Investment Pacing and The Timing of Fund Raising for Startups

Yesterday I had a conversation with my managing director about my investing pace. It had seemed to both of us separately that I had a lot going on, and that I was potentially going to invest in what seemed to be a large amount of startups in a short amount of time. After all, this is my 11th week at Launch Capital – barely 3 months in!
While my pace was blistering by some measures, after some reflection it wasn’t so bad after all. Some thoughts on this pace:
1. We looked at the other directors at LC and noted that for some reason, deals seem to come in waves and bursts. Sometimes the bursts can be planned for, like after a Ycombinator or Techstars Demo Day. Other waves come with no warning whatsoever. Or some deals drag on and then run into other more faster moving, hot deals in the future.
And there are long periods of calm where there seems to be no attractive deals for a while. It’s in these times I take a breather, but also wonder if I’m doing something wrong that deals have dried up.
2. We talked about adjusting the pace. This could be raising our bar, although I was already only looking for startups with very high potential (see The $100,000,000 Question) and not those whose trajectory was more obviously a smaller exit. We could shift our bar, like being really focused only on startups I had personal interest in. However, we noted that we didn’t want to potentially overlook an opportunity simply because it wasn’t in some area of determined focus.
3. I also noted that although we had set a goal of investing in 7-10 seed startups this year, the calendar year was problematic to review pace. This is because the second half of the year has 3 dead months in it for fund raising: August – when the investment community all go on vacation for the summer; November/December – when we all dive into the three holiday whammy starting with Thanksgiving, and then it’s Hanukkah and Christmas.
Thus, in any given calendar year, there are only really 9 months where rounds have the best chance to be closed. Even though in reality not all investors go on vacation, the problem is that many venture funds operate via partnerships. Often the entire partnership needs to agree on an investment before it takes place; all it can take is enough of the partnership to be on vacation and that can mean that a round can’t close with that fund. So investment pace can be raised during those 9 active months as those startups who happen to be fund raising then have a much higher probability of closing their rounds.
4. As mentioned previously, some funding rounds can drag on for months before they close. Nobody ever plans on that, but sometimes it takes time to round up investors to believe in a startup enough to commit. Given my experience, it can be deceptive that I am working on many startups at once because their actual funding rounds may not close until months later, as the entrepreneur tries to find a lead somewhere.
While I talk about my own investment pacing and the environmental factors that affect it, I think this has important implications for startups and the timing of their fund raising.
In the last few years of angel investing, I’ve observed that startups who start fund raising in the summer are at higher risk to not closing their rounds before the end of the year, due to the 3 down months in the latter part of each year. Starting fund raising in September is even worse because you really have to finalize everything in 2 months; if you start drifting into November, then people begin go on vacation and it’s harder to find your investors (and their money). Inevitably, many of these startups drift into January and finally are able to close their rounds.
This is not so true for startups who close rounds with all angels. Individual investors are not beholden to a partnership and can make decisions in more flexible timeframes.
The 3 down months in the latter part of the year also affect those who are looking for their next rounds. Remember that fund raising in the second half of the year really only means you have 3 months to work in – It can be particularly problematic if your burn rate and plan show you running out of money in November or December!
Remember that if you need to raise money, you need to do so before your money runs out. Sometimes people say that the rule of thumb is to start looking for your next round 4-6 months before your current funds run out. However, nobody can predict how long your fund raise will take. Depending on investor interest and your progress, you may raise in a few weeks; or you may need a few more months in if interest is low or your progress isn’t substantial. In tough economic times you may find that it takes an extraordinarily long time to raise a next round; you may even need to go asking for a bridge to carry you through what inevitably is the new year when fund raising probability goes up again.
My advice to startups is – no matter what, try to plan for your funds to run to the middle of the calendar year, which has you raising your next round in January. If you need to raise money in the second half of the year, you’re putting your venture at much higher risk than otherwise.