Interpreting Fundraising Market Statistics

Fundraising startup CEOs only raise money every one to three years. In parallel, they are moving through the stages of growing their company. So it is always a challenge to gather intelligence on the fundraising market conditions.

Venture fundraising is tough, and it often competes with the time and energy actually needed to build the business you are fundraising for. You always want to get good terms from investors, but how are you supposed to know what good terms are?

Fundraising startup CEOs constantly monitor articles in the business press, information from sources like CARTA and Pitchbook, and word-of-mouth sources like investors, other entrepreneurs, and mentors to try to get a feel for what reasonable terms are. However, some fundamental limitations create information asymmetry in the fundraising market, with the balance distinctly skewed against the fundraising entrepreneur and in favor of the investors.

The best relatable analogy I know for the venture fundraising market is the real estate market. Many of us have had the experience of shopping for and buying a house. What you discover through that process is that:

• At different times, a different pool of homes is available for sale. Each is unique and only available until it is sold.
  
  
• Each available house on the market has a unique mix of features and benefits. Available homes are located in different neighborhoods, are of different square footage sizes, have a different number of bedrooms, have different amenities like pools and interior finishes, and so on. No two homes are the same.
  
  
• The level of buyer interest for any given house varies as well. Some houses generate bidding wars while others languish on the market with no interest. The degree of competition changes as the balance shifts between seller supply and buyer demand, which changes the value placed on individual houses.
  
  
• The urgency and motivation of sellers also vary. Some sellers are pressured to sell quickly, and others are simply testing the market, willing to stay in their current home if they do not find a willing buyer at the desired level.
  
  
• Some houses are marketed more effectively by sellers and real estate professionals who know how to stage the home, take attractive pictures, and generate awareness and a sense of scarcity.
  
  
• Some buyers can make more competitive offers because of their available resources and other obligations, such as an existing house to sell, make the difference between a cash offer and a contingent offer.
  
  
• There are comparable homes sold, and those comps inform the market for other homes, including guiding the appraiser’s determination that supports the mortgagor’s decision to grant a mortgage. These forces create soft standards in particular local markets.

At the end of the day, all of these factors, plus a certain amount of luck and timing, will determine the terms on which a willing buyer and a willing seller agree to transfer the ownership of a particular house. There is no website that one can check for a definitive “Buy It Now” price. Only a complex process/negotiation that sorts through the various factors and hopefully brings a buyer and seller to a place of common ground.

Now, think of a startup CEO as the seller of a particular “property” (a.k.a. startup company) to one or more potential investors (buyers) of stock in that company. Like a house, the startup company’s characteristics vary with strengths and weaknesses relative to the others available in the marketplace. The motivation and sense of urgency of the “buyers” will depend on the attractiveness of both the elements of the company, the potential terms of the investment, and whether other more attractive combinations are available.

That said, hopefully, it is clear that the terms at which the sellers and buyers of stock in a particular startup company will depend on the balance of many factors. Because someone else was able to “sell” at a specific “price,” does not mean that you will be able to do the same because, inevitably, there are material differences between the two situations you wish to compare. For example, imagine that, in a particular town, the average house sold for $250,000 last year. Does that mean that if you own a house in that town, you will sell your house for $250,000? Likely not. It is quite possible that in that same town there are houses that sold for $100,000 and houses that sold for $750,000. While it is possible that your house might sell for precisely the average in town, it is more likely that it will sell for less or more or even not at all, depending on the characteristics of the house, the price you put it on the market at, the other available houses, and how motivated you are to sell. 

Similarly, remember that the published trends, bar charts, and averages can only give you limited information. These population statistics will always fail to capture the nuances of the particular individual situation. Remember your statistics class? When you learned that statistics regarding a population tell you nothing about the individual case? A common example used to teach this concept is tossing a coin that has a 50% chance of coming up heads. Does that 50% average statistic tell you anything about whether your next toss will be heads? No, it does not. The next toss will either be heads (100%) or tails (0%). You can actually be sure that the next toss will NOT be 50%.

The fundraising application of this concept is that the published statistics about particular sub-populations in the venture capital market may give you a sense of what the patterns are, however, those statistics will never reflect all the nuances that go into the terms of each individual deal. It is imperative not to fall into the trap of assuming that because some published statistic indicates that a company raising a Series A will give up 20% of their equity, on average, that is what you will be able to raise at. While that benchmark may provide some insight into how the fundraising markets are moving, it will fail to capture the details of each particular raise, such as:

• The lines defining different rounds of funding (e.g., Seed, Series A, Series B, etc.,) are fuzzy, with definitions varying by investor and industry. In fact, what you name a particular round of funding can depend on what you have raised before, what tends to get you in the right “bucket” as you are trying to attract certain investors and other factors that can be somewhat arbitrary. There are no hard and fast rules for what these terms mean, so you sometimes see a Series A-1, Series A-2, Series A-3, then a Series B, and other patterns. Technically, you could call your round whatever you want, although when marketing to potential investors, there will be pressure to use more standard terminology.
  
  
• It matters how much a company has raised before, how far along they are in development, how much risk remains in its product development, how much revenue it has been able to generate, the quality of the revenue that has been generated, the experience and reputation of the CEO, the strength of the team, and so many other factors. A company’s relative momentum can often create excitement amongst investors that generates demand in the form of competing term sheets.

As a fundraising startup CEO, you sound foolish if you start quoting general statistics about the fundraising market to potential investors, as if those statistics somehow precisely determine what term sheet you can earn from knowledgeable investors. Trust me, it is a cringeworthy moment when you see a first-time founder make this mistake. Remember the real estate analogy so you never forget that while you want to get the best possible offer for the “house” you are selling, there are many other sellers out there trying to attract the same “buyers” (investors). Rather than population statistics, you should try to make your startup’s characteristics as attractive as possible, generating as much interest and momentum from potential investors based on those characteristics as you can. That is how you will get the best deal.