Historically, startups raise capital in “rounds” – financing events that take place every 1-2 years. They raise enough money to hit their next milestone(s) and raise another round or achieve profitability; they typically aim for enough cash to provide ~18 months of runway. The first round is a Seed round, then a Series A, then B, and so forth.
In the last few years, though, this historical norm has become more of the exception than the rule, at least for early-stage companies. Many companies raise more than one round of capital before a Seed financing, and may raise more than one Seed round; funding events sometimes happen within six months of each other.
One strategy that some successful companies have begun to employ in this new funding landscape is an approach I’ll call tic-toc funding rounds (thanks to Andrew Hoag for coming up with this term). In tic-toc rounds, a company successfully raises a financing round, bringing in a target amount of capital. Then, in the subsequent 6 months or less – long before it “needs” more money – it raises an additional, typically smaller financing on terms that are more favorable to the company. A company might raise $5 million in an initial Series A round, for example, then bring in another $2-3 million a few months later at a higher valuation.
The company’s rationale for a tic-toc strategy is probably obvious. In an uncertain fundraising environment (which is arguably the status quo), more runway is better. If more capital is available on fair terms, it makes sense to at least consider taking it. Furthermore, it can be particularly attractive to take in additional capital if any of the new investors might lead a subsequent financing round.
A new investor’s rationale for investing may be less obvious: why deploy capital into a company just a few months after it raised money at a lower valuation? First, the company faces less risk because it has demonstrated the ability to raise capital recently and presumably still has much of that cash in the bank. And it may have hit another important milestone or two already, justifying a higher price. One of the most important reasons may be FOMO: investors see a company – that they might have invested in – raise money successfully. If they were on the fence about it before it raised money, it might be that much more attractive now that other investors committed.
If you are an entrepreneur raising capital, then, keep the tic-toc strategy in mind as you fundraise. Maintain open lines of communication with those investors that pass on your initial funding but otherwise expressed interest, and don’t burn any bridges. Once you close your financing, consider going back to those investors that didn’t quite get to “yes.” You don’t want to undertake a whole new fundraising process on the back of a successful one, but just let the relevant investors know that you closed your round and are happy to keep them posted on your progress. If any expresses interest in adding some capital to the round, consider putting together a second financing soon after the first. Make sure you discuss the concept with your existing investors – you don’t want to surprise them, and they may want to participate too.
