The hot round fallacy

I originally wrote this essay for The Information, where it was published on Feb 16.

Here's a fun little paradox in fundraising: Founders and the media love to talk about how quickly funding rounds happen these days—think about the big, rapid-fire raises from OpenSeaDataBricks and others—but when you watch a fundraising process from start to finish, it’s never as fast as it seems. Even the tidiest-looking processes, ones that seem to kick off on day X and sign term sheets on day Y, aren’t what they appear to be.

The best-run rounds are always running, just at different levels of intensity. This breaks some brains because founders want to believe you’re either fundraising or you’re not. In reality, great founders are always fundraising. It’s just that sometimes they call it “fundraising” and sometimes they call it “building relationships.”

This is an important point for founders to internalize because the illusion of fast, aka hot rounds hurts companies. Specifically, founders come to expect that they can emerge from a hole, say “We’re raising” and be done in a few days.[1] The early-stage market hasn’t taken quite the same beating as later-stage or public markets, but still, now is no time to be stupid. The truth is that nearly every fast round I've ever seen (and I’ve seen many) actually started months earlier with careful relationship- and narrative-building or extensive work by an investor—or in many cases both.

Let’s look at this from the investor’s perspective. Every venture capitalist has some quality bar a company needs to clear to trigger an investment. That usually consists of two key components: the overall market or opportunity, and the founder and company in the context of that opportunity. While different investors may consider these in different orders or with different weights, they all form views on each.

Developing a feel for a particular market requires research. That might involve commissioning a consulting firm[2] to perform due diligence on a particular region and its regulatory structure, or it may mean simply talking to potential users and building a view on what solutions may or may not work. This can take weeks or months, most of it before an investor ever talks to the founder of a prospective investment. Some investors run this process quickly, some run it slowly, and to be sure, some don’t run it at all.[3]

But just because a venture capitalist has all the information necessary to make a quick investment decision doesn’t mean they will—there’s still the company to consider. Here again, we run into different speeds and philosophies. When I worked at Y Combinator, we made most of our decisions in 10 minutes. Other investors need hours with founders, often distributed over months or years. Once a venture capitalist has these pieces, the question becomes whether the price of the deal makes sense.

When you understand this framework, the pace at which many follow-on rounds seem to occur doesn’t look quite so fast. These (mostly) aren’t discrete fundraising decisions. They’re continuations of situations where an investor did all or most of the work to get to a “yes” at a given round but lost, then reevaluated the price, made another decision to say “yes” and convinced the founder to take more money.

Founders can use this understanding to their advantage by realizing that they do not have to be passive bystanders in the investor knowledge-gathering process. Think about it this way: An investor evaluating a market needs information. That investor needs to talk to people. Founders are people who happen to know quite a lot about their markets and also generally like talking about them, and investors are usually happy to listen![4] As they listen, they can’t help but be influenced by a convincing story and growing metrics.

That said, founders have to be smart about what information they share and when they do it.

Those who spend too much time with investors and who share too much information too often inevitably hurt their companies. It can be hard for founders to see the balance here, so as someone who’s seen many rounds happen,[5] I’d offer these rules of thumb:

  1. Meet with investors who can actually make the decision to lead a round. This is not necessarily someone with the title of partner.
  2. Meet with those investors once per quarter—maybe once a month in extreme cases.
  3. Share high-level metrics, but not enough to let someone form a full picture.
  4. Prepare concrete asks that can’t be executed during the conversation, such as: “Here are three portfolio companies that would be good customers. Can you introduce me to the heads of analytics at each?”
  5. Track follow-ups.

Maybe someone wants to make the semantic argument that this isn’t fundraising. There’s no deck, there’s no ask, there’s no official invite to a fundraising kickoff party.[6] But it is a meeting between someone who wants to provide funding in exchange for equity and someone who is willing to sell equity for money. If that isn’t fundraising, I don’t know what is. When founders run this part of the process effectively, they’re able to target their later, formal fundraising efforts solely at investors they know are interested.

From there, things should move along at a nice clip, in no small part because the founder is now effectively running an auction. I’ve written extensively about this in the past, so I won’t rehash all of it here, but the main point is that competition forces investors to move quickly. This is in part because good investors generally know when other good investors are interested, but it’s also about the way founders act when they have options versus when they don’t. This is hard to fake, and it works.

I’ve seen founders attempt to force a quick process by setting arbitrarily short timelines, by refusing to produce reasonable data or answer questions, by generally being jerks—all things they believe are effective based on what they’ve read, not based on the work they’ve put in. Startup orthodoxy confirms what these founders want to believe: that they can keep their heads down pretty much forever and get chased by money whenever they need it. Maybe that was true at one time. But markets change, and founders who adapt reap the benefits.


Thank you to Jillian Goodman for your help writing this.


[1] We’re focused here on priced rounds: Series A, Series B and up. Seed rounds are different.

[2] This is a strategy for rapidly building knowledge on many opportunities that I first saw happening at Tiger Global Management and that other funds have adopted.

[3] There are plenty of investors who operate on gut, but this happens less and less as you move through Series A to B and up.

[4] Venture capitalists like to have meetings. This is a major part of their jobs. Go have a meeting! They’ll listen for longer than your parents and you will get free coffee out of it.

[5] When asked this question, I generally come back to Potter Stewart’s famous quote from a distinctly different context: “I know it when I see it."

[6] Not a thing. At least not yet.