Community Wisdom: Fundraising at the Seed Stage

This post from a few weeks ago from HTNer Rachel Bartholomew about the challenges of raising money at the seed stage caught our attention:

Prompt:

We thought we’d tap into the collective experience of the community in an attempt to answer that question (broadening it slightly from device only to health tech more broadly). These conversations focused on the “seed” round of funding, which we generally found to be akin to the first funding in the door. Increasingly, people seem to call this pre-seed funding.

While we tend to hear publicly about celebrations of completed funding rounds, the reality for many folks in the process of raising is much more bleak. One founder who is currently wrapping up a seed round put it as:

It’s a pretty sobering outlook, but it also feels appropriate based on what we’re hearing from many early stage founders in the community. It’s a tough time out there right now for founders, and that seems true irrespective of whether you’re finding (or have found) success on the funding trail to date. 

This article is intended to try to help provide a sense of the market for founders at this stage, with some advice on how to navigate the market. What we found particularly interesting in talking to folks at this stage was how idiosyncratic paths to success are, but how similar the challenges are. 

The broadest reflection we have from this is that folks are always trying to make a formula, playbook, framework, or hack out of everything, which makes sense because as humans, we have trouble executing when those things don't exist. But, as is true with many things in life, fundraising being one of them, there isn't a silver bullet or perfect framework to put in place that works. For some people, they follow the frameworks and it works. For others, they also follow the framework and have no success. So while it’s a good idea to listen to the frameworks and take them into account, over-indexing on them driving success can lead to disappointment and misplaced blame. The biggest hurdle is probably accepting that, feeling ok with it, and still deciding to move forward in the journey.

To help provide a sense of the profile of founders we spoke to, we’d categorize funding processes into four archetypes of funding processes that we heard:

We spoke to founders across all of those groups, and heard many of the same challenges and opportunities for folks in the midst of their funding process. We’ll dig into the learnings about the shared challenges below, and how some founders are addressing them. Here are the high level takeaways:

1. There is an art to handling, and learning from, rejections

2. Have a clear fundraising strategy for yourself, but be ready to be flexible 

3. Success comes from an idiosyncratic breakthrough; connections help

4. Make sure you’re telling a good story

5. Be efficient with your time in talking with investors

6. Play the momentum game

7. Make sure you have a support system throughout the journey

Now, let’s dive into each learning.

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Learning 1: The art of handlings rejections

If there’s one certainty in the fundraising process in this market, it’s that you’re going to hear a lot of no’s. Commonly, founders that have had success in completing funding rounds had to reach out to upwards of 50 investors in order to find their lead investor. So needless to say, you’re bound to hear a variety of no’s along the way. One founder shared with us a bit of context on the hardest part of some no’s - they can seem almost illogical to you as the founder:

While frustrating, it also seems like it isn’t worth your time trying to fight the no. As the comment above mentioned, the investor has made up their mind, and combating the rationale point by point isn’t going to change their mind, it is just going to start an argument. If an investor does give you tangible feedback, treasure that:

When we asked a few early stage health tech investors about what a tangible “no” looks like from them, they outlined various scenarios in which they pass and how they go about communicating that to founders. In both instances, the investors we spoke with highlighted situations where the company may have been too early for investment. One seed stage investor we spoke to described the process as follows:

From what we heard from founders, this approach from an investor seems like the best case scenario in terms of feedback a founder can receive from a VC when getting a “no”. 

Another investor we chatted with whose firm typically invests at the Series A, but more recently has done a few Seed deals, described a similar way for delivering a “no”:

Again, this a great example of what helpful feedback from an investor can look like. But unfortunately founders don’t always appear to experience that from every investor. The worst case scenario is one that we’ve heard play out in this process and elsewhere - you get strung along by an investor only to feel like they leveraged you to learn about a space and then hand those learnings over to a competitor of yours. One founder mentioned:

As we’ll get into later, it highlights that you as a founder need to evaluate investors just as much as they’re evaluating you, and know when you’re getting strung along. Understanding when you’re getting a “no” and moving on is key.  As you’re hearing no’s, it’ll be important to start to assess whether there are patterns you can pick up on from investors in why they’re saying no. This founder highlights their experience:

As a founder, you are in the tough spot of needing to decide when to make these changes, and ultimately what is best for your business. Sometimes we heard from founders who made adjustments based on investor feedback that ultimately ended up being good for the business: 

Virtually every successful pitch story we heard included some element of tweaking based on the feedback that they were getting from investors. This ranged from big things like changing go-to-market strategy to little things like adding a live demo of the product to make the pitch more tangible for investors. Like the rest of your business, you should be iterating based on what you’re learning. It’s also a reminder to ask for feedback if you’re not getting it and then evaluate it for yourself - what’s the worst that can happen if you ask?

