What The Fundraising Roller Coaster Looks Like Under Covid-19 Lockdown
We founded Airbyte in December 2019. We raised a $600k pre-seed round in 2 weeks in January 2020, at the beginning of our YC batch. And then we raised an additional $1.2M seed round in May 2020. This article is about our seed fundraising experience during Covid time. As a matter of fact, we actually started the fundraising process 5 days before the Covid lockdown started in the US. I’m sure not every founder remembers the day they started the process, but in our case, it’s easy to remember!
We made a lot of mistakes during these 8weeks and learned a ton. I’d be very interested to know if you see any other mistakes we made or things we missed. There will be more rounds in the future, so it’s always worthwhile to reflect and learn as much as possible.
The Plan: A/B/C model from YCombinator
YC asks you to come up with 3 different plans:
- Plan B is the “normal” one. It’s our “go-to” plan if our meetings go as we expect, so what entrepreneurs call the “conservative scenario” ;).
- Plan A is the “great” one. In the event the meetings go a lot better than we expected, how should we adapt to leverage our fundraising traction in the best way?
- Plan C is the “shit hit the fan” one. In case we have a hard time getting meetings or getting investments, how should we adapt so we ensure the company survives in the best way possible?
We’ve gone through many fundraising processes, and we were really impressed with YC’s way of thinking. It forces you to go through all possible scenarios, so you can get out of it the best way.
Our illusionary plan — raise both a Seed and a Series-A
Our Plan B was to raise a small seed round, about $1M-1.5M, with 2x the valuation of the pre-seed round. It would give us a 2-year runway to achieve the milestones we needed for a Series-A. Our Plan A was to raise a $10M Series-A right away. And our Plan C was to extend the pre-seed for $500k with about the same valuation, so we still had a 1-year runway. We had money until December of the same year at that moment, so just for 6 months.
At the time, Airbyte was a marketing data product. The context was that we had a great team (5 senior people from the exact industry we were targeting), the TAM (Total Addressable Market) was huge, and our approach was unique. The YC partners’ feedback was very positive about us, so we felt great confidence coming into the fundraising process, and really thought we could easily pull off our Plan B.
Boy, were we wrong….
The 1st mistake we made — optimizing valuation over speed
We had our first meetings on 03/11/20, and had 5 of them before YC’s demo day (and lockdown start day on 03/16). In the first 5 meetings we got, 4 investors were interested in investing (only VC funds at the time), 2 at the valuation we wanted, and 2 others at a 25% and 40% lower valuation.
We took the 2 first, and said no to the others, even though one of them wanted to cover the whole round ($2M). We thought that, given our early conversion rate, we didn’t need to make any concessions about the valuation.
In normal times, our decision would have made sense. We thought the pandemic would take a few weeks before it would impact investments. So, in our mind, we still had time to get better conditions, especially given we had demo day on 03/16 and possibly 100 investor meetings in the next few days.
But we failed to understand the immediate impact the pandemic would have on the VC funds’ willingness to invest. Especially given that our industry was impacted by the drastic decrease in marketing budget across most industries.
What Covid changed in the fundraising experience
So what happened? Many things:
Demo day was virtual, which makes it hard to make connections with investors. Investors would “like” our project and connect over emails to organize Zoom calls.
Having Zoom investor meetings had pros:
- You can stack up 10 meetings a day (which we did the first two weeks following demo day). So a lot more meetings, as you don’t need to travel to the VC’s office.
- You can communicate with your co-founder during the meeting more easily. For instance, we would tap on the other’s knee to prompt him to answer.
But there were a lot of cons, too:
- It is super hard to read the body language emanating from the investor. It was very hard to understand where we were weak.
- A lot of investors had a hard time investing, as they had never made a deal without meeting the team in person. Trust is central to their business, and we underestimated how the pandemic would prevent them from building trust the way they were used to.
Covid traded quantity over the quality of the investor meetings. Honestly, you would rather have quality when fundraising.
How we adapted eventually
1. Optimizing for relationships and trust
When the lockdown started, our conversion rate dropped to 0% for a while. After a week, we went back to the 2 other investors who had offered to invest at a lower valuation, but it was too late.
So we changed our approach towards funds. We began focusing on relationships, and on recreating trust in a remote world. To do that, all the team was heads down on producing great product progress and closing POCs and customers. Our goal was to have significant news to share with them every week.
Still, for 4 weeks, we didn’t convert any funds. We knew we were missing momentum on the fundraising process; we needed to create FOMO on the investor side. FOMO enables you to have some control over the discussion with investors. Without FOMO, the investor has no need to commit immediately, and can wait to see how you perform in the next couple of weeks, or even months.
One fund was interested in leading our round if we could close $250k more at that point. The issue is that having one extra investor didn’t help us close; one is not enough — investors need to see a trend. And we couldn’t get another investment from other funds, and we were putting forth our best efforts to convert one more. That’s when we understood what we needed to do.
2. Focusing on angels
We started again to see a few business angels, whatever the amount of the investment. Angels didn’t need to meet per se, not as much as funds. As former entrepreneurs mostly, they have a higher tendency to trust other entrepreneurs.
We started to convert some angels and eventually to get that closing trend going. Obviously, we still kept the funds in the loop.
Over a period of 2 weeks, we could close a certain number of angels, which created some FOMO, and we closed the round in our Plan B with a last fund, while we had no investment for a period of 4 weeks before that.
What we learned
Here are the 3 main lessons we learned:
- Understand the investment context. We could have closed the round before the lockdown, and should have, even if it was at a lower valuation.
- You need to create trust, whatever the context. In a remote world, this means keeping investors up to date with impressive updates.
- Most important of all, FOMO is what closes rounds. Showcase momentum on the product, revenue, and-most importantly-the fundraising process, and you’ll close the round fast.
Some founders use valuation to get fundraising momentum, and then to increase the valuation along the round. This is completely possible with a SAFE. But we didn’t want to do that; we want the same valuation for every one of our investors in the same round, out of honesty.
Voila! Hopefully, this is useful to you. If you see other lessons we missed, please share them!