Charles Hudson has spent more than a decade investing in early-stage startups. As Founder and Managing Partner of Precursor Ventures, he has invested in hundreds of companies and witnessed massive changes in the market that required founders to get creative and retire old funding strategies. On this week's episode of Build Mode, Startup Battlefield leader Isabelle Johannessen talks with Hudson about the headwinds facing early-stage founders today and the most common mistakes founders should avoid when trying to raise capital.
Optimize higher valuations than careful planning
A high valuation doesn't make sense for every company. While it has the potential to attract media attention and legitimize the company to other investors, founders need to be realistic about the expectations they are setting for the company at their valuation and, most importantly, think about who they choose to put on their capital sheet. Is it worth spending a big check for the next 10 years working with an investor you are not compatible with?
“The real risk with these big rounds is that you end up being a prisoner of your own company. You've raised all this money and you've sold people a big vision. They don't want their money back. They want you to find a way to build something worthy of what they've given you,” Hudson said.
Perform your own due diligence on prospective investors
Speak with the portfolio founder to see what kind of value-add investors can offer. Review claims about recruitment, GTM support, and connections to other platform teams. Remember, the VC is courting you just as much as you are courting the VC.
If you want to learn more about valuations and investor selection, be sure to subscribe to Build Mode. Next week, Elorian co-founder and CEO Andrew Dye will appear to talk about the massive $30 million valuation the company received before raising pre-seed.
Find out if venture capital is right for your business
A great business isn't necessarily a venture-sized business. Venture capital only works if you are building a company that can recover your money.
“I've been having more success lately with telling people, 'This is what venture capitalists want from you. Let's abstract from your company. This is the kind of business you have to want to build. Is that what you want?'” Hudson said.
Understand the realities of fundraising today
Venture capital has changed dramatically in recent years. Investors aren't just evaluating your company relative to last year's startups. They also compare you to the fastest growing AI companies in history. Even startups that are seeing incredible growth in other markets aren't keeping up.
“They're doubling, tripling, quadrupling, and the message we're hearing from the market is that's good but not great,” Hudson said.
A new season of Build Mode has begun. Every week, we talk to investors who back some of the hottest startups in the game, founders who built their companies from scratch, and people who successfully exited their companies.
We are working on bootstrapping and crowdfunding. We analyze term sheets and provide practical proposal advice.
Subscribe to Build Mode on Apple Podcasts, Spotify, or wherever you like. Watch the full video on YouTube. New episodes of Build Mode drop every Thursday.
If you buy through links in our articles, we may earn a small commission. This does not affect editorial independence.