Obviously, getting that many no’s from investors can take a toll on your mental health and opens up room for letting self-doubt around your original idea creep in.

Effectively listening to the feedback you’re getting in the no’s is really important and often requires a support system around you to gut check that feedback. One founder notes:

All of this highlights the value of critically and honestly assessing what you’re hearing when you get “no’s” from investors. Even the most successful fundraise processes hear their fair share of “no’s”. But if you’ve gotten to 40 or 50 no’s from investors without any real progress, it might be time to reassess things based on the feedback you’re getting.

Learning 2: Be flexible in your definition of success

Talking with these founders, it was clear that while the market is challenging, it is not as though deals have ground to a halt completely. But in order to get deals done, founders have needed to make adjustments on the fly. 

As you prepare for your fundraising process, it behooves you to have a plan - map out what the ideal funding process looks like for you. It’ll help you to run a tight process, and also understand if your round isn’t coming together as expected. From a founder who launched and closed their funding process in under two months earlier this year:

Woah. This was an incredibly efficient process, particularly in this market and not at all the norm from what we heard from other founders. But we think that it is helpful context to hear how efficiently the fundraising process can go, even in this market. Two founders we spoke with started fundraising in December / January and are in the process of closing their rounds currently, which seems to be a more typical fundraising path for companies that are successfully raising in the current environment. 

For most companies we talked to going through the fundraising process that have successfully closed a round, their definition of success changed in a material way during the process. Whether that was the amount of capital, valuation - they needed to adjust expectations.  

If you’re in the process of raising, there will probably be something you have to give up on along the way to get that deal across the finish line. In particular, a lot of founders ended up reducing their valuations in order to close their rounds. This is a choice we heard founders actively making, and in hindsight some ended up appreciating. From one founder:

It’s worth taking the time, ideally at the beginning of your process, to know what your minimums are in terms of how much funding you need to raise for the business. This will allow you to adjust on the fly, if needed. One of the founders we spoke to shared how changing the “ask” changed the outcome of their funding round:

This founder made two changes - first they reduced the amount of capital they were asking for. Second, they changed the name of the funding round from a “seed” to a “pre-seed” round. This was an early stage company raising on an idea. It was an astute move by the founder to recognize how investors were reacting and adjusted on the fly, which led to success. Note nothing about the business actually changed in this adjustment, it was just a storytelling mechanism that generated more momentum for the business. We’ll come back to this point on momentum later.

On the other side of the table, investors are also encouraging founders to be more flexible on terms to get the deal closed:

It goes without saying that we’re in a tougher market than we have been in the past few years, both for founders and also investors. As a founder, it might take more flexibility from you in order to get a deal done than you’ve heard from companies that have raised in the last few years. Having a plan going into the process will help you to understand what it makes sense for you to flex on.

Learning 3: Success comes in myriad ways; connections help

One of the commonalities across the various processes we heard about from founders is how success seemed to come from one serendipitous event - whether that was an intro through a friend to a VC, or a pilot customer win, or a tweak to the business model. Everyone has their own idiosyncratic thing that was a key catalyst in the process.

A key in all of that was leveraging any connections you have to get connected to investors - founders, former colleagues, family, friends, college classmates, etc. It shouldn’t be a surprise that anecdotally we heard VC conversations sound like they go best when there are warm introductions. 

From one founder, we heard the value of taking intro conversations:

Different founders had different perspectives on who to reach out to during this process, which not surprisingly seemed aligned to where their personal networks resided. One founder who lived in NYC made it a point to tap into the network of other founders in NYC to get warm intros to investors. Another founder tapped into college friends who were investors for warm intros. Lean on those folks you know to help you create the “serendipitous” moments you need for a successful process. Having personal connections into investors is by no means a sure thing, but it absolutely helps. 

In the case that you’re newer to the industry or don’t have as robust a network to turn to, we asked investors what has been the most successful instances of cold outreach they’ve seen from founders. Below are some do’s and don’ts of the craft.

LinkedIn is the most obvious place for cold outreach, which means investors’ DMs are oversaturated with inbound messages from founders. You have to make sure your message stands out. One investor details what they like to see:

Another investor suggests similar cold outreach structure:

As you’re going through the stress of a fundraising process, it naturally can be hard at any given moment to know when a breakthrough is coming. Just know that in hindsight, many founders recount a key event or two as the catalyst that drove their success. Inevitably, you won’t know that in the moment though.

Learning 4: Make sure you’re telling a good story

The one area where a lot of founders seem to get sideways is not thinking about how their story is resonating with investors. 

