How to Survive the Gap in Funding Rounds?

Key Points:

  1. Raise extra VC funding and venture debt but save it for a rainy day, and be open & transparent with your team. 
  2. Build relationships with Series A investors early in order to expand your network and understand what metrics and milestones you need to hit for your sector. 
  3. Talk to mentors 2-3 years ahead of you in your company’s trajectory.
a large gap between two cliffs

Startups can lose steam between rounds of funding for a number of reasons, including low revenue or profits, misreading market demand, budget problems, or personnel issues. A 2019 report from the Bureau of Labor concludes that 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year. We talked with Brett Jurgens, CEO & co-founder of Notion, about his advice for other founders looking to make it to past Series A.

Notion, a smart self-monitoring system built for home & small business owners, was founded by Brett Jurgens and Ryan Margoles in 2014. Brett led Notion through several rounds of VC funding, including a $10M Series A round led by Translink Capital and Draper Nexus, with participation from existing investors. In order to finance the business, Brett raised venture debt as well as participated in the Techstars accelerator program. Notion ran a successful $300k crowdfunding campaign on Kickstarter, increasing visibility and traction and allowing them to pre-sell units to customers. In early 2020, Brett continued on as CEO when Notion was acquired by Comcast. 

Brett sat down with us to share his tips on raising against the clock, maintaining investor relationships, and hitting the necessary metrics & milestones.

Raising Against the Clock

1. Raise extra but save it for a rainy day

Typically, startups raise enough for about an 18 month runway. However, Brett noted, an 18 month runway means that you have to start raising again in 12 months. “If you are confident in your next 12 month period, if you can hit a bunch of milestones, you can raise again,” said Brett. There is a reason, though, that so many companies fail between Seed and Series A – it’s a big jump and everything takes longer than most think.

“Instead, raise for a 24 month window, but save it for a rainy day. Try and knock it out of the park in 12 months to stick to the conventional 18 month period, but the further that round can get you, the better.”

This way, you can spend like you’re raising in 12, but have the extra runway in case it takes longer. In Notion’s case, they raised extra in their Seed round – enough for 24 months – because they were working in hardware and knew they wouldn’t be able to move as fast. This gave them the runway to get the traction needed to raise Series A about a year and a half later.

2. Raise venture debt right after raising venture capital

Venture debt can be a useful tool to fund your operations via loans from specialized banks or non-bank lenders. Right after or towards the tail end of your venture raise, go raise some venture debt. Brett advised, “Go, put it on the books, but don’t spend it. Have it available and if you never use it, whatever.” He added that the terms and warrants are likely not going to be onerous, but it will give you some extra runway and “the ability to double down on some things before you’re able to raise again.”

3. Be open & transparent with your team

Although you want to raise your next round at an ideal time, not because you have to, the vast majority of companies are up against the clock with pressure to raise when the conditions are not perfect. Even though there is always pressure on the founders and CEO to close the round, be fully open and honest with your team about cash balance, how the process is going, who you’re talking to, and whether the conversations are going well or not. “There should be no surprises,” said Brett, “regardless of whether the outcome is positive or negative.”

“Doing the opposite is detrimental. It is a disservice to your team and the company to hide the stress, the good and the bad.”

Furthermore, this will help you take advantage of the powerful asset of your team. If your team knows the full picture, they can share their advice and help slow the burn rate. But if you don’t tell them you need help, they won’t know how to help the company weather the storm.

Maintaining Investor Relationships

1. Understand your investors’ follow on policies & go back to the well

If your Seed round investors are small, angel investors, or don’t participate in follow ons, then it isn’t expected that they are part of your next round. If your investors are big enough and your company is doing well, then raising your next round is as easy as going back to the well. 

If your investors are expected to follow on but you’re not hitting all the marks, that is a tough place to be in, Brett admitted. In order to survive until the next round, it may be time to explore other options to extend your runway.

2. Start relationships with Series A investors early

Start conversations with potential Series A investors early, not to pitch them right there and then, but to get to know them and build your network. “Many early stage founders and CEOs are scared to speak to Series A investors because they feel they aren’t ready enough. But none of these investors are going to invest if they don’t know you.” Keep talking and keep them in the loop. Get to know them and they’ll get to know you and your business, and it’ll be a no-brainer to invest when the time comes.

Series A Metrics & Milestones

1. Speak with investors in the round and sector

When Notion was raising their Series A round, they knew they had the right traction and partnerships. Their unique market strategy of offering their product through insurance companies set them apart. Now they just needed the funds to pour fuel on the fire. 

How did they know what metrics and KPIs they needed to hit for Series A? “I didn’t sit in my basement and come up with metrics we needed to hit.” This is another opportunity to use your network of Series A investors. Metrics change from place to place, industry to industry. Talk to investors that you might raise from next to understand what they are looking for, given your space.

2. Talk to mentors 2-3 years ahead in your company’s trajectory

Again, this depends on the company and the plan you have for the business. If your plan is to go IPO, speak to other companies that have gone public. If your goal is an exit, speak to mentors with the experience. In his experience as a founder and mentor himself, Brett shared that “the best mentors are those 2-3 years ahead of you, still in the game, people who raised A or B while you were raising Seed,” Brett said. Not only did they just spend time doing what you’re doing, they know the relevant intros and would be able to provide the warmest of intros. 

Brett also leaned on was a group of fellow CEOs during this period. They all raised Seed at a similar time and were going through similar things. They were able to help each other and learn from each other by rehearsing their pitches and sharing their decks with each other to get feedback. Brett said that another valuable lesson was that there isn’t just one path to success, no secret formula of “do this and be successful”. Instead, through talking to peers and mentors, Brett was able to find the right path forward for Notion.

3. Prove you’re capital efficient & show what you need the funds for

Seed is all about potential and team. Series B is mostly about metrics and competition. But “Series A is a weird spot, where you’re trying to show you have traction but that you’ve only just peeled back the first layer of the onion.” You need real numbers to show investors but also need to prove that you haven’t fulfilled your potential. 

Brett found that Series A investors had a wide range of diligence requests and expectations, which left him and his team often feeling both overprepared and underprepared. Some investors were attracted to their story and traction, but others operated more like later-stage investors and wanted data and analysis on topics that Brett didn’t expect to be asked about for several years. Expect to be surprised and try to stay agile. 

Regardless of what diligence requests you get, though, be sure to prove that you’re not just capital efficient, but that you have a plan to spend the funds. “Investors want you to spend their capital, not just sit on it,” Brett said. A slow spend is a negative sign, but you also want to show you will spend responsibly.

Surviving the period between funding rounds, especially between Seed and Series A, is a difficult task for many startups. Use these key strategies to bridge the gap and propel your company forward:

  1. Understand that your next round may take longer than anticipated. Raise extra VC funding and venture debt but save it for a rainy day. Be open & transparent with your team about cash balance & how the raise is going — they may be able to help extend your runway. 
  2. Build relationships with Series A investors early in order to expand your network and understand what metrics and milestones you need to hit for your sector. 
  3. Talk to mentors 2-3 years ahead of you in your company’s trajectory. There isn’t just one path to success, but by sharing with advisors, mentors & peers, you can find the right path forward for your company. 

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