How to not need to fundraise (in order to fundraise) (Oversubscribed Weekly #17)

Mike here. Today we’re talking about putting yourself in a position of optionality to make fundraising a lot easier. Also, please reply to this email with any topics you’d like us to cover around seed stage fundraising – we’re curious about what topics are the most opaque.

In our book, we walk through the process of how to raise a seed round swiftly. If I had to boil the entire process down to a single takeaway, it’s that as a founder, you’ll have the most success fundraising if you’re able to turn the tables so that investors are selling you their money to you, rather than you selling your startup to them.

Bryce Roberts (Indie.vc Partner) has an old, but short, Medium post, showing the most effective pitch deck to make this happen:

It’s worth a good laugh, but it’s also true – the best way to get an investor to start selling you on your money is by not needing it.

Therein lies one of the paradoxes of fundraising: you want to fundraise because you need capital to grow, but the best way to fundraise is to not need the money.

The way to break free of this paradox is to ensure that you’re in a position of optionality, meaning you could continue to run your business without outside funding, and you’d be fine. If you’re profitable, you’re already in a position of optionality and you can use that to your advantage. However, if you’re not profitable and don’t have a clear path to profitability, here are some ways you can put yourself in a position of optionality.

Good ways to put yourself in a position of optionality:

Non-dilutive grants

There are a LOT of non-dilutive grant opportunities which are underutilized by startups. This may include regional public-backed pitch competitions (e.g.43North, Archgrants), corporate-backed pitch competitions (e.g. Quesnays), orgovernment grants. If it works out, this is “free” money. However, there are two things to watch out for: (1) don’t let the fact that you’re in application and/or pitch mode cause you to unintentially enter full fundraising mode, and (2) don’t get addicted to winning small pitch competitions and winning a $10-25K check every few months. Consider these grants to be a means to reaching a point of optionality, where you’ll be able to enter fundraising mode with significantly more leverage.

Non-dilutive accelerators

While most people think of Y Combinator or Techstars when thinking about Accelerators, there are literally hundreds of Accelerators in the US that you could participate in. Just like you would vet investors, you should also vet accelerators, as not all of them will be a good use of time. However, in the past few years there’s been a surge in accelerator and incubator programs which provide capital and resources, but don’t take any equity (they’re typically non-profits or have some public funding). Since they don’t take equity in your startup, they’re relatively low risk. To give you a sense of what these look like, check out MassChallenge as an example (which has some application deadlines coming up) and do some more googling. Note that even though these programs may refer to themselves as “Accelerators,” participating in them doesn’t hurt your chance of participating in top accelerators (YC, Techstars) later on – it actually helps.

Cut the fat

If you’re getting ready to fundraise but you’re not in a position of optionality because you’re burning too much money, you should find ways to cut the fat. Start taking advantage of credit offerings from service providers, slow down your marketing spend, or slow down your development velocity by firing one of your contract developers. These are all difficult things to do, but may help you tremendously before you start fundraising. To dive deep on what it looks like to cut the fat to put yourself on a position of optionality, read Joel Gascoigne’s radically transparent post about how Buffer made layoffs and put itself in a position where they didn’t need outside capital to survive. While Buffer has famously taken a more profit-driven approach to growing their business, if they ever decided they needed to raise money, they’d have no trouble doing it.

Potentially dangerous ways to put yourself in a position of optionality:

Bridge Rounds

Sometimes raising a small bridge round from existing investors or new small investors is what you need to do. However, if you’re not careful, it can be a huge waste of time. Whether you’re raising a $200K bridge round or $2M seed round, fundraising takes time. It may end up taking you longer than you think to raise the bridge round, and by the time you finish raising it, you may need to start fundraising again. Raising bridge rounds sometimes leads to founders falling into the trap of “always fundraising” – something you want to avoid. We’re not saying your should never raise a bridge, but be careful not to fall into the trap.

Generating service revenue

Generating service revenue is one of the most popular things startups do to give themselves runway. I’d argue that the only time you should do this is when the service business is aligned with your vision of the company, and could be a long-term part of the business model. Otherwise, spending time generating revenue in ways that are not vision-aligned will either be a distraction that causes your startup to bleed out slowly and die, or it will become the new direction of your business (which can potentially be a good thing). If you’re part time on your startup and freelancing on the side to pay your bills, that’s fine, but if you’ve already made the full-time plunge and want to generate revenue for your company, be very intentional.

Here’s to not needing to fundraise (so that you can fundraise)!

Enjoy this? Get Oversubscribed in your inbox every Thursday.