Entertaining offers from VCs to preempt your next round is almost always a waste of time and sometimes dangerous. On three separate occasions at GroupMe and Fundera, I let excellent VCs that were interested in our company conduct diligence when we weren't actively fundraising. In every single instance we spent months getting excited that a top tier VC was going to make our lives easy by preempting our next round with a term sheet. And in every single instance they passed.
A preemptive financing is an extraordinarily compelling proposition for entrepreneurs: skip the formal and painstaking fundraising process and replace it with a painless gift from someone you like at a VC firm you admire. In the recent bull market when money was recklessly thrown around preemptive rounds happened aplenty. Capital allocators were incentivized to deploy their wares as quickly as possible and were increasingly diligence and valuation insensitive. That epoch is dead and now we are living in reality again, which means that it’s important for entrepreneurs to understand the motivations of a VC.
When a VC says they want to preempt your round, they are being savvy and doing their job. They are attempting to get a first look at your company and avoid competing to invest in a way that appeals to your sensibilities. It does not mean they are committed to investing. It simply means they will evaluate the company outside of your designated fundraising plan and then make an investment decision.
Frequently a lot of these processes kick off because an existing investor introduces you to one of their friends they say is a good VC and would be helpful for your company. It gets you excited because there’s social proof, you trust your existing investor, and you begin to hallucinate that there’s an easy fundraising path forward. There’s seldom an easy path.
Entrepreneurs need to be mindful of and for the most part avoid the “I want to preempt your next round!” trap for several reasons:
When you talk to one venture firm, even if you think you’re embarking on some clandestine operation, the clock starts on your fundraise whether you like it or not. Word gets around - VCs talk. They go to dinners and banter and gossip through a variety of channels. Some will say they passed even if they never got a look in the first place. Some will say the passed after issuing a term sheet you rejected. You don’t want to be tainted goods, and if there’s a cycle of “we passed” stories out there it makes any subsequent fundraise all the more difficult.
Fundraising mainly sucks for most entrepreneurs. It’s emotionally draining and almost always takes longer than you want. Engaging in a preemptive process has a real opportunity cost when it comes to focusing and executing on what matters most.
The preempting investor has no incentive to move fast, especially in this market. If they think they’re getting an exclusive look at your company, most of the time they’ll take their sweet ass time.
They will likely say No and that you should keep them updated on your progress. It will take weeks at a minimum, but likely months to get to this point. It’s the same probable ending that would happen during a more rigorous and standard go to market process.
Competition is important. Unfortunately (and fortunately for some I suppose), a lot of VCs have a herd mentality and nothing speeds up a process and gets to Yes like competition and FOMO. A preemptive process strips you of control of the narrative and dynamics of a proper fundraise.
I’ve been burned by entertaining preemptive rounds on multiple occasions. It’s like touching the hot stove repeatedly.
There are some compelling reasons to entertain the preemptive round on occasion. You get to learn why people you like and respect will say No. This is a gift when you decide to run a real process so you can get ahead of the curve. Letting an inside investor (someone who is already on your cap table) that you like and already knows the status of the business is a great reason to consider it. Especially if the Partner is someone you deeply trust. This is the ideal scenario - it saves you time and you know you’re not working with a wildcard. Same could be said for a new investor that you have a long-standing, deep, and trusting relationship with. If these things are true, then it's worth considering. Otherwise, in this market, be wary of someone trying to preempt your round.
Carrie (my wife) and I just finished binging season two of The Bear. The show is spectacular. It provides a unique and intense glimpse into the world of high-end hospitality. One of the really beautiful things it highlighted through the season was how much fellow chefs help each other. Different members of The Bear would shadow their counterparts at other restaurants and were greeted with open arms.
After we watched it Carrie asked me if I thought that chefs were actually that kind and supportive of one another in real life. I don’t know the answer, but I’m inclined to believe yes because I’ve seen similar dynamics amongst founders in the world of company building. Building things as an entrepreneur, regardless of your industry, is hard and lonely. What has continuously surprised me is how willing other founders and operators are to share their learnings and insights.
