Global VC funding in Q3 2022 was $81B, down 53% YoY from $171B and 33% QoQ from $121B,
the lowest level since $70.6B in Q1 2020
(@geneteare/ Crunchbase News)
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Global VC Pullback Is Dramatic In Q3 2022
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đź’Ąđź’Ąđź’Ą The Fundraising Wisdom That Helped Our Founders Raise $18B in Follow-On Capital
Two years, our team at First Round, led by partners Bill Trenchard and Brett Berson, began to quietly build out a program to help our founders navigate the choppy waters of follow-on fundraising.
Long had we observed founders caught off guard by what was needed to raise their Series A after having a relatively easy time at the seed stage (only further exacerbated by an influx of seed funding in the market).
All together, we have immense knowledge in fundraising that we’ve accrued witnessing our companies raise over 1,000 rounds and $18 billion in follow-on funding. It’s possible for startup founders to know more about almost every facet of company-building, but fundraising is one area where we’ll always be able to offer more experience.
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Realizing how well positioned we were to help, we built a program called Pitch Assist — a four to six week bootcamp for our startups that are getting ready to raise follow-on capital. At the end of the program, they emerge with a well-designed deck, a strong narrative, and a clear strategy for how to approach the fundraising process.
Unlike normal fundraising advice, Pitch Assist is an immersive program where we advise, build presentations and rehearse side-by-side with First Round founders. Trenchard, in particular, has experience on both sides of the table, having started and fundraised for 5 companies before joining the firm.
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What follows is an inside look at how we run the Pitch Assist program, and what startups everywhere can apply from what we’ve learned helping create fundraising pitches and processes for over 10 years.
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FIRST, FIX YOUR TIMELINE
Given the cyclical nature of tech and venture, there are distinctly good and bad times to raise capital. “Avoid August, the second half of November and December, when many venture firms slow down.
The year-end holidays and summer dog days are dead zones for fundraising, so why set yourself for an uphill process? July can be slow, too. You can finish your fundraising process in late July — just don’t start it then,” says Trenchard.
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The Fundraising Wisdom That Helped Our Founders Raise $18B in Follow-On Capital
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First Round Review
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Liquidation Preference: Your Equity Could Be Worth Millions—Or Nothing
In 2014, mobile security startup Good Technology was valued at $1.1 billion. Employees thought their equity packages were winning lottery tickets. They were wrong.
One year later, Good sold for $425 million. Employee share prices tumbled from $4.32 a share to $0.44. While executives made millions, employees—some of whom paid $100,000+ in taxes on their equity—made next to nothing.
Good Technology’s situation isn’t uncommon. Like so many startups, it had investors and board members whose equity was protected by high liquidation preference—a guarantee that they get paid first and at least a certain amount when the company sells. When startup investors make millions in a sale, but money runs dry before reaching employees, a bad preference stack is often the cause.
To avoid being surprised when the company you work for is acquired, you need to understand what preferences are, why they’re important, and how you can negotiate around them.
What A Preference Stack Is & Why Startups Need Them
If your equity package works out to 0.1% of the company, shouldn’t you be entitled to 0.1% of the acquisition? Startup financing isn’t that simple.
When a startup is sold, the money it makes is paid to shareholders in a predetermined order, called its “preference stack.” As a rule, employees are last, while shareholders with liquidation preference (LP) come first.
Three factors affect liquidation preference, and understanding them can give you a better sense of who gets paid how much and when:
- Multiple: This decides how much money an investor will be paid. A 1x multiple—standard for mid-stage companies—guarantees the investors get 100% of their money back. Higher multiples become more common in later-stage companies.
- Seniority: This is an investor’s place in the preference stack. Most unicorns have a “pari passu” structure, in which all investors with liquidation preference are paid simultaneously. However, between 2015 and 2016, there was a 60% increase in deals that gave “senior” preference to later-stage investors—meaning they get paid first.
- Participation: There are two types. In standard, “non-participating” preference, an investor with a 1x multiple and 10% ownership chooses to either be paid 1x of their investment or 10% of the acquisition price. In “participating” preference, the investor gets both. The latter arrangement is rare—as of 2014, only 31% of deals included participating preference, and they generally include a payout cap.