilutions were extremely low compared to companies’ development stage. You could define a $20M and even a $30M-$35M cap as a first-raising company, and investors swallow it because it was the only way not to get excluded by an exciting deal.
We saw $100M cap as a first round!
Many first-time investors have been drawn into the Silicon Valley ecosystem thanks to demo days made on Zoom. People thought that the bull condition of the market would never cease, but that, as usual, it does sooner or later.
Before 2022 I used to say that it’s up to founders to define their companies’ valuation cap and then try to raise an investment round—if they could.
In 2021, investors could agree as fast as they could or be left out.
Those anomalies in private and public market valuations come rarely, and the pandemic drove the craziness of the multiples, even without any traction.
FOMO—Fear Of Missing Out—played a significant part in this phenomenon, and both early and late-stage suffered from overvaluation. Now things are different, and a profound normalization phase is in place. The stock market is just ringing the bell, and the world as we know it’s over.
It was not all bad. Thanks to this phenomenon in the last two years, we learned a critical thing about how job:
Seed investors need to move fast, with or without market anomalies. Investors should decide on the most critical deal in less than 2 hours, and on average, the decision process must be below 48 hours from the first call with a startup.
That’s how we work today at Lombardstreet Ventures.
What does the New Normal Look Like Today?
What if companies approach us with an incredibly high valuation cap? Today is the time to negotiate with founders without fear of losing the deal. Growth is no more the only parameter of interest. Sustainable growth and an acceptable burn rate compared to revenue are essential factors. Monetizing services from day one has always been crucial for a Seed stage investor, but today you need to get there frugally. Every dollar should count.
Despite what some VCs tell founders, “investing faster to grow” has never been a good strategy for creating a massively successful business. More money in the bank means you have more runway in front of you, and these days founders should take this advice even more seriously. Frugality has never been off of the table.
Today it’s not crazy to make counter offers and see what happens—and I can assure you that it was a recipe for being left out six months ago. 20%, maybe 30% less than founders’ expectations, is still excellent. And I think the next six months will be even more challenging: we start seeing 40% less than the 2021 mark.
How to Raise the First Rounds in 2022
TL;DR
Think of a bold valuation and then cut it by 30% before starting to pitch. If you’re not the cool kid in the room, offer another 15-20% discount on top. We keep seeing valuations cut by over 40%, sometimes more. Things went back to 2019, and let me say that if they stay there, it’s a miracle.
Avoid useless price rounds for raising below 5M dollars and close as fast as possible through a Y Combinator SAFE.
🤔Note this: we have met a lot of companies outside the Bay Area that don’t get this right, primarily because wrong investors made them close a priced round to raise $300,000.
SAFEs are about speed and rolling close. 90% of the time, you don’t need a price round before Series A, and you don’t go chasing a lead investor using a SAFE. It’s a paradox because the whole process gets slowed down.
TL;DR ⇢ Pitch, close, wire. Repeat.
The Winter is coming and will be a long one. Do privilege angel investors and micro VC funds below $50M. Collect small checks and work so your fundraising can be closed in less than three to four weeks.
BTW, we suggested the same thing in 2021. It’s an evergreen that never gets old.
In short:
Use platforms such as Stonks to attract attention and test the general sentiment + connect with investors on Twitter.
Submit your pitch to our website. You might get a check signed less than 48 hours after the first call 😀.
Be fair, responsive, and convincing because it won’t be easy.
Work carefully to eliminate any potential blockers in your fundraising path before starting.
Raise money for twenty-four frugal months of runway.
Most importantly, get out of the office months before starting to pitch and create valuable connections in San Francisco. The pandemic is over, and people start gathering again.
Great post!