The role of a company founder is vision, culture and fundraising. Founders should have their finger on the pulse of the VC market, and one of the ways to do that is through strategic advisors (attorneys, CPAs, etc.) These strategic advisors will help founders understand the overall fundraising landscape as well as what the market commands.
Know the Value
This idea of what the market bears is a combination of both art and science. Founders will want to “sell” the least amount of equity in their company for the most amount of capital (higher valuation) while it is of the interest of the capital provider (VC, PE, Angel) to receive the most amount of equity for the least amount of capital (lower valuation). In 2021, founders could command higher valuations due to many macro investing trends. Today, that has shifted. Capital is harder to come by, so investors hold more leverage in setting terms. Founders need to be smart with valuation, as their last round won’t necessarily dictate a valuation increase — even if they hit milestones — since many valuations were already inflated. Founders should find smart capital at a fair value and focus on execution.
We need to understand the shift over the past few years, 2020–2023. Capital was cheap or even free and now it is very expensive. Valuations were extremely bloated and now, in many stages, down 60%. The world of outside capital has changed and so must founders’ expectations. The founder journey and value for what founders are building may not match the current funding economics. Founders should be prepared to feel pain or discomfort in the valuation.
Communication and prioritization of goals is important even before founders receive the term sheet. It is OK to be upfront that certain terms are a non-starter. If it’s known that a particular VC invests only with certain terms even though they will not lead the round, then it might not be the best fit.
There is a big difference between capital and smart capital. Smart capital can open doors, integrate the founder into an ecosystem and be a trusted resource through growth stages. It is important that founders focus on not only what capital provides from a direct growth perspective but also what the investors of firms provide with that capital.
Develop Pitch
There are a few big issues I see in pitches. One is the founders using the “We are like XXX for ZZZ” approach: “We are the Airbnb of [insert industry.]” Or they think their serviceable market is bigger than it really is. And lastly, they try to address a problem in too many industries at once from launch. A business solution may solve problems in many verticals but require teams and domain knowledge not currently staffed. It’s better for the founder to start by solving a need in one and move to new markets after proving success. Discounting the time, domain knowledge and expertise it takes to do well in certain markets can waste valuable time and money.
There was recently a great interview with one of the GPs at Benchmark capital in which he referenced startups trying to sell a boat. They go through all the amazing features of the boat: the beam, sail, riggings, etc. But what they should be selling is the wind. Even the worst of ships can set sail if the wind is right. So, it is more what wind the startup is trying to catch in the marketplace and why it is uniquely positioned to take advantage of that momentum in comparison to the other boats currently available. Feels like a great analogy to timing, positioning and, of course, building quality as well.
Defining the market is extremely important. Many startups overstate the true market they are addressing. It’s the difference between TAM and SOM. (TAM, SAM and SOM are acronyms for three metrics to describe the market in which an organization operates: Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market.) Just because someone “could” be a customer, it is important founders really hone in on what part of the market they are addressing, what percentage their competition currently holds and their thesis for growth. Many market incumbents are not just going to roll over, so founders need to understand what their product or service is going to replace and the barrier or cost to switch. All this needs to be factored into the “obtainable” discussion.
Maintain Relationships
Once terms are accepted and capital deployed, the most important element in a great founder/VC relationship is communication. Many founders are worried that this new level of accountability will stifle growth. In actuality, it can help propel it further — and faster.
For us, after deploying capital, all incentives are aligned. We believe in the plan and are here, of service, to help the founder achieve the next levels of growth. Bad news, stumbles and even roadblocks happen; good communication opens the door to a multitude of resources to help push through them. Hiding bad news, pivoting without discussion, or similar actions that short-circuit communication will undermine alignment. The more a founder’s capital partner knows, the more that partner can help the founder see beyond the horizon for capital, resources, partnerships, etc., to make the company a success.
Chris Van Dusen is a senior partner at Solyco Capital, a vertically integrated investment firm that delivers capital solutions for late-stage startup and growth companies. The firm takes a private equity approach to venture capital.
Van Dusen joined Solyco in 2022 as the last partner to be brought on by the firm. He manages sourcing of capitalization and serves in CMO and CRO roles for the brands in the portfolio.
