I had two meetings last week with first-time founders, each building a company in an industry where they had no real experience, pre-product, asking for advice about raising a round of angel funding. I told each of them the same thing.
Get further down the product development path. Make sure you’re on the right track. Don’t spend 6 months trying to raise funding from unsophisticated investors before you know you can actually build something of value. Learn the industry. Understand the market. Get to know your customer. And demonstrate that by gaining even just a little bit of traction before you try to raise.
I wrote a post few weeks ago about the growing power of no-code development platforms. These include platforms such as Shopify, Webflow, Zapier and Airtable. Much as cloud computing dramatically lowered the cost of launching and scaling a company, these no-code platforms similarly allow a company to build, launch, test and iterate an MVP to get to product-market fit faster than ever.
This is great for the entrepreneur. They can build more value in their company before raising capital to accelerate growth. We are seeing more early stage companies that are able to skip entire funding rounds because it’s less capital intensive than it’s ever been to get their product ready to pour on the marketing dollars.
But it’s also changing investor behavior as well. Smart investors with strong deal flow can pick from companies that are already showing some level of traction, dramatically reducing risk in their portfolio.
According to the Pitchbook – NVCA second quarter Venture Monitor report, the median age of companies that received angel and seed financing rose from 2.8 years in 2018 to 3.1 years in the first half of 2019. That’s the first time this number has been over 3 years.
The median pre-money valuation for seed-stage deals is $8 million so far in 2019. This is up from approximately $3.9 million in 2012. The median deal size is $2.1 million, up from $1.0 million in 2015 and $520,000 in 2009. Today’s seed round is what the Series A used to look like.
These changes ripple through the early stage eco-system.
As seed investors pick from companies that have already built a product and developed some level of product-market fit, they have left room for an increase in pre-seed and angel rounds. Pre-seed is the new seed round, with deal sizes under $1 million and pre-money valuations of $3 – $5 million.
A growing number of angel investors have come in to fill the gap below pre-seed level.
You can view this shift in the investing landscape in a few different ways. For some first-time entrepreneurs, this growing legion of angel investors, with different levels of sophistication, offering up seemingly innocuous SAFE notes with very few terms to negotiate, seems like an opportunity. Take the cash, worry about valuations later, and plunge deeper into the product development pool.
There are many risks with this approach. One of the biggest risks in my opinion is that of wasted time and effort. Starting and building a company is incredibly hard. It can be all consuming. The more you raise, and the more time and effort you invest in it, the more it will weigh on you.
If you are running down the wrong path, toward a cliff, picking up speed along the way, fueled by premature funding, you can waste an enormous amount of time and energy.
The tools exist today to validate your idea in the marketplace before you commit the time and effort to raising money and force yourself down a path that might not deliver the rewards you’re seeking. This is a unique moment in time, where even a
When you’re ready, the funding will be there if you’re on the right track. And you’ll have a better sense of company value, and be in a better position to negotiate terms, than if you jump into a fundraise process to early.