Read this if you are struggling to fundraise in New Zealand

Though Termius got into Y Combinator (YCW19) and closed the seed round in just a week even before the demo day, six months prior to that I had tried in vain for three months to raise money in New Zealand. During this time, I pitched to many local investors and found out that the market conditions for seed capital were pretty poor. I learnt a few lessons about fundraising that may help other start-ups. It is hard to generalise from the experience of just one company, so take the following with a grain of salt.

Y Combinator Demo Day

From the beginning, my main goal was to raise capital as quickly as possible and get back to work on the product, so I decided to raise locally because I already knew several angel investors. The product had a user base and some revenue, so I thought it would be a piece of cake. The most difficult thing, however, about the fundraising was that the product had been created for network engineers and sysadmins. Hence, it’s nearly impossible to have a meaningful conversation about an early stage investment in Termius with a person who has no clue about SSH. However, I hoped that if I could convince at least one investor with a technical background, then it would be possible to close the round with a bunch of “me-too” investors. I shortlisted all investors with a technical background in New Zealand and tried to connect with them. Those investment pitches helped me to adjust the pitch deck and better understand Termius’s investment opportunity, but they never progressed beyond what I call the multiple stage. As I said, the product had some revenue already. For me the revenue was a validation of the fact that the product had potential, but it could hardly be used for valuation because I was raising a seed round. Despite those arguments, revenue along with the market multiple was always their method for valuation. Therefore, Termius valuations were pretty low despite the reduced risks like the post-revenue stage. This meant one of the following scenarios for fundraising locally.

• If Termius raised enough for a few years of runway, then the founders would have diluted their stake too much, which would have lowered the company’s growth potential. With a high founder dilution, Termius would be unable to raise the next rounds from good VCs despite any success because early stage investors got too much. The best investors see this case early on and avoid investing in such companies because the founders can lose interest once they are left with a small amount of equity. Check this video with Marvin Liao, Partner of 500 Startups, expressing his opinion on racked cap tables.
• If Termius raised a couple hundred thousand, then I would have to spend a few months of fund raising and another couple of months doing due-diligence, including the paperwork, for a pretty short runway.

Both scenarios made no sense. Once I figured out that there was no way around the low valuations, I stopped fund-raising locally.
By the way, New Zealand is no different from many other places apart from Silicon Valley. I heard exactly the same stories at Y Combinator from entrepreneurs from Europe and other parts of the United States. I guess that such conditions are due to the lack of competition among local investors. Most investors I talked with didn’t seem to have the fear of missing out(FOMO), which is the only leverage an entrepreneur has to progress to a deal.
Fundraising in Silicon Valley was completely different. In the beginning, it was hard to get a first meeting as cold emails hardly went through. Doing Startup School and going through Y Combinator helped to break through. Once I could get in front of the right people, the magic happened. VCs and angels in the Valley do have FOMO, so they answer emails within hours. They are also less arrogant and mind their reputation a lot more, which means two things. First, if they aren’t going to invest, they almost always tell you the reason within a few days after the meeting. In New Zealand, I was waiting for an email for two weeks from a well-known venture firm. Second, if they are going to invest, the decisions made very quickly. In addition, a startup doesn’t get a board of directors and two months of due diligence after a seed round, which is a huge time saver. Termius had an extra bonus: most investors in the Valley did have a technical background, so it was a heaven to pitch there.

Side note: There are two main ways of getting in front of investors in the Valley: other founders you might know who got investment from there and cold emails. There is a great video by Michael Seibel, CEO of Y Combinator, about writing cold emails to investors.

I was astonished by the speed of fundraising in Silicon Valley and asked one of our investors why Silicon Valley is so different to other places, e.g., Europe or New Zealand. He answered: “Don’t worry about them. They never saw a success.” That made me think that the Silicon Valley investors are more bullish because there are plenty of successful tech companies around and many of the investors were part of this success. Being bearish on startup investments is not cultural, but probably has more to do with having a surrounding critical mass of unicorns.