Optimizing for High Valuations Over Prudent Planning
Charles Hudson, the founder and managing partner at Precursor Ventures, has spent over a decade investing in early-stage startups. He has seen massive shifts in the markets that require founders to get creative and do away with the old fundraising playbooks. In a recent episode of Build Mode, Hudson discussed the common mistakes founders should avoid in order to get funded.
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. It’s essential to 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," Hudson said. "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."
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.
"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.
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
The new season of Build Mode is out now. Every week, they’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. They’re getting into bootstrapping and crowd funding. They’re breaking down term sheets and giving hands-on pitch advice.
