Thread by @dunkhippo33

Today's tweet storm is about tranching your fundraise -- esp at pre-seed and seed to get momentum on your raise.

It's a topic I've lightly touched upon before but here are the tactics and reasons to do this.

Read on >>

1) First, the concept of a fundraising "round" is basically dead at the early stages (pre-seed / seed / post-seed). Most of the rounds I'm seeing get done are on SAFEs or notes. Even from well-known larger firms.

2) This is great for entrepreneurs because it means that you don't need a lead to raise money. You can just agree on a cap / discount / and amount with any investor and can sign and wire with no legal costs.

Just download the SAFE on the YC website and mutually sign.

3) It also means you can sign and wire whenever you want. You can get some ppl in now. And then some ppl in later. Or you can just take one check now. And then raise more later. Or you can continuously raise. Or raise all now.

This flexibility compared to equity is gold.

4) And, you can also decide on a valuation cap that is different for each investor. No longer does everyone have to be in the same round w the same terms.

And this makes sense. Your investors should all be different in their "value adds" so shouldn't they get diff terms?

5) Lastly, because of this, SAFEs and notes give entrepreneurs more leverage in creating FOMO.

It allows you to create more urgency to make investors decide faster.

6) Ok, so now that we've established the logic behind this, how can you do this?

Let's say you're raising $1m. If you go to investors and say you're raising $1m, most of them are not going to commit now. Why? Because it's better for them to wait.

7) It's better for them to wait until other ppl commit, and since you're very far from raising the full $1m, they know they have time to twiddle their thumbs.

This is not a good situation for an entrepreneur -- I've been there!

8) Unfort this is a chicken and egg situation -- ppl won't commit until there are other committed investors. But there won't be other investors until ppl commit!

Enter the tranche strategy.

9) One way to solve this is to break up your $1m raise into smaller pieces. Say you break it up into $300k and $700k.

You go to the market and still tell everyone you're raising $1m. But for those who can move fast, you're doing $300k at special terms.

10) Offer a lower cap on a SAFE for the $300k, and tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs.

And that the cap will most likely go up after that.

11) This allows investors who commit early to be rewarded for being early. It also allows you to get momentum on your raise.

And most importantly, it allows you to test the pricing of the cap.

12) If you have a TON of demand on that special first tranche, the cap is too low. If you have no demand, then the cap is too high OR no one is interested.

If no one is interested at these special terms, then you have a bigger problem & should probably pause fundraising.

13) Often it's hard to know if your cap is too low or too high (assuming investors are interested), so by testing with a small tranche, you're not giving up much if you price too low & that momentum is valuable to you.

14) Moreover, once you've got some money in the door, you need subsequent cash even less. So you can afford to ask for a higher cap on that later money. It's less critical than the first tranche.

15) As you're getting close to filling the first tranche, that is the time to go to all investors you're in touch with and keep them abreast of the situation.

"Hey - just wanted to let you know we now have $100k left of our first tranche. After that, the cap is likely going up"

16) Once you fill the first tranche at those special terms, you can assess whether it was easy or hard to raise. If it was hard, you might not want to increase the cap. You may even want to consider postponing the rest of the raise depending on your learnings.

17) This strategy works with big and small investors. If you are approaching large lead investors, you still tell them "Hey I'm raising $1m round". I'm starting to bring in smaller checks on a party-round SAFE, but we are raising a large round that fits your sweet spot.

18) If a big check wants to come in, they will offer you an equity deal, and you can roll all your SAFEs into the round at that time. This is how to reconcile a lead investors into this process.

Also in my exp, leads often get more conviction if a party round is going well ;)

19) If no lead investor wants to come in, then you can party-round your way to success with this tranche strategy. There is NO REASON to hold up your round waiting for a lead.

I advise all our portfolio founders @HustleFundVC to talk with lots of investors - big and small.

20) Ultimately, what gets fundraises done is momentum. Through this tranche strategy, you are creating urgency so that investors will prioritize a decision on YOUR COMPANY over all others.