Playing the long game in fundraising

When you're raising an equity round, it's easy to lose track of what matters in the long term. The biggest check and the highest valuation might feel like wins today, but they can undermine the company you're trying to build. So, how do you avoid these temptations and make decisions that will serve your company down the road?

Peter Majeranowski is CEO and co-founder of Circ. In the third of our series in partnership with Unreasonable Impact, we sat down with him to discuss why a high valuation isn’t everything, how founders should go about choosing a lead investor, and what it means to responsibly manage your capital. 

A too-high valuation can set you back

A lot of times, founders approach valuation with a simplistic model: calculating how much cash they need to survive the next couple of years, and working backwards based on how much of the company (20% or 25%) they’re willing to give away to get that cash.

But this basic math can push your valuation too high too early, which will undermine what should be your ultimate goal with VC capital: maximizing your exit.

More importantly, if you have multiple rounds ahead and material scale-up risk between here and there, an inflated valuation early can set a bar you might not be able to clear. If there’s a setback, or the market changes and you suddenly need 3x the revenue to hit the same valuation target, you've painted yourself into a corner and will likely face a down round. 

Look for less 

Rather than going out for as much capital as possible, it can be better to ask for slightly less than you actually want. Not only will a more realistic valuation give you more breathing room, it will help you drum up real interest. Start with investors you've already built relationships with, get a feel for where the market is, and see what kind of appetite exists before you ramp up the process.

Talk to those in the know

Fractional CFOs can be really important when deciding on a valuation because, by virtue of working with various companies at different stages, they're fully entrenched in the market. Their data is way ahead of any published index because it's real time, giving you a clear read on what's appropriate to go out with.

Other sources of wisdom include friendly investors, other founders, and data from Carta. Together, these sources give you a realistic anchor before you go to market. 

Who leads your round matters more than its size

Most companies don’t get multiple term sheets, but if you do have several to choose from, don’t just jump at the one that offers you the best price.

Neither should you blindly accept a term sheet from a tier-one VC. Every case is different, and will balance factors like their ability to help you fundraise in the future, whether you need a strategic lead versus a non-strategic lead, and maintaining the most optionality to continue to fundraise down the road.

Plus, you’ll need to ask yourself whether this person (the Partner leading the deal, not the firm) is someone you want as a co-architect of your company, and who will help you navigate the inevitable bumps in the road. Valuations are temporary, but board members are semi-permanent. Talk to other founders in their portfolio to find out how they actually work with companies.

You should also make sure to spend time with the individual partner and ask how committed they really are to building the company with you. Directly ask them how committed they are to your company and their firm, as well as whether they have plans to leave – if they’re on the way out, the deal might never see the light of day. 

Saying no 

If you have to turn down a term sheet, the best path forward is to be open and honest about why. If they simply couldn't meet your round size, that's an easier conversation. But if they offered a competitive term sheet and you're choosing someone else, the explanation requires more care.

Be clear that the decision isn't personal, but is about what you believe is best for the company and its mission. If you've been transparent about your ideals throughout the fundraising process, it won't come as a surprise when you stick to them.

Be mindful that the investor has likely spent a lot of time fighting for you. Then, keep that relationship on good terms. Climate tech is a small enough world that a transactional mindset will catch up with you. 

Managing your capital is a moral responsibility

Capital can advance your solution, but at the same time, it isn’t neutral. The decisions you make with it have consequences. Burn rate, for instance, isn’t really a spreadsheet exercise, it’s a human exercise. Your decisions around it can stress out your team and investors, and potentially impact people’s lives if you have to cut headcount. This has to be taken seriously, and you can’t just go into autopilot once the money’s in the bank. 

More money = more discipline

This means that once you raise any form of outside money, the processes with which you manage that money need to scale with the amount of financing that you have received. So, you’ve done your pre-seed round, you better have good accounting in place and at least a simple cash budget. Once you’ve raised some meaningful institutional money, you’ll want a forward-looking proforma with multiple scenarios that you can test. Too often, the rigor people apply to managing dollars is inversely proportional to how much they have in the bank, when you should always worry about how you spend every penny.

Peter Majeranowski is the Co-Founder and CEO of Circ, a certified B Corp revolutionizing the fashion industry's environmental impact through breakthrough recycling technology for blended textiles. Under his leadership, Circ has raised over $100M in funding, formed partnerships with global retail leaders, and driven Circ to be named an Earthshot Prize Finalist, a Fast Company Most Innovative Company, a TIME GreenTech Company, a BloombergNEF Pioneer, and most recently, Inc.’s Best in Business. Pete was also recognized on the 2022 Vogue Business 100 Innovators list. Prior to founding Circ, he worked in finance for an investment group focused on early-stage ventures across Eastern Europe, where he held C-suite roles in multiple portfolio companies. A former U.S. naval officer, Pete served for six years with deployments to Iraq and the Middle East. He holds a BS in Applied Economics from Cornell University and an MBA from Duke University.