When we started Fundera I had this obsession with wanting to be able to visualize the mechanics of our business in a spreadsheet. I needed to know all of our levers and how every aspect of the funnel was performing across every relevant dimension. I didn’t know how to do this so I asked First Round if they had any suggestions. They connected me with Matt Salzberg who they said had this practice down to a science at Blue Apron. Similar to the chefs in The Bear, Matt welcomed me kindly. He hid nothing about how he managed and measured the progress of Blue Apron, and walked me through his daily/weekly dashboards line by line. He had a company to run but paid it forward and helped me learn - something that provided no immediate benefit to him or his business.
There are several different archetypes of tech entrepreneurs. I've noticed some of these traits in myself and many other people who have built companies. I have opinions about which archetypes have a higher likelihood of achieving success, but all of them seem to work. There are also a lot of entrepreneurs who have characteristics of multiple of these archetypes and live at their various intersections. I've attempted to group them into five categories (but I'm sure there are plenty more): the serial inventor, the opportunist, the problem obsessor, the industry expert, and the academic.
The Serial Inventor is clinically addicted to building things. For some ADD can be a hindrance. For the serial inventor it’s a superpower. This entrepreneur believes that everything they encounter in the world can be done better. This drives them absolutely insane to the point where they need to constantly be hacking away at these problems. There is no off button for their capacity to generate ideas and actualize them. This person is usually inspiring to be around. You may use the word Genius to describe them, and their ability to go broad is remarkable.
The Opportunist is someone who sees a hole in a market and goes for it. I've seen a lot of Associates at VC firms fit into this category. This is a person who evaluates and maps markets, knows all about TAM, studies industry trends, and when the timing is right and they develop the guts, they pounce. The Samwer Brothers from Rocket Internet are a quintessential example of this, studying companies that work in the US and bringing them to Europe. Non-industry specific venture studios also can be grouped into the archetype.
Entertaining offers from VCs to preempt your next round is almost always a waste of time and sometimes dangerous. On three separate occasions at GroupMe and Fundera, I let excellent VCs that were interested in our company conduct diligence when we weren't actively fundraising. In every single instance we spent months getting excited that a top tier VC was going to make our lives easy by preempting our next round with a term sheet. And in every single instance they passed.
A preemptive financing is an extraordinarily compelling proposition for entrepreneurs: skip the formal and painstaking fundraising process and replace it with a painless gift from someone you like at a VC firm you admire. In the recent bull market when money was recklessly thrown around preemptive rounds happened aplenty. Capital allocators were incentivized to deploy their wares as quickly as possible and were increasingly diligence and valuation insensitive. That epoch is dead and now we are living in reality again, which means that it’s important for entrepreneurs to understand the motivations of a VC.
When a VC says they want to preempt your round, they are being savvy and doing their job. They are attempting to get a first look at your company and avoid competing to invest in a way that appeals to your sensibilities. It does not mean they are committed to investing. It simply means they will evaluate the company outside of your designated fundraising plan and then make an investment decision.
Frequently a lot of these processes kick off because an existing investor introduces you to one of their friends they say is a good VC and would be helpful for your company. It gets you excited because there’s social proof, you trust your existing investor, and you begin to hallucinate that there’s an easy fundraising path forward. There’s seldom an easy path.
Entrepreneurs need to be mindful of and for the most part avoid the “I want to preempt your next round!” trap for several reasons:
When you talk to one venture firm, even if you think you’re embarking on some clandestine operation, the clock starts on your fundraise whether you like it or not. Word gets around - VCs talk. They go to dinners and banter and gossip through a variety of channels. Some will say they passed even if they never got a look in the first place. Some will say the passed after issuing a term sheet you rejected. You don’t want to be tainted goods, and if there’s a cycle of “we passed” stories out there it makes any subsequent fundraise all the more difficult.
