Thread by @dunkhippo33

How to raise a $2m seed?

This advice applies during "normal" conditions but especially now.

(Btw, these are just a few tweets -- for more on fundraising, sign up for my blog elizabethyin.com :) )

1) First off, I'm a big fan of something I call a "tranche strategy". BUT lots of other VCs are not.

You need to do what is best for your company and weigh the pros and cons...

2) Before I dive into what this is, let's take a step back. Fundraising is all about supply and demand.

Supply of your round. Demand from investors.

It's hard to control demand from investors. But you can constrain the supply in your round to get it done.

3) Part of the problem with seed rounds like $2m is that it straddles two groups of investors:

a) smaller investors (usually angels & microfunds) who can move quickly

b) larger investors (lead seed VCs or big Sand Hill VCs) who can put in $750k chunks but it will take longer

4) Ideally you want to use the speed of the first group to make progress on the round and leverage the second group into a term sheet -- that's the strategy.

So you need to take mtgs with both groups of investors

5) The problem is that the first group's money doesn't really make a dent in a $2m round. $100k or $200k doesn't move the needle.

The round is just a bit too big and too pricey on valuation for them.

6) This is where the tranche strategy comes in. Instead of raising $2m, what if you break it up into $500k and $1.5m?

You tell smaller, faster investors you're raising $500k at special terms (SAFE or note).

You start convos w/ larger investors on the $1.5m. Terms are open.

7) Now you have a supply constraint on the $500k w/ better valuations for investors who can move quickly. Those terms are only around until you hit $500k.

That tranche is going to go fast.

8) The other neat thing about the tranche strategy is it helps you test the market for valuation.

If that tranche is HARD to raise, then you have big problems. If no one wants in at your low valuation, then you need to go back to the drawing board.

9) As a side example, my friend was looking at buying some real estate and was asking me for advice. Me who knows nothing about real estate.

I asked her 1 simple q. If the property were free, would you take it?

The answer was no. That's when you know you have a problem.

10) Conversely, if your tranche is easy to raise, then you have a sense of investor demand and what valuation the market thinks makes sense for your co.

You can either raise the cap on your SAFE after you hit that tranche OR you may end up w/ a term sheet from a lead.

11) If the tranche is easy to raise, that adds speed to your round that you can take to your convos with lead investors as leverage.

"Hey, just wanted to update you that we've now raised $500k and are going into final all-partner mtgs w/ 2 firms. Wanted to see where we stand?"

12) If you end up getting a term sheet, you can just roll the notes / SAFEs into the priced round and convert them.

If you don't but you are still making progress w/ angels / microfunds and if the first tranche was easy to raise, you can raise the valuation cap.

13) I often get the q of "how do you justify all these changing effective valuations"?

The reality is between the time of the first check to the last check, in 90% of cases, MONTHS have gone by. Usually at least 3.

14) The time from verbal terms to a finalized legal doc for a priced round in itself is often 1+ mo. Just the LEGAL work.

Yes, there are rounds that close in a wk. But in my career of seeing 30k+ deals, I've NEVER seen that happen w/ someone who wasn't already well connected.

15) Ok, sounds too good to be true - what are the DOWNSIDES of this strategy.

If you try to get too clever w/ too many different valuation caps, the math will get hairy. Mistakes will be made in the conversion. You won't realize how much of your co you've sold.

16) Another downside: some investors don't like the thought of other investors getting better terms for being 2 months earlier.

Guess what - investors should just move faster! :)

2 mo for a startup is a lifetime of progress. The co should be worth more after 2 more mo.

17) But given the tradeoff between spinning your wheels in trying to get those first commits on the $2m vs getting your round done albeit in a scrappy way, I would pick the latter any day as an entrepreneur.

But, that's just me. Afterall, I am from @HustleFundVC.