This is Part 2 of a 5-Part Series, tied to our publication of the PCG Calculator.
There are two distinct kinds of fundraising.
Vision Raise — you’re raising based on hope. Based on team, prototype, early customer interest, and so on. This means that you do not yet have Product-Market Fit. These rounds are usually called a Friends & Family, Pre-seed or Seed round. If you want to think about how these rounds should be thought of and priced, check out this article.
Metrics Raise — you’re clearly post PMF, if you’re trying to accomplish a metrics raise. Because PMF is a hard thing to define, here is how four (very smart) people have defined it in a particularly catchy way.
- Eric Bahn describes it as “a spreadsheet raise”
- Hansae Catlett once put it to me as a “just add water situation”
- Naomi Ionita described it as “if you put in $1 of CAC, it produces $Y of LTV”
- Michael Seibel in a talk once defined it as “people want to buy the thing you’re making, faster than you can make it. Everything breaks [in a good way] when you have PMF.”
This is of course a very, very high bar. If you have PMF, you’ll know it. If you think you have PMF, you probably don’t. It has to be obvious, beyond all doubt. (To be clear: at AbstractOps, we don’t have PMF, but we hope to, soon.)
But wait… what about the “in-between”? When you have more than just hope / idea / team, but before you have clear, undeniable PMF?
Let’s call that the Vision?? Metrics?? Raise. All those “Seed+“ and “Pre A” rounds fall into this bucket. If the bar for PMF and a Metrics Raise is very high, it means there’s probably a long while when you’re plugging away at it.
This is one of the hardest spots to be. It’s when you’re clearly making progress in the right direction, and you need capital to continue, but the quantity of capital you need + the low-ish valuation you can command results in excess dilution. It’s essential in this phase to stay as lean as possible so that you can stretch the Seed round (or if necessary, the Seed+/Pre-A round) dollars as long as possible and keep dilution low.
In 2021, we saw a lot of companies raising at Series A-B valuations despite being only Seed+/Pre-A ready. This is a different kind of excess — not of dilution, but of capital. This is the mean which is now reverted.
This is also the reason investors will sometimes advise you not to start properly monetizing yet… because it’s a way to keep the “Vision Raise” honeymoon going longer. The moment you start monetizing, you start being measured against Metrics.
Access all parts of our Startup Valuations & Fundraising: Summer 2022 series below:
Part 1: Startup Valuations & Fundraising
Part 2: The Flavors of Fundraising
Part 3: How Should I Value my Startup?