How to lose your round in one call

A round that does not close costs you the year you spent on it.

Between September and December last year we had a call or two with thirty-odd teams and went no further. This month we went back through all of them, the socials, the product, the site, and where it was not obvious we asked the founders. Nothing closed. A few are still operating. The rest are wound down or have been quiet since.

Thirty is a small sample and we have no control group. Pre-seed rounds close unannounced all the time, and we were one of the people who said no. Several of those teams were as good as companies that closed rounds the same month.

Three of the four reasons below were in what the founder said on the first call, about the money, the numbers, and how big the business could get. The fourth is taste and it was the most common.

What losing it costs

The runway went on the raise. At this stage there are no spare hours, so the product stood still for those months as well. The person who stayed another year on the promise of the round is now looking for work. So is the hire made against it. The angels who wrote the first cheque hold paper in a company that stopped. They will be asked about you next time you raise. Then the months it takes to admit the round is dead and cut, or wind down.

It is close to a year since those calls. Most of the thirty companies did not get through it.

You lose it on runway

DocSend's pre-seed report is the one we found that timed raises that failed. In their panel a raise that failed ran five months on average before the team stopped pitching. Close to a third of the raises that closed took thirteen to eighteen weeks. Teams came to us with four months of money. Four months is seventeen weeks. That runs out a month before the average failed raise stops, and it is the top end of what a third of the closed raises took.

Do the subtraction before the deck:

Months of money left, minus months to a wire you can put a date on. No date you can defend, use five, the average length of a raise that fails.

Zero or below means you run out before the wire. Fix the money first. Cut costs, take the smaller cheque that buys five months, or bridge from the cap table, and bridge only to a milestone that changes the round.

You lose it on a number

Between the first call and the second we check what we were told. Once or twice that quarter a number from the first call did not survive the check. By the second call it was the reason we were not going further, and a fund running the same check a month later would have stopped at the same place.

Run the check on your own deck before the first call, on every number a fund can look up: users, revenue, the size of the last round, who is on the cap table. If a wrong one is already out there, correct it yourself, the same day, with the right number attached.

You lose it on the ceiling

Some of the thirty had users and a product that worked and a ceiling the business was unlikely to get past.

A venture fund has to return the whole fund on one or two companies in the portfolio, so every company it backs has to have a shot at being that one. At a ten percent stake held to exit, a $200m exit gives a $20m fund its money back. A $200m fund needs $2bn for the same, before dilution and before it has made anything. A business with a visible roof cannot be that company at a large fund however the pitch is written. That business is a fine deal at a small fund, an angel, a family office, or a strategic. A small fund is returned by a small exit, and the other three do not need a fund returned at all.

Work out the exit you can defend, then the fund size that exit returns, and build the list from that: funds of that size, angels, family offices.

You lose it on taste

The most common reason we did not go further was that somebody on our side looked at the product and did not believe it. A no on taste gives the founder nothing to work on. Somebody else can look at that product and want it.

A fund's version is the team, and ours is narrower, whether this product can get traction in six months. Both are taste. In the largest survey of venture investors we know of, 885 respondents, nearly half named the team as the single most important factor, and early-stage investors did so more often.

The part we get wrong, and the base rate

Sometimes we cannot yet tell whether a round is fundable and we say no anyway, because a slow maybe spends your time for you. That no is made by people who also have a view on what they want to spend the next six months on. Whether it is fundable and whether we want to work on it are hard to keep apart. So some of the thirty were a no because of us and might have been a yes elsewhere. We cannot tell which.

The nearest published base rate is from a UK survey of 1,200 early-stage companies. Different country, a wider spread of instruments than venture, and a survey only reaches companies still around to answer it, so read it as a floor. Of those that applied for equity, 31.3% got all of it, 23.8% got some, and the rest, about 45%, got nothing.

TL;DR

• Thirty-odd teams we had a call or two with last autumn. None that we can find has closed a round since. Most of the companies are wound down or quiet. Small sample, no control group, our no is inside it
• A failed round costs the year: the runway spent pitching, the product that stood still, the hire made against the round, the angels holding paper
• Runway first. Failed pre-seed raises in DocSend's panel ran five months. Months of money left minus months to a wire you can date. No date, use five. Zero or below means fix the money before the deck
• A number that does not survive a check. Check your own deck before the first call. Correct a wrong number yourself, the same day
• A visible ceiling at a large fund is a no on fund size. Work out the exit you can defend and pitch the funds it returns, plus angels and family offices
• Taste, the most common reason, gives you nothing to work on. A fund's version is the team
• We get some of it wrong. In the nearest published base rate, 1,200 UK early-stage companies, about 45% of those that applied for equity got nothing. The survey only reached companies still around to answer, so it is a floor