The Reality of Startups — Tech News Won’t Tell You This
Don’t Believe Everything You Read
Last week, I shared some common criteria, metrics, and check sizes for each stage of fundraising.
As I was typing ballpark numbers per stage, I could hear founders in my head…
But, Kathryn, what about that $10M pre-seed round I heard about???
But the other day, in Techcrunch, I read about someone who raised a $50M Series A??
How did that founder raise $2M with no customers???
As someone who often knows the full story behind a press release…please, for the love of everything — don’t mistake a hyped-up, sunshine-only news story as term sheet reality!
If you hear an incredible story of an incredible raise, there’s usually some extenuating circumstances going on:
More traction than is typical for that stage, e.g. they’re calling it a “Seed Stage” but the company has $2M+ in revenue
A second time founder, raising from previous investors, who are happy to take a big bet on someone who has already been a winner for them
Lots of strings attached or “hair on the deal” — yes, they raised $5M but they’re going to need a $100M exit to make any money, whereas, your $500k raise gives you the same payout at a $10M exit
And of course, Silicon Valley pricing is often different than the rest of the country.
To be clear — this isn’t a knock on tech reporting. I love and subscribe to many tech newsletters and the reporters do an excellent job with coverage. There is simply a natural bias in what, how, and when startups share news about themselves!
Many Things Happen Very Quietly
You know what doesn’t get reported?
Companies that have bootstrapped to solid cash flow — why would a founder publicly announce they are wealthy now? 😂
A high customer churn rate
Everyone: “Look at these amazing new customers we have!”
No one ever: “Here are the companies we painfully lost last quarter!”
Companies quietly closing their doors or (even worse?) being a zombie
A really crappy work environment (okay, occasionally this makes news but it has to be really, really bad)
Employees getting $0 at an exit because the company raised (too much) money
In The Wild: A Real Life Example
A competitor of one of our portfolio companies raised a boatload of money. $40M. It was surprising as, to our knowledge, their product was not as good.
At first, the doubts hit:
What do they know that we don’t? What are they doing better? Should we change strategy? Is our product not as good as I think? Do we need tons more money??
But the founder knew what to do:
I’m going to stay focused, talk to customers, execute our plan.
Fast forward 2 years, that competitor shut down and the portfolio company is crushing it.
It’s Not Just Tech News…
The other place where misinformation inadvertently spreads…pitch events or demo day!
Now, don’t get me wrong — pitch events and demo days are amazing!
And founders are doing their job to showcase their company to the fullest.
Just know: it’s part of the expectation to explain one’s company in the most positive way possible.
No one stands on stage to say:
Eh, I’m really struggling and I’m not sure if we’re going to be around in 6 months but we closed a few good deals last month and got a great angel check so I’m feeling cautiously optimistic even though that could change in 30 seconds.
A founder’s pitch narrative (and with good reason):
We are basically a unicorn already. Look at this hockey stick growth. Here’s 100 more reasons we’re awesome and our world domination is inevitable.
Go into a demo day or pitch event knowing the game being played.
Don’t take it to heart if someone who started at the same time as you has 2x more customers.
They might be burning tons of cash, have high churn, or got those customers through one warm connection that’s not repeatable.
Remember: when you talk about your business, it sounds amazing to everyone else!
HYPE. HYPE. HYPE.
Still don’t believe me?
Think about people you know on social media.
How often do social posts tell the full story?
Once a friend posted amazing photos from a family beach camping trip. I texted her to say I loved the photos. She said it was hot, buggy, sandy, and (direct quote) “f-ing miserable.” 😂😂😂
It’s always “best foot forward” on social, in the news, or during demo day. Nothing wrong with that, just know it for what it is!
To News or Not To News?
So, what’s a startup founder to do?
Get to know other founders. When you have founder friends, you see the full picture. Good, bad, ugly. This can be experienced founders as mentors, someone a stage ahead, a direct peer, or a behind-the-scenes look at a real founder journey.
Use the news for information. I think it’s helpful to stay up to date on startup happenings, market trends, and see how founders are positioning their companies and progress. (I love reading Hypepotamus!)
Know if it’s helpful or hurtful to you. If seeing what others are up to lights a fire, great! Use other’s successes to motivate and inspire you. If it’s bumming you out, giving you a distorted reality, or causing you to make hasty, short-term decisions, then minimize your exposure.
Remember — every founder has imposter syndrome and the public story is rarely the full story!
What are your favorite places for startup news? How do you balance staying up-to-date on the outside world vs staying focused on customers?