3 Tips for Raising a Seed or Pre-seed Round in 2022

If you’ve been out raising a seed or pre-seed round, you may have noticed 2022 is not feeling like 2021. Late last year, inflation and interest rates ganged up to give public tech companies, even really good tech companies, a “haircut” in valuation (i.e. lower multiples on revenue). The changes in the public market very quickly ripped through late-stage VCs, mid-stage VCs, and even early-stage angel investors. The cap table juggernaut, Carta, recently confirmed what you are feeling: Fewer early-stage deals are getting done this year compared to other periods. You are an intrepid entrepreneur, so clearly you are not going to raise the white flag and surrender. May I offer three suggestions to improve your chances of raising a seed or pre-seed round in 2022, especially with angel investors?

First, make sure that you’re crystal clear on your investors’ real concern. The most discouraging outcome for an investor is to take a chance on a company, watch them thrive, and yet fail to profit from the investment and the risk that they took. As an angel investor, my biggest fear is a company that crushes it for eighteen months, but then needs to raise money at the same, or even a lower valuation, because of the “haircut.” I cannot afford to wait a year or two for a company to catch up to the valuation at which I invested. If a company doubles its revenue and other key metrics, it sure as heck better double in valuation as well.

Understanding this concern, you can assuage an investor’s fears by giving them a peek into the future. Show where you expect to be in 18 months when you raise again. After you paint the picture, share recent (and by “recent” I mean 2022) deals which are similar to where you expect to be in 18 months. These comparables will illustrate realistic valuations your investor can expect in 18 months as you execute against your plan. Drive the message that if you succeed as an entrepreneur, your investor will succeed along with you.

Second, make sure your investor gets the nuances of how convertible investments work. Keep in mind that we angels pride ourselves on being former entrepreneurs and operators. We don’t have diplomas from fancy MBAs, nor are we black belts in finance. We understand pre and post-money valuations on equity rounds, but the mechanics of how SAFEs and Convertible Notes become preferred equity can get a little fuzzy. 

For example, let’s suppose that you are raising a million dollars using a post-money safe with a $5M conversion cap. What you would not want to do with your pitch deck or during your presentation to investors is to state that you are using a $5M SAFE and assume that your audience understands the nuances of the conversion mechanics. Take a minute and explicitly explain that, based on the size of the raise, when the SAFE converts to Preferred equity, you expect the SAFE to result in a share price equivalent to a $4M pre-money valuation and a $5M post*. In 2022, investors are focusing on valuation. Make sure that the angel is equating your $5M SAFE to a $4M equity investment so that you get maximum credit for offering a fair valuation that will increase proportionately to your operational progress.

Finally, move quickly to close your funding. Investors are sitting on lots of cash they would like to invest in good companies. They are waiting for valuations to get to where they need to be today so that there is room to see a lift when the next guys invest in 2023 or 2024. Be among the first to embrace the 2022 valuation realities, and be among the first to grab the capital you need to keep scaling. If you want to be convinced that the change we are seeing is real and permanent, listen to the first 50 minutes of this podcast. Then, quickly close your round at 2022 valuations so that you can fully devote yourself to building your company.

In summary:

  1. Understand your investor’s real concern
  2. Take a minute to explain how SAFEs and CNs convert to equity
  3. Move quickly on closing your round (accept the new normal of 2022)

*If you are not sure about the math for converting SAFEs or other convertible instruments, spend a few minutes poking around the wonderful resources on Cooley Go including this article about how SAFEs convert. Once you conceptually understand the process, plug some actuals into this awesome tool from Carta.