Ask a Seed VC: When is a startup ‘too early’ for funding?

by Anthony Ha and Claire Rafson

Image: Unsplash/Micheile

Welcome back to Ask a Seed VC, Eniac’s advice column on startup fundraising and investing. Today we’re answering a question from Electra Coustoftides, co-founder and CEO of Xworks:

While boostrapping and investing in ourselves over the last year+, we have also been applying to early stage, angels, VC’s, accelerators etc. who all say they are interested in investing in early stage companies however most of always the feedback returns as “too early for us.” (We also understand this could either literally mean too early or code for we are not interested.) However, our questions are the following:

  • At what point would an early stage company get invested in?
  • What does an early stage company need to do in order to be investable? (that is beyond product market fit/traction)

Let’s approach this from a few different angles. First, as a founder, it’s important to ask yourself whether you really need to raise funding now. If you’re still building your first product, and you’ve got the resources that you need for that phase, then it probably makes sense to hold off.

If you do feel ready to raise, will investors actually write that check? It depends on a number of factors, including the team, the industry, and the product. One way to start getting a sense of the right timing is by looking at your peers and your competition. When did they raise? How far along were they?

You will, of course, find startups (including some in Eniac’s portfolio) that raised money long before they built anything, when the founder had nothing more than a general idea. In those cases, they probably established an impressive track record elsewhere — if you’ve already led one or more companies to a successful exit, investors are going to be lining up to back your next startup.

In other words, we can’t point to a single moment where every startup first raises funding. For some, it’s at inception. Others need to be more mature. You raise money when you need it, and when you can convince investors that there’s a big opportunity your company can solve.

So where does that leave you? The idea that you’re “too early” basically means that investors aren’t willing to back you solely based on the founding team, and that you haven’t built or achieved enough yet to convince them that you’re going to solve a VC-scale business problem.

There’s nothing wrong with that, especially since you’ve been able to bootstrap so far. Most founders get turned down again and again before receiving their first check. Some successful startups waited years — by choice or by necessity — before raising any institutional funding. (And even after you’ve raised a seed round, it can be a long wait until your Series A.)

Still, we’re assuming you wrote in because you’d like to move beyond the “too early” phase. As you’ve guessed, the most straightforward way to do this is to build something that gets enough traction to show product-market fit (a topic that we’ve discussed in more depth in the past). If you’re not there yet, keep working at it — a “no” isn’t a no forever, and investors respect founders who show tenacity and scrappiness, even after they’ve been turned down.

It’s also worth asking for more feedback — not all firms will provide it, but some will. If they’re unimpressed with the product, keep building. If it’s the market size, you can do more research and modeling. If you need more traction, ask if there are specific metrics you should focus on and milestones you could reach that might change their mind.

You should also try to cast an even wider net than you have so far. If pitching institutional VCs isn’t getting you anywhere, focus on angels who write smaller checks, and apply to accelerators beyond marquee names like Y Combinator and Techstars.

And in addition to raising funding, try to network more broadly. Join founder networks and find other entrepreneurs who might be willing to collaborate. Try to recruit strategic advisors who can help you find the right direction for your company and product. Then, when the time is right, they may be able to introduce you to the investor who writes that first check.

Good luck!

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We lead seed rounds in bold founders who use code to create transformational companies.