It’s important to recognize that having a good story and pretty slides are not the same thing. Yes, a solid slide deck can help you tell your story. But if you focus too much on the deck it can be a waste of time and energy. In the early days, be sure to practice your story on people who are going to give you honest feedback. From one founder:

Know that you might never feel like you’ve gotten your story quite right, but even then you can still find success. Another founder we spoke to mentioned:

Listening to the investor side of the table, we heard several pieces of advice, as well as watchouts when assembling that initial pitch.

Many founders will pitch both generalist and healthcare specific investors during a funding round. One seed-stage investor shares this piece of advice to prepare for both types, dependent on the investor’s level of knowledge of the space you’re in:

Additionally, while it is necessary to explain the quality and magnitude of the problem you’re solving (TAM), make sure you’re putting that problem into context and demonstrating why your company is the one that is going to solve it compared to all the other solutions that have come before or are currently sitting next to you in the market. Of course, at the seed stage it can be daunting to jump to the billion dollar vision, but you still should - another seed stage investor mentions:

A third investor suggests founders answer the following questions up front:

As we alluded to above, a common watch out we heard from investors is that founders tend to over-index on the mission / vision, but they don’t articulate why this is a billion dollar business. At the risk of stating the obvious, you are pitching to investors whose ultimate success comes from generating a sufficient return on investment for their LPs. 

We’ve all heard the debate at this point over whether healthcare startups are really venture scale or not. This question is really a proxy for asking whether venture investors can generate the returns required for their LPs. One investor notes:

As discussed above, a founder should go into the fundraising process with the expectation that the first version of the story you tell will not be the final version - and that is ok. You are at the earliest point of your company’s journey and the iterative process to reach PMF is just beginning, so updating your story based on the feedback you’re getting is necessary. 

Importantly, there is a balance with this. At the end of the day, you know your company better than any investor you face, so don’t stray too far from that vision. One investor sees this happen a lot at the seed stage and shares the following: 

All of this really comes back to a storytelling exercise. It’s your job as a founder to take the feedback you’re getting from investors and evaluate whether the story you’re telling about your business is resonating. As investors here articulated, there are some key elements that any investor is going to be looking for in an early stage pitch. So if it’s not resonating, it might be worth taking a step back and evaluating what is missing.

Learning 5: Be efficient with your time in evaluating investors

Investors are evaluating you in this process, but you should keep in mind that you are evaluating potential investors. You may not have the luxury of picking from multiple investors who want to invest in your business, but you do have the ability to pick and choose how you spend your time. Every moment you’re fundraising is a moment you’re not working on your business, and it’s worth being thoughtful about what investors you’re talking to. We’ll break down below a few dimensions we heard other founders thinking about when targeting investors. 

Part of the investor segmentation strategy is knowing where they are investing in the first place (e.g. stage, market vertical, etc.). Understanding this has become increasingly difficult in recent years as many investors have ventured out of their typical investing profile as new opportunities have come up (e.g. Series A investor now looking more seriously at Seed stage). In fact, one investor we spoke with mentioned:

If you’re wondering how to do this well, this investor offered two potential resources to get clarity on up to date investor interests:

• NFX Signals: a solid database of investors segmented by stage and vertical

• Investor blogs & content: investors are always publishing blogs and content to their firm’s website or personal blog page, it’s worth checking those out to understand recent investment theses and areas of concentration. 

On the topic of investor segments, it was interesting to see that some founders had an easier time raising from generalist VCs than healthcare VCs, and others had the opposite experience. This distinction seemed to follow a clear line of how much healthcare expertise was required on behalf of the investor to understand the business. From a founder working on a B2B healthcare idea:

Another founder in B2B healthcare echoed very similar feedback about the challenges of talking to generalist VCs who didn’t know the space:

Yet that wasn’t a uniform experience - One founder focused on a more B2C condition specific approach was struggling to get traction with healthcare investors, and then started getting traction with generalist investors.

Another dynamic worth considering is whether you’re talking to Pre-Seed / Seed investors or Series A / B investors. The last few years seem to have thrown everything out of whack here as investors have blurred the lines across these various stages. As one investor shared:

It’s a sentiment that is helpful to hear because it helps provide some context for who is actually investing in the seed space today, and why firms you might have heard investing in seed deals over the past few years aren’t actually going to be the sweet spot today. As one founder recounted:

After pivoting to a different investor target, this founder was able to close their round in a month. It highlights the value of thoughtfully segmenting the different types of investors you’re talking to, and why for some you might be “too early” but for others you’re at the right stage.

