I’ve written a lot about the fundraising process. Of late (however), I have begun advising founders to pull the plug on their fundraise.
It is an emotionally sensitive topic for founders. It requires you to acknowledge the failure of a mission that you have put your heart & soul into, and an endeavor that would have undoubtedly solved 98% of your problems (yes, I am exaggerating for creative effect).
However, as the allocator of limited resources, you, as the founder, must know where to deploy the focus and attention of your time and that of your team. There is a romanticism in continuing to dig because you are maybe so close to finding that gold only if you continue the search. However, you should not create yourself a hole so deep that you would require the power of the Dark Knight to climb your way out of the mess – regardless of the result of your quest.
There are several reasons why your fundraising efforts aren’t delivering results. You may need to improve your social capital or find a narrative that resonates with investors or have better preparation for due diligence. However, the primary reason for a failed expedition to fundraise is (drum rolls): high valuation.
It is highly improbable that your startup will not find an investor at the right valuation. Let’s not forget that even at the height of the 2008 global financial crisis or the 2020 meltdown due to COVID – events that seemed like the end of the world – investors were willing to buy when everyone else was hell-bent on pummeling stocks down to ZERO!
Therefore, in my experience, the primary failure of a fundraising effort is a valuation mismatch that is too big for an investor to digest. You should (at most times) recover from the entanglement of extremely high valuations through astute selling and negotiation techniques. However, at times, the trauma of an outrageous valuation sticks onto you and prevails over everything else your startup is doing well.
Therefore, if a valuation mismatch is a consistent feedback that you receive, then it is best to stop your fundraising for a short period. 6 months at a bare minimum but ideally 9 months so that investors you have pitched to - forget about you!
The strategy is to allow the investors that you have met to get a mental reset on your startup and (most importantly) the valuation you had quoted. I borrow this concept directly from Dan Ariely’s Irrationally Predictable, wherein he discusses his experiments on the stickiness of a first impression with consumers, and further experiments on the results of resetting that first impression. I will share more about my learnings from this book in my review over this weekend.
Once you have regained the aura of “freshness” with an investor without the past baggage, you start digging again – with a new spade in a fresh ditch!