Charles Hudson has spent more than a decade investing in early-stage startups. As the founder and managing partner at Precursor Ventures, he’s invested in hundreds of companies and has seen massive shifts in the markets that require founders to get creative and do away with the old fundraising playbooks. In this week’s episode of Build Mode, Startup Battlefield lead Isabelle Johannessen talks with Hudson about the headwinds facing early-stage founders today and the most common mistakes founders should avoid in order to get funded.
Optimizing for high valuations over prudent planning
A high valuation doesn’t make sense for every company. While it can garner attention from media and legitimize the company to other investors, founders should be realistic about the expectations they are setting for their company with their valuation and most importantly think about who they’re choosing for their cap table. Is a big check worth working with a bad-fit investor for the next 10 years?
“The real risk with these big rounds is you end up being a prisoner of your own company. You raise all this money, and you’ve sold people on a big vision. They don’t want the money back — they want you to find a way to build something that’s worthy of what they gave you,” Hudson said.
Run your own due diligence on prospective investors
Talk to portfolio founders to see the kind of value-add the investor can offer. Verify claims they make about recruitment, GTM support, and connections to other platform teams. Remember, the VCs are courting you as much as you’re courting them.
If you’re curious to hear more about valuations and investor selection, be sure to subscribe to Build Mode. Next week, Andrew Dai, the co-founder and CEO of Elorian, comes on to discuss the company’s massive $30 million valuation they received before even raising pre-seed.
Know whether venture capital is right for your business
Great businesses aren’t always venture-scale businesses. Venture capital only works if you’re building a company capable of returning a fund.
“I’ve been more successful lately in telling people, ‘This is what venture capital needs you to do. Let’s abstract away from your company. This is the kind of business you need to want to build. Is that your desire?’” Hudson said.
Understand today’s fundraising reality
Venture capital has changed dramatically in the past few years. Investors aren’t just evaluating your company against last year’s startups; they’re also comparing you to the fastest-growing AI companies in history. Even startups that are showing growth that would be amazing in other markets aren’t keeping up.
“They’re doubling, they’re tripling, they’re quadrupling, and the message they’re hearing from the market is that’s good but not great,” Hudson said.
The new season of Build Mode is out now. Every week we’re talking to the investors backing some of the hottest startups in the game and the founders building from the ground up and those who have successfully exited their companies.
We’re getting into bootstrapping and crowd funding. We’re breaking down term sheets and giving hands-on pitch advice.
Subscribe to Build Mode on Apple Podcasts, Spotify, or wherever you like to listen. And watch the full videos on YouTube. New episodes of Build Mode drop every Thursday.