Recently many of the companies we meet claim they are not raising capital. Yet it is very clear that they are in the middle of a fundraising process, or at least testing the water.
I don’t know if it is a sign of the frothy market environment when companies expect to raise the following round (at the following round valuation) before they achieve the expected milestones. Or perhaps companies are seeing their competitors raising large rounds quickly and feel obligated to do the same in order to keep up. Or maybe companies are just trying to arm themselves with enough capital before the party ends and the markets dry up.
All the above are perfectly good reasons to raise capital, and if I were in their shoes I would probably do the same. In fact, we advise many of our companies to leverage the current market environment and raise money now. However, I believe you should be frank with investors and explain the real motivation for raising capital now.
There is no problem with meeting VCs when you are not raising capital, just to brainstorm or keep them posted. But when you ask for a meeting and say you are not raising capital while it’s clear that’s not true, it puts everyone in an awkward situation. When we see someone presenting a well-rehearsed pitch using a beautiful slide deck – it is pretty clear they are in fundraising mode. Yet, when they don’t say they are raising capital we are often left hanging in the air. We come out of the meeting asking ourselves questions like: Are they raising capital now? If so, why do they need it now? Should we start a diligence process or should we wait? Is the round size reasonable? Do they know what to do with the money?
Having all these open questions doesn’t help advance the investment process and might turn down some good investors. Moreover, when you are not candid it reflects poorly on the company and team. It is much better to explain why you think the company should raise capital now even though it has enough runway to keep running without it. Being open will make these conversations more productive, allow you to quickly know where you stand, and enable you to raise that round more easily.