Fundraising mainly sucks for most entrepreneurs. It’s emotionally draining and almost always takes longer than you want. Engaging in a preemptive process has a real opportunity cost when it comes to focusing and executing on what matters most.
The preempting investor has no incentive to move fast, especially in this market. If they think they’re getting an exclusive look at your company, most of the time they’ll take their sweet ass time.
They will likely say No and that you should keep them updated on your progress. It will take weeks at a minimum, but likely months to get to this point. It’s the same probable ending that would happen during a more rigorous and standard go to market process.
Competition is important. Unfortunately (and fortunately for some I suppose), a lot of VCs have a herd mentality and nothing speeds up a process and gets to Yes like competition and FOMO. A preemptive process strips you of control of the narrative and dynamics of a proper fundraise.
I’ve been burned by entertaining preemptive rounds on multiple occasions. It’s like touching the hot stove repeatedly.
There are some compelling reasons to entertain the preemptive round on occasion. You get to learn why people you like and respect will say No. This is a gift when you decide to run a real process so you can get ahead of the curve. Letting an inside investor (someone who is already on your cap table) that you like and already knows the status of the business is a great reason to consider it. Especially if the Partner is someone you deeply trust. This is the ideal scenario - it saves you time and you know you’re not working with a wildcard. Same could be said for a new investor that you have a long-standing, deep, and trusting relationship with. If these things are true, then it's worth considering. Otherwise, in this market, be wary of someone trying to preempt your round.
Carrie (my wife) and I just finished binging season two of The Bear. The show is spectacular. It provides a unique and intense glimpse into the world of high-end hospitality. One of the really beautiful things it highlighted through the season was how much fellow chefs help each other. Different members of The Bear would shadow their counterparts at other restaurants and were greeted with open arms.
After we watched it Carrie asked me if I thought that chefs were actually that kind and supportive of one another in real life. I don’t know the answer, but I’m inclined to believe yes because I’ve seen similar dynamics amongst founders in the world of company building. Building things as an entrepreneur, regardless of your industry, is hard and lonely. What has continuously surprised me is how willing other founders and operators are to share their learnings and insights.
When we started Fundera I had this obsession with wanting to be able to visualize the mechanics of our business in a spreadsheet. I needed to know all of our levers and how every aspect of the funnel was performing across every relevant dimension. I didn’t know how to do this so I asked First Round if they had any suggestions. They connected me with Matt Salzberg who they said had this practice down to a science at Blue Apron. Similar to the chefs in The Bear, Matt welcomed me kindly. He hid nothing about how he managed and measured the progress of Blue Apron, and walked me through his daily/weekly dashboards line by line. He had a company to run but paid it forward and helped me learn - something that provided no immediate benefit to him or his business.
There are several different archetypes of tech entrepreneurs. I've noticed some of these traits in myself and many other people who have built companies. I have opinions about which archetypes have a higher likelihood of achieving success, but all of them seem to work. There are also a lot of entrepreneurs who have characteristics of multiple of these archetypes and live at their various intersections. I've attempted to group them into five categories (but I'm sure there are plenty more): the serial inventor, the opportunist, the problem obsessor, the industry expert, and the academic.
The Serial Inventor is clinically addicted to building things. For some ADD can be a hindrance. For the serial inventor it’s a superpower. This entrepreneur believes that everything they encounter in the world can be done better. This drives them absolutely insane to the point where they need to constantly be hacking away at these problems. There is no off button for their capacity to generate ideas and actualize them. This person is usually inspiring to be around. You may use the word Genius to describe them, and their ability to go broad is remarkable.
The Opportunist is someone who sees a hole in a market and goes for it. I've seen a lot of Associates at VC firms fit into this category. This is a person who evaluates and maps markets, knows all about TAM, studies industry trends, and when the timing is right and they develop the guts, they pounce. The Samwer Brothers from Rocket Internet are a quintessential example of this, studying companies that work in the US and bringing them to Europe. Non-industry specific venture studios also can be grouped into the archetype.
