I found a report from Carta, the equity management platform, that’s full of data and very helpful. It’s called State of Pre-Seed: Q2 2023. Carta defines “pre-seed” as “any company that has yet to raise a priced equity round.” Lots of companies begin by raising capital on convertible instruments and do priced equity rounds as they mature. Carta doesn’t explicitly say this, but I assume it also caps valuation of companies included in this report.

The report is full of useful data. In addition to high-level data, it provides granular data broken down by the two most common convertible instruments used by early-stage companies to raise: simple agreements for future equity (SAFEs) and convertible notes.

One point that stood out to me was that 52% of pre-seed companies that raised in the first half of 2023 were in California and New York. These companies were also more likely to raise more than $2.5 million in their pre-seed rounds.

The report is a great resource for anyone curious about the state of fundraising for early-stage venture capital companies in the first half of 2023. The report can be downloaded for free here.

I recently reviewed an early-stage founder’s fundraise deck. He’s raising capital for his start-up. His first start-up was shuttered when he couldn’t attract paying customers. He mentioned the first start-up to me but positioned the idea behind that business as a success because another company executed on it and is worth $10+ billion. Even though his business failed.

Most start-ups fail. Failed start-up attempts, while painful, can pique an investor’s interest. The failure itself isn’t what they focus on. What they want to know is what you learned from it and how you’ll apply that knowledge to the next attempt. If you learned valuable lessons that will increase your chances of success and speed of execution, that’s a positive founder trait to many investors.

Founders shouldn’t shy away from their failures. Instead, they should own them, share what lessons they learned from them, and articulate how those lessons increase their chances of success as a repeat founder.

I caught up with an entrepreneur who’s frustrated with a service provider. The firm handling his bookkeeping hasn’t provided him with financial statements for his multiple businesses in a few months.

I was curious how he makes decisions, knows the companies aren’t in financial trouble, and knows whether they’re making or losing money. He told me that he’s been keeping close tabs on each business’s bank accounts to get some level of comfort.

Financial statements, such as profit-and-loss statements and balance sheets, are important tools for entrepreneurs. They help you understand the financial health of your company and alert you to situations that could harm the company (e.g., a cash shortfall). Running a company without financial statements is like driving with your eyes closed. It’s dangerous. Bad things can happen if it goes on too long.

If you’re an entrepreneur, you should make sure you have relevant financial statements prepared monthly, and you should review them every month. If something doesn’t make sense, ask questions until it makes sense or is corrected. If a firm can’t consistently meet that expectation, it may be time to find one that can. Otherwise, you’re driving blind and could end up driving your company into a brick wall.

This week I was discussing an upcoming capital raise with a founder. The company has pivoted, and its latest product is resonating with prospective B2B customers. These businesses have been searching for a solution to a problem, to no avail. This founder’s solution checks all their boxes. Prospects are converting to customers relatively quickly.

Things are looking good, and the founder wants to raise venture capital. His pitch is coming together, but we talked a lot about one part of it: the market. How many customers exist for his solution? I learned that his “known” market is material but not gigantic and not growing (as far as we could tell). There’s a clear path to building a company with seven-figure annual revenue. Beyond that, not so much.  

Markets matter a lot. It’s hard to build a big business in a small market—there just aren’t enough people willing to pay for the solution. It’s equally as hard in a static or shrinking market because companies grow by taking market share from other businesses—the market is cutthroat (and likely low margin).

Venture investors understand this dynamic and spend lots of time understanding the market a start-up is operating in before they invest. If the market won’t support a large company (now or in the future), the probability of an investment being profitable for the fund goes down drastically. If they can’t see the investment turning a large profit for the fund, they probably won’t invest.

Markets matter, and founders should understand their market and its potential. If a founder can’t articulate why a market will support a large company (or multiple companies) and how their solution will win in that market, they may not be able to raise venture capital.

You learn a lot about someone who wants to be an entrepreneur when times are tough. Especially when it’s possible they could run out of cash and have to shutter their company. It’s in tough times that great entrepreneurs separate themselves from everyone else. The great ones do their best work when their backs are against the wall. They turn desperation into a superpower. They make the impossible happen.

