Lessons from founders raising their first round in a bull market

For Manu Bansal, founder of Lightup.ai, raising a seed round from a16z was not a very difficult journey. His previous company, Uhana, launched in 2016, was backed by NEA and had been acquired by VMWare in three years.

So he had demonstrated ability when it came to not just building a product, but building a company, attracting a team, generating revenues and most importantly, getting it to a good exit.

But a challenge came up in 2021 as he was raising the seed round — the venture funding market got white-hot. In 2016, total VC investments in the U.S. were about $80 billion. By 2020, the capital deployed had ballooned to $164 billion, according to PitchBook NVCA. By all means, 2021 will top this trend.

Indeed, startups have never had it so good. The list of superlatives describing this insane bull market is getting longer. Silicon Valley is the Walmart on Thanksgiving Day sale.

Founders can raise money fast, really fast. Ask Bansal, inundated by investors and ready to do a preemptive up round just three months after he closed his seed round.

But this can be a gotcha, he warns.

The vicious preemptive trap

As the supply of capital grows, competition heats up, especially for people like Bansal. The number of unsolicited inbounds grows, with each attempt to get the founders’ attention getting more crazy. Often, the easiest way investors get the founders’ attention is to pump up the valuation. Up round, anyone?

But the dark side of this market can become a vicious preemptive trap, a cycle where an A round happens too early and a B round follows within a few months and the C round is not far behind.

“A company’s metrics cannot move materially in such short spans. As one of my investors says, figuring out go-to-market (GTM) has time constants involved,” said Bansal.