Ride It to the Sky
Ride It to the Sky
This type of support is commonplace. You just need to ask for it and occasionally know where to look for it. Another place it can be found is in CEO support groups. There are many different iterations of this, YPO being a common one. I did Venwise and met monthly with a group of fellow CEOs navigating similar problems to me. Everyone was open and honest. Nobody was peacocking. I’ve also participated in CEO Summits where the “I’m crushing it” veneers come down and everyone is vulnerable - both seeking and imparting wisdom.
Ecosystem support is a great enabler and accelerant for progress. Older generations help newer ones with wisdom and capital, and new generations inspire the older ones, pushing the boundaries of what’s imaginable with charmingly naive gusto. The Bear does an exceptional job capturing this phenomenon in hospitality and I loved it because it distinctly reminded me of what we have in the best of tech. It’s one of the things that motivates me to do and be better.
I don't use the word "Opportunist" pejoratively
- entrepreneurship is all about seeing opportunity and chasing it.
The Problem Obsessor is the entrepreneur that is absolutely obsessed with a singular problem. Sometimes it's hyper-specific like "why can't we do reply all over SMS?" and other times it might be super broad like "too many people die of heart disease." A lot of times this person is a generalist. They experience a problem firsthand and then they become fervently passionate about solving it. Sometimes they only want to solve it for themselves but their solution catches fire. I love this approach because it scratches a very personal itch.
The Industry Expert is the entrepreneur who has a very unique insight into how something should work in a relatively niche environment, but believes that insight/solution may be more broadly applicable with big-business viability. These are the people who may have been working in a corner of information security or specialized databases for many years and believe they can invent something novel and important in that space. We see this a lot in enterprise, but it can be applicable anywhere. They're steeped in an industry, have a competitive advantage in the knowledge and network they've accumulated, and they're ready to leave their mark.
The Academic is the entrepreneur who finally decides that their research, scientific knowledge or invention is ready for commercialization and they're the one to do it. Sometimes it happens by accident. Sometimes a business person (maybe an Opportunist?) gives them the nudge. Sometimes they're just ready to rock. They're super technical and have world-class depth in an area, and translate that knowledge into something groundbreaking.
I've been a couple of these. GroupMe was a very personal problem. We wanted to build reply-all SMS for our friends so we could stay in touch before, during and after music festivals. Then we realized we were building a close-ties network and just built features that made our experiences with our groups more fun. If I am being honest with myself Fundera was more of an Opportunist approach. I was inspired by companies like Lending Club and Funding Circle in 2013 and innovations in lending, and believed there was a unique moment-in-time opportunity to create a dominant platform in the US for SMB lending. I tried to convince myself that it was all about "empowering entrepreneurs." A piece of it definitely was. But truthfully I mainly just wanted to build a great business. It's taken me a while to admit this to myself and be totally comfortable with it.
One of the things I've been grappling with is an entrepreneur's "interest longevity." Regardless of archetype, interest in a product / business / idea / industry likely doesn't last forever. I don't think I could have done GroupMe for a decade and still been as passionate about the problem, and my enthusiasm for the world of SMB lending meaningfully waned towards the end of my Fundera journey. If you talk to any Problem Obsessor, Opportunist or Generalist who has built a company, they will almost always declaratively say they'll never build another company in that industry again. I do wonder if one archetype is inherently more obsessive for longer durations, and I have immense respect for and bewilderment of entrepreneurs who remain passionate about their singular company or space for decades. It's a superpower that I'm glad I don't have. Mixing it up is fun for me.
Another observation is that it's really neat when entrepreneurs from different archetypes partner with one another to start companies, and when executives who resemble these archetypes join companies. The differences in respective characteristics and motivations feed off each other for the better and ultimately create a winning environment for success. Different archetypes bring different energy and raison d'etre to the table, and that makes everything more fun.
