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Relying on the Dream, Data, or something in between
Jason Yeh is an ex-VC & the founder of Adamant, a group focused on making fundraising easier. Founders ❤️ binging his Fundraising Fieldnotes newsletter and podcast Funded before raising capital. Find Jason on Twitter: @jayyeh.
A common startup dilemma is “Should I raise before or after I launch?
Here’s the scenario:
Founder follows good advice and works on validating a market opportunity while also building an MVP. Along the way, she builds her network meeting investors and others in the ecosystem intrigued by her work.
4 months of bootstrapping has been hard but with another 2 months, she’ll be able to release her product!
The plan has always been to raise money and with her efforts to network, there actually seems to be a few investors who would be interested. Should she start fundraising now before she launches her product or wait a few months until her product is in the wild and she has even more data to share?
What should she do? Raise before or after launch?
The standard VC advisor will respond with some variation of “well, you can either raise on the dream or raise on data.” Next to the gentle encouragement to raise pre-launch since “you can only raise on the dream once,” this advice has the typical, non-committal tone that accompanies a lot of VC advice. This is for good reason. Because as with so many scenarios…
… it depends.
Let’s jump into why.
The Dream
The Dream refers to how you sell the opportunity. In a pre-launch pitch, a founder can point to all the amazing things that will happen post-launch and beyond. It is this amazing future that she and the investor can dream about together. The only proof they need to offer (and can offer) is the playbook they intend to run, the prototype, and their passion. That combined with a good process that builds pressure to commit (i.e. if you don’t act now, the startup will take off after launch and you’ll lose your chance to get in at such a low valuation) can drive a Dream-based fundraise to close.
The Data
After launch, all those promises you made before should be answered by the data.
- Before: “Customers have been looking for a solution!” After: “So customers have been demanding this product? Well what’s your CAC, Sales Cycle, weekly growth?”
- Before: “Our product is best in class” After: “What’s engagement look like and 15, 30 day retention?”
In your post-launch pitch, you better have a great story that fits with the available data. You can’t hide behind your charisma and future dreams anymore!
… or can you?
It all depends… the space everywhere all at once and in between
First off… what a good movie huh?
Anyway, this is the kind of “it depends” portion of the story. The answer is not as black and white as pre-launch = dream, post-launch = data. There are tangible components to a pre-launch fundraise and dream-like stories that should push a post-launch raise. Everything goes everywhere (all at once)… it’s not so black and white.
Pre-Launch Nuance
In many cases, fundraising pre-launch is better. It’s true there is an advantage of being able to sell a dream instead of needing to provide real results. Assuming your launch will go great (big assumption), you might sacrifice some valuation / dilution by raising earlier but doing so derisks the next 18 months of the business (in other words..derisks the possibility of launch not going so great).
So raising on the dream is great, but not every business can raise on a dream! In the example that I led with, I mentioned the founder spent time networking and building heat around her company. There needs to be intrigue around you and the company and some momentum to get a deal done. Not every dream gets money just for being a dream.
- Some common elements of a pre-launch pitch:
- Evidence of market validation
- Team excellence & team building
- Rapid product iterations
- Wild / differentiated vision
- Overall excitement + reputation
Post-Launch Nuance
And post-launch? If you launch and don’t have hockey stick growth, are you DOA?
[Note: DOA is not Decentralized Organization that is Autonomous 😂…it’s “dead on arrival”]
No. Most companies don’t hockey stick right after launch. With good consistent growth though, your numbers will paint a believable picture of a future opportunity.
But a “believable picture” isn’t the exciting opportunity that venture capitalists invest in. So how does anyone raise post-launch? That’s where the story comes in.
Taking a plain vanilla set of consistent but boring data and sprinkling an exciting dash of “but this is all leading us to a new inflection point!” gives you that awesome ice cream sundae of an opportunity that VCs will get excited about.
Even a less than spectacular launch with limited data can be dressed up by a story. “We opened the product up to limited release to get customer insights… and learned so much! Here’s what we do next!”
Some common elements of a post-launch pitch:
- Exciting product launch
- Rapid Iteration with customer feedback
- Customer testimonials
- Growth data
- Engagement data
- Ways to accelerate with capital
- Obvious opportunity to grow with capital
So when should you raise?
The answer is you need to identify how much excitement there is for your deal and how compelling your story is relative to how much runway you have left to improve the story. Your decision should always be about what is right for your business and situation. Don’t let sound bite advice dictate your strategy.
This story was originally published on Adamant
Comments (10)
Dabo Chen@chendabo
Fabrie
Pre-launch is not only raising with dream, it is the same as post launch, that you will need a good story. For founders who don't have a track record, a clear path forward with some validations of your product could also work. (interviews, demos etc)
Share
Great article but in my experience raising on the dream alone is very very difficult without a proven track record
Outdone
Super insightful post @jayyeh
I think another big factor at play is how capital intensive it would be to build a solid (read: good enough) product. Companies like, say, Rivian couldn't really afford to raise post launch.
On the flip side, relatively lost cost consumer web apps can probably build a fairly solid product to launch without have to raise a legitimate round.
My startup, Outdone, certainly falls into that second camp. But even though I'm happy with our decision to launch a fairly robust first product before raising, I gotta say its very nerve-racking watching those early metrics come in — so hard to know if it will be good enough to convince investors!
WunderGraph
It's always easier if you have numbers to support your case. But in terms of "venture" capital, this is really playing it safe. There are VCs who are willing to invest in potential (true venture capital) before everyone else does and thus generate an exceptional return - if the company takes off. These usually are the ones that understand your product and why you're building it vs. VCs who just crunch the numbers without true understanding of how the product works. They usually will invest only if it's clear that it's a relatively safe bet (emphasis on relatively ;), and by then you'll have a couple of VCs to choose from. However, it's pretty late in the game and many founders don't make it through the bootstrapping phase to this point.
Good read
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