There’s also an art to sequencing conversations in the right order depending on your fundraising strategy. The fundraising process takes up a lot of time, even for the most efficient funding rounds. It behooves you as a founder to be efficient in intro meetings. Every minute you’re preparing for intro meetings is time you’re not working on your business. And if you’re involving multiple team members in the meetings, it becomes an even bigger time suck. You need to make sure you get out of it what you need to in order to know if an investor is interested. 

How do you know if an investor is interested in you? The one give away that people talked about was investor follow-up. This was uniform from folks we talked to - if an investor is interested in investing, they’ll follow-up with you. If you’re chasing them something is wrong. As one founder put it:

This idea of the “waiting game” is something that came up again and again with founders. And it makes perfect sense - if you’re an investor, you have every reason to wait to make a decision as long as possible. Unless you’re worried that the company has enough momentum that you might lose the deal. This notion came up when we asked about how due diligence has changed in this market. One investor mentioned:

If you’re a founder, you can inadvertently waste a lot of your own time just because you’re barking up the wrong trees. Being thoughtful about who you’re reaching out to, and understanding the various segments of investors you’re talking to can help you categorize the types of feedback you’re getting and respond accordingly. 

Learning 6: Playing the momentum game

In many ways, fundraising does feel like a very, very intense game that you are playing as a founder. The key to doing well in the fundraising game as a founder: generating momentum that avoids the “waiting game” dynamic described above. The “waiting game” is the surest way to lose the fundraising game. 

For the founders who are lucky enough to close rounds really quickly, momentum is not a problem. It is already on their side, a combo of multiple factors - team, market, traction, product, storytelling, etc. For everyone else, there inevitably will be a question you need to ask yourself about how you generate momentum with investors: 

There is a really insightful comment in that quote about the power of sequencing good news to manufacture momentum. It gives you a natural opportunity to re-engage an investor who has you in the “waiting game,” and can potentially kick you out of it.

Equally as important is to recognize when you just don’t have enough momentum for investors to jump. When you’re in this camp, we heard from founders about how it can actually behoove you to stop fundraising and focus on the business:

The caveat highlighted above about being in the cash position to do it feels like an important distinction here - if you don’t have the cash to pause and hit the reset button, this advice feels less relevant. One of the hardest parts of fundraising is that there is never any definitive point at which anyone else tells you that you should shut down the fundraising process. There’s always theoretically more you could do - cold outreach to that one additional investor, follow-up one more time with an investor after an intro convo, fly to that one additional conference, do the next coffee chat. 

Couple that with the hustle culture in which we live where countless folks on social media feeds talk about how the key to success is not giving up. You need to decide for yourself when you’ve failed, which only adds to the stress of the decision.   

But you’ll also probably notice that dragging along the fundraising process completely undermines any sense of momentum that you have as a founder and gives investors even more reason to wait you out. 

Learning 7: Make sure you have a support system throughout the journey

In all the conversations we had with founders, we asked the following question: “How has the fundraising process felt for you on a personal front? Any ways you’ve found particularly helpful in helping to deal with the stress?”.

Here are a few responses we heard: 

Founders have plenty of things to handle in the day to day and often it seems like the easiest thing to deprioritize amongst all of it is your mental and physical well being. So, whether it’s exercise, meditation, chatting with your co-founder, spending time with family, friends or customers - it is important to step back and remember these outlets exist for you.

After all, you can’t give 100% to your company if you’re burnt out and running on empty.

Conclusion

The fundraising market is clearly taking its toll on founders at the moment. We hope by sharing some of the stories from other founders it helps to normalize the experiences a bit.

Ultimately, your task as a founder is to tell a story that cuts through the noise and excites an investor enough to move. If you’re not seeing traction in investor conversations, it means you haven’t done so. The trick is then assessing and addressing the reason why so that you can overcome that issue or know when to move on. 

Maybe your founding team doesn’t have the right experiences. Maybe you’re asking for too much money. Maybe you’re talking to the wrong investors. Maybe nobody believes in your go to market. Maybe your pitch is confusing to people. Maybe you need more traction with customers. You likely aren’t going to get a clear answer from the venture capitalists you’re pitching on this. Your job is to figure this out and address it before you run out of momentum and/or money. 

The hardest part of all of this is that for folks who aren’t finding success, there isn’t really a playbook that guarantees success. You could be following every framework and piece of wisdom from VCs and accelerators, and yet still fall flat in the fundraising process. It can seem like a cruel game in many ways in that regard. It seems key to find your support system around you who can help you navigate all the ups and downs of processes like these.

If it’s helpful for you, we always offer ourselves up as a sounding board on any/all of the topics we’ve covered on for HTN members during Office Hours each week. We can’t guarantee you our perspectives will be helpful, but you’ll get our honest opinion and/or a safe place to vent.