After watching ~300 Series As and Bs - and way more seed rounds - I’m reasonably confident that there are two types of fundraises. I’ll call these “Attention spikes” and “Explainers.” This isn’t as elegant as it could be, but here’s the theory.
Fundraising at the seed, A, and even B is largely an emotional decision. There are a number of reasons this is true which I’ve explored in other essays. Fundamentally it is because investors are betting on an extremely distant future using extremely limited information. While investors will talk about their theories, process, data, etc, the best investments have been largely gut calls.
In order to make that gut call, the VC needs to pay attention to the thing in front of them and get excited. A Spike raise is a fundraise done on the basis of the excitement generated by a specific - and relatively narrow - part of the startup.
There are some clear constants here, and some that change. For instance:
Team - this is the clearest and easiest spike. If you founded a giant company, you will easily fundraise for your next company. If you and your team were the top researchers at OpenAI, you will get funded - and in size.
Traction - traction captures attention. However the type of traction and the magnitude necessary vary radically across time and space and market conditions. We just went through a phase where the scale of revenue growth necessary to get VCs to hand over term sheets went from ~1m quickly to…some number larger than that but don’t ask anyone what it is because no one knows. What matters in these situations is that your growth or the quality of that growth stands out relative to the other things currently in the investor’s queue. That’s what makes it a Spike.
On the other side are the Explainers - these are businesses that can and should and do raise rounds but don’t have that immediate attention grabbing signal. These companies require the founders to actually explain what it is that they do and why it is interesting.
These companies are fascinating to me because they’re some of the most long term interesting companies. What’s more, the pricing is usually lower than the Attention Spikes, they have fewer competitors, and the founders often know things other people don’t. Despite that, they will have a harder time fundraising because, at first glance, they do not look special.
These are the companies that generally benefit most from spending time with investors ahead of the fundraise and building relationships with those investors. These founders need the time to co-build conviction without the pressure cooker dynamics of a fundraising process.
But there’s a paradox in all of this - unless you have some amount of contact with investors, it is hard to know if you are an Attention Spike or an Explainer. Your existing investors may give you a sense of this, but they’re wearing rose colored glasses.
You’ll get a signal on where you fall by observing the behavior of investors toward you. If you find that investors are falling over themselves to give you money or fly you places on jets, you are likely in the Spike category. You generally will not know for certain until you say “ok we are raising” because the market can move quickly and yesterday’s spike (crypto) is suddenly dead (crypto) and then alive again (crypto) with far less predictability than anyone cares to admit.
Said differently, if you have hype and need money, go get it.
If, however, you find yourself needing to chase investors to get meetings but, critically, have a core of deep believers and a business that is getting more interesting by the day, then you have a good shot at finding your next deep believer and building a generational company.
Figure out where you stand, build your fundraising plan accordingly. Email us if you want to make that plan better.
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