Over the next six or so months, we’ll see which cash-strapped founders can separate themselves by making the impossible happen.

I recently had the opportunity to speak to a group of early entrepreneurs about bootstrapping. One of these founders asked about execution when you’re bootstrapping—specifically, how to execute and move the business forward when you have limited resources and limited help.

My response was simple. Early-stage founders can’t do everything they’re thinking about, especially when they’re bootstrapping. They don’t have the finances and likely don’t have the manpower. Figure out what the most important next milestone is and what actions get you closer to it. Focus intensely on those actions. Don’t worry about the other stuff. Said differently, figure out the 20% of activities that will make 80% of the difference in getting you to your next milestone.

Focus is important when you’re an early-stage company. You have tons of balls in the air, and you’re adding more all the time. Many early-stage founders (myself included) try to keep juggling all those balls, but it’s just not possible. You don’t have enough hands. It’s better to figure out which of the balls matter most (given your stage). Keep the critical balls in the air and let the others drop (for now). 

Homing in on what’s most important is easier said than done, but it can be the difference between success and failure for early-stage companies (especially when they’re bootstrapped).

OnlyFans is a social media company that’s surged in popularity since the pandemic. The company has a less-than-stellar reputation because of the type of content creators post on the site. I’ve never used the site and don’t know a lot about it, but I read an article about the financials that caught my attention.

The parent company, Fenix International Limited, is based in the UK, so its financial statements are public. I looked at its latest financial report covering 2022 and noted the following:

• Creators on the platform grew 47% to 2.16 million
• Fans (i.e., users) on the platform grew 27% to 187.9 million
• $1.09 billion in total annual revenue
• ~67% of annual revenue is generated in the US
• ~48% of revenue is subscription
• ~52% of revenue is transactional (take rates from purchases)
• Net profit (after taxes) of ~37% or $403 million
• Dividend of $338 million paid in 2022
• Dividend of $310 million paid in 2021

Bloomberg says the company is owned by a single individual, to whom all dividends are paid.

Again, I don’t know anything about the platform and haven’t used it, but its financial performance is something to take note of. The revenue, net profit, and dividend figures surprised me.

I’ve been learning about successful entrepreneurs who happen to be investors—I call them “investor entrepreneurs.” I heard about Stanley Druckenmiller and have been learning about his journey as an investor.

Druckenmiller is a hedge fund manager, which I’m less familiar with. I’m still learning about that investing style and about hedge funds, but one thing has stood out to me from learning about Druckenmiller: there are many creative ways to deploy capital and achieve outsize returns. There’s no set path that all investors must follow. Some investors like to invest in what others might consider unorthodox ways, and they can still be successful. 

I’m excited to continue to learn more about Druckenmiller, his approach, and why he was successful. 

I’ve been chatting with several founders who put off raising in 2022 and earlier this year in hopes that fundraising conditions would improve. They’re now at the end of their runway—they must raise new capital. It’s a tough spot to be in, and I suspect it may be more common than not for early-stage founders who raised in 2020 or 2021. 

Summer vacation season is over, and public markets rebounded through July (August has been a down month so far). The optimal window before year end in which these founders can raise capital opens in September and closes around Thanksgiving. This two-and-a-half-month window could be make or break for many early-stage start-ups this year.

I’m curious to see how many early-stage founders begin fundraising in September and how the number of investments completed in this year’s window compares to last year.

I was chatting with a kid interested in entrepreneurship recently. He wants to start some sort of business and asked me where to begin. That’s a broad question, so I shared my story.

When I was a teenager, I was obsessed with fixing up cars and spent tons of time learning about it. What are the best parts? Who makes them? How do you buy them? How are they installed? I was more knowledgeable than most people. My friends ended up paying me to help them fix up their cars. And that morphed into a large business years later.

I ended by advising him to find a problem he’s obsessed with and keep feeding his obsession. Eventually, the obsession will lead to figuring out how to solve the problem. Others will think his obsession is odd at first. But once he masters the problem and solves it, they’ll think he’s a genius. They may even end up being his customers.