Landing Your First $100K Investment for Your Startup in an Economic Downturn

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Landing Your  First 0K Investment for Your Startup in an Economic Downturn

It’s not just from VCs

Landing Your  First 0K Investment for Your Startup in an Economic Downturn
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The last few months have been a confusing time for founders and investors. As a founder who’s gone through accelerators like YC and raised formal seed rounds to the total of $3.5 million, I’m hearing mixed signals from the market.

On the one hand, everyone is freaking out about the market correction of public market tech valuations and the economic downturn. Everyone’s sharing their opinions to brace for winter, including Y-Combinator sharing sober news with founders. Capital is certainly slowing down.

On the other hand, people like Paul Graham point to the advantages of starting a company in a bad economy, such as less competition for user acquisition and talent acquisition as well as disruption incumbents are not prepared for. This also seems to hold true in practice, with some of the largest companies such as Airbnb, Uber, Slack, Square, and WhatsApp in the last recession alone. As a good friend correctly pointed out, the correlation is hardly causation — the more likely reason is technological disruption happened to coincide with the downturn that put incumbents in vulnerable positions. I think the point still stands.

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So how can early-stage founders and prospective founders square this circle?

First, it’s probably true that fundraising is going to be a lot harder and longer than it used to be. Levers like FOMO are going to be less effective. Real metrics, value, and products are going to be more important than ever.

However, unlike the more discretionary investments by venture capital funds, there are structured programs with standardized terms that are going strong. For founders (and prospective founders) who are looking to land the first $100K to stay in the game, there are still a few options.

When I thought about my first $100K cheque back in April of last year, I looked at literally hundreds of accelerators, venture studios, grants, and the like that are geo, sector, and founder specific. Take the time to go through them.

For this article, I’m going to highlight some of the new, emerging programs that I wish was available when I went through the process.

Traditional VCs are starting to vertically integrate pre-seed and seed sourcing by operating their own accelerators. The terms are not bad, especially given the recent tech valuation compressions in both the public and private markets. Investments are typically: (1) In SAFEs (2) investment size ranges from $500K-$1m and (3) Valuations ranges from $5–10m post-money.

Programs are relatively new, but seem to last about 2–3 months with a focus on specific skillsets. Though it’s uncertain how long these programs will continue to exist, here are a few examples with investment terms:

  • a16z START — “Andreessen Horowitz invests up to $1M for a percentage of ownership in your company. Founders will receive 1:1 support and be able to leverage a16z’s domain expertise and networks.”
  • Sequoia Arc — “Sequoia will invest $1M in the form of equity to participating companies at the start of the program.”
  • Pear Accelerator — “ $500–750K SAFE at $10M valuation cap from Pear VC as soon as you are accepted.”
  • Afore Alpha — “We will invest $1M on a $10M post-money SAFE with no discount. And it doesn’t matter where in the world the company or founders are based.”

Links will have more FAQs and details including application dates.

Founder’s POV

The upside is good investment to dilution ratio and the brand value of top VCs. While there can be some value add, I’m not sure how much social and human capital can be allocated to the startups realistically. Introduction to portfolio companies and/ or significant time with partners is probably challenging. I’d think about having 1–2 very specific asks and thinking about getting those.

The potential downside is negative signaling. If the multi-stage VC doesn’t follow-on for the seed round, it may send negative signals to external investors in the market. That being said, that’s a problem for the future.

Formalized programs to invest at the talent level have been growing over the last few years. The base thesis is “investing in the team” rather than the idea. Investments are typically: (1) In SAFEs or convertible notes (2) investment size ranges from $80–120K depending on the region and (3) valuations are sub $1m post-money, implying a ~10% dilution.

These programs last about 6 months, with the first half dedicated to finding co-founders and coming up with an idea. The second half is dedicated to executing that idea. During the first half, founders are given a modest salary to work on the idea full-time. During the second half, founders who are selected (typically 50% of the cohort) receive the investment above.

  • Antler — “The exact amount varies depending on location, it’s roughly about US$ 100,000 for a small equity stake in your company.”
  • Entrepreneur First — “If you are successful at the Investment Committee, at the start of Launch, we will make our first investment in your company. We invest £80,000, along with the stipends paid in the first part of the programme, for 10% of your company.”

Founder’s POV

The upside is the ease of getting started. Founders can be pre-team, pre-product, and pre-everything, but be paid to work on the idea. The potential downside is the investment terms. There is no guarantee of receiving the investment after the first half and the dilution is pretty significant.

One other reminder is to read the fine print. Unlike other accelerators, many of these programs may have side letters giving them to pro-rata and ROFR EVEN IF you don’t end up being selected for the second half.

For this piece, I’ve focused on relatively recent funding structures, but don’t forget about the existing models, especially those with some new twists.

  • Crowdfunding: While this isn’t a structured program, it’s a way to raise money if you have a large community. The instrument could be equity, debt, or pre-orders. Many DTC companies use this to have their fans and customers share the upside. While players such as Wefunder, Kickstarter, and Seers have been around, there are new players popping up. Stonks integrates “live” aspects for founders to host virtual demo days.
  • Traditional accelerators: There hasn’t been too much innovation from players such as Techstars and 500 Startups, investment size and terms are starting to change. Y-Combinator for example recently changed their terms to a standard $125K on SAFEs with a $375K MFN for a total of $500K of investments.
  • Venture Studios and company-backed programs: Many Forunte500 companies are investing in companies strategically. I’m not a huge fan of this model because founders have limited agency (direction provided by sponsoring company) and retain a much smaller equity stake. Companies like Founders Factory and Rocket Internet are known for this. That being said, if your vision aligns, it can be a great way to get started with a significant amount of funding and resources.
  • ICO: These are reserved only for Web3 companies, but they can be a powerful way to have early access to capital.

Remember that fundraising has little to do with your worth or your ability to build a good product. This applies in both ways.

If you crushed it with your fundraising, buckle down and focus on building substance. The next round might be challenging if this economic climate continues. If you’re having a tough time fundraising, hopefully, the little shared above can contribute in some way. When I was starting my company in Q2 of last year, I applied to a bunch of these programs as well.

Gratefully, I was accepted into a few including to Y-Combinator. While each application is slightly different, the core components of the application and the interview are quite similar.

Structured programs are just one way of getting money. Now is the time for your creative problem solving to keep your company alive.

Go to Publisher:

Entrepreneur's Handbook – Medium


Author: Daniel Kang