Investor Flags Anti-Signal in Early-Stage Fundraising Pitches
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4. One fundraising pattern that I see often is an early-stage founder who says during their pre-seed or seed round fundraising that "we won't have to raise venture capital after a few rounds." Maybe this is a hot take, but that's a big anti-signal for me. Yes, I understand that none of us want dilution. As early-stage investor, we'd obviously prefer not to get diluted alongside founding teams, too. But there is a natural physics around company building, especially in today's competitive environment, that requires capital formation to be a thoughtful part of your strategy. If you are a defense company & say you won't have to raise capital after one or two rounds, you should look at the current group of successful defense companies (i.e. Anduril, Saronic, Mach, etc.) and ask why they have chosen to raise capital despite having their own commercial success. None of these founders love being diluted, but having a smaller percentage of a larger pie (i.e. more enterprise value) is likely a higher expected value than being frugal on the fundraising front. Often I hear pre-seed founders who say that they'll raise debt instead of doing equity rounds. When you ask how much equity they'll need to raise to access debt financing, there isn't a clear response, which means they don't actually understand how to raise debt or what the required In other cases, I hear this from founders who are struggling to raise capital. The message you're sending the market is that you've accepted that you're not great at fundraising & you're trying to come up with alternative ideas around capital formation that likely don't align with the path to becoming a $10 billion company or whatever the venture target is. Anyways, just be aware that these fundraising messages send a mixed signals that might impact the types of investors who will back you. More power to you if you can pull it off, but know the historicals if that's the plan.
3. In general, we've been talking a lot more about the difference between pre-seed and seed investing and how that informs our sourcing strategies. In terms of portfolio construction, our goal is to invest in 20 core companies where we have meaningful ownership. This means we really do have to find companies at the pre-seed for our portfolio construction to be effective. So you end up spending much more time with PEOPLE, instead of early stage COMPANIES. You can't wait for someone to start a company. You have to be there before they make that decision. This means getting endless coffee meetings with engineers from companies that you admire, who may or may not start a company in a few years. If you thought the feedback loops on venture were slow, imagine the feedback loops on trying to find founders who haven't yet decided to start a company and building relationships with them over years, with the hope that they'll start a company one day. Out of 100 coffee meetings, maybe one or two of those founder meetings become an actionable investment, but this is the work you have to do these days if you are a seed manager. Hopefully you like coffee! ☕
5. Before investment committee this week, I visited a factory in Hawthorne. I won't say much about what the company is building. I'll just say it's a deep tech startup working on a wildly ambitious energy project. But the visit stuck with me for a different reason. Their headquarters sits in a mostly residential neighborhood. I parked on the street and could've sworn I checked the signs. Halfway through the founder walking me through their 20-year vision, a very kind woman from the neighborhood stepped into the office to tell me street cleaning was about to start and I was going to get a ticket. I ran out, moved my car, and walked back in laughing. Here's a company trying to build the next few decades of American energy, surrounded by neighbors thoughtful enough to save office guests from parking tickets. I love Los Angeles.