This type of support is commonplace. You just need to ask for it and occasionally know where to look for it. Another place it can be found is in CEO support groups. There are many different iterations of this, YPO being a common one. I did Venwise and met monthly with a group of fellow CEOs navigating similar problems to me. Everyone was open and honest. Nobody was peacocking. I’ve also participated in CEO Summits where the “I’m crushing it” veneers come down and everyone is vulnerable - both seeking and imparting wisdom.
Ecosystem support is a great enabler and accelerant for progress. Older generations help newer ones with wisdom and capital, and new generations inspire the older ones, pushing the boundaries of what’s imaginable with charmingly naive gusto. The Bear does an exceptional job capturing this phenomenon in hospitality and I loved it because it distinctly reminded me of what we have in the best of tech. It’s one of the things that motivates me to do and be better.
I don't use the word "Opportunist" pejoratively
- entrepreneurship is all about seeing opportunity and chasing it.
The Problem Obsessor is the entrepreneur that is absolutely obsessed with a singular problem. Sometimes it's hyper-specific like "why can't we do reply all over SMS?" and other times it might be super broad like "too many people die of heart disease." A lot of times this person is a generalist. They experience a problem firsthand and then they become fervently passionate about solving it. Sometimes they only want to solve it for themselves but their solution catches fire. I love this approach because it scratches a very personal itch.
The Industry Expert is the entrepreneur who has a very unique insight into how something should work in a relatively niche environment, but believes that insight/solution may be more broadly applicable with big-business viability. These are the people who may have been working in a corner of information security or specialized databases for many years and believe they can invent something novel and important in that space. We see this a lot in enterprise, but it can be applicable anywhere. They're steeped in an industry, have a competitive advantage in the knowledge and network they've accumulated, and they're ready to leave their mark.
The Academic is the entrepreneur who finally decides that their research, scientific knowledge or invention is ready for commercialization and they're the one to do it. Sometimes it happens by accident. Sometimes a business person (maybe an Opportunist?) gives them the nudge. Sometimes they're just ready to rock. They're super technical and have world-class depth in an area, and translate that knowledge into something groundbreaking.
I've been a couple of these. GroupMe was a very personal problem. We wanted to build reply-all SMS for our friends so we could stay in touch before, during and after music festivals. Then we realized we were building a close-ties network and just built features that made our experiences with our groups more fun. If I am being honest with myself Fundera was more of an Opportunist approach. I was inspired by companies like Lending Club and Funding Circle in 2013 and innovations in lending, and believed there was a unique moment-in-time opportunity to create a dominant platform in the US for SMB lending. I tried to convince myself that it was all about "empowering entrepreneurs." A piece of it definitely was. But truthfully I mainly just wanted to build a great business. It's taken me a while to admit this to myself and be totally comfortable with it.
One of the things I've been grappling with is an entrepreneur's "interest longevity." Regardless of archetype, interest in a product / business / idea / industry likely doesn't last forever. I don't think I could have done GroupMe for a decade and still been as passionate about the problem, and my enthusiasm for the world of SMB lending meaningfully waned towards the end of my Fundera journey. If you talk to any Problem Obsessor, Opportunist or Generalist who has built a company, they will almost always declaratively say they'll never build another company in that industry again. I do wonder if one archetype is inherently more obsessive for longer durations, and I have immense respect for and bewilderment of entrepreneurs who remain passionate about their singular company or space for decades. It's a superpower that I'm glad I don't have. Mixing it up is fun for me.
Another observation is that it's really neat when entrepreneurs from different archetypes partner with one another to start companies, and when executives who resemble these archetypes join companies. The differences in respective characteristics and motivations feed off each other for the better and ultimately create a winning environment for success. Different archetypes bring different energy and raison d'etre to the table, and that makes everything more fun.
