An Open Letter to Demo Day Startups
Dear Incredibly Fortunate and Accomplished Startup Founder,
Congratulations! You're part of Some Famous Accelerator's latest batch, and demo day is coming up shortly. If you've never been to a demo day, you're in for a treat: there will be more investors than you can imagine in a single room, and most of them will be there for the sole purpose of investing gobs of money into your company and your batchmates' companies. Well, kind of. Demo Days are a boon for founders, but there are some pitfalls to watch out for, too. As an investor who has been to dozens of demo days, here are the most common missteps that I've seen:
Mistake #1: Not raising at demo day
This isn't always a mistake, but it's usually a huge missed opportunity. Occasionally I see a founder go up on stage and give an awesome pitch, then proclaim, "we're not raising right now but plan to start in 2-3 months." What? Why?! That makes me so sad. The investor-to-founder ratio at demo days is something like 10:1 or 20:1. Do you know what that ratio will be when you start trying to fundraise by yourself in a few months? It'll be 1:1, and often 1:0 when you ask for an intro and don't get any interest. Demo days are like Twilight movies: after the first few days, there's a huge drop-off in interest.
Mistake #2: Raising at too high of a valuation
The aforementioned 20:1 investor ratio makes it easier than usual to raise capital at an inflated valuation. A company that might have raised at a $4m valuation outside of an accelerator might be raising at a $6m-$12m valuation at demo day. Obviously higher valuations lead to less dilution, and that's very tempting. However, the downside of high valuations is that they raise the bar for your next round to the point that you can't have any missteps.
Here are some recent (estimated) benchmarks for Silicon Valley SaaS startups:
- No monthly revenue -> valuation $4m-$6m
- $25k in monthly revenue -> valuation of $7m-$8m
- $50k in monthly revenue -> valuation of $9m-$11m
- $75k in monthly revenue -> valuation of $11m-$13m
- $100k in monthly revenue -> Series A territory ($14m+ valuation)
If you raised a seed round at a $4m valuation, growth has been slower than you hoped, and you only get to $25k in monthly revenue, you might still be able to raise a bridge round at $7m.
If you raised a seed round at $7m, investors expect you next round to be at >=$10m, so you'd have to reach $50k/month.
If you raised a seed round at $12m thanks to graduating from an accelerator, it's next to impossible to do a bridge round, because to be at the expected $15m+ for your next valuation you'll have to get into Series A territory.
The point is: high seed valuations aren't just bad for VCs, they're also dangerous for founders . Be careful.
(Note: SaaS startups often have 60-80% margins. If your company does something else and has half the margins, then you'd need approximately twice the run rate for the same valuation as a SaaS company. This isn't a rule, just a heuristic.)
Mistake #3: Raising too little money at too high of a valuation
Even worse than pushing for a high valuation is pushing for a high valuation and only raising a little bit of money. Perhaps you were only planning to raise $800k, and your valuation got pushed up to $12m. So you decide to raise $800k at a $12m pre. Only 6.25% dilution -- awesome, right? Wrong. Now not only would you have to get into Series A territory to raise more money, but you also have very little capital to do that. If you're going to raise at $12m, at least take $2m-$3m from investors so that you have a long time to make substantial progress. 
Mistake #4: Rushing fundraising
The more prestigious the accelerator, the more likely a founder is to tell an interested investor, "Hey, you have three days to decide whether to invest because I want to close my round and get back to shipping product." I get it -- fundraising sucks. It's time consuming and draining and distracting and it puts a lot of things on hold. But picking investors is very important, too. Would a CTO hire an engineer after talking to them for 30 minutes because interviewing is distracting and they just want to code? No, of course not. So why would you take shortcuts when selecting investors? Take as much time as you need to get to know each person you talk to, because you'll be working with them for next 3 or 5 or 10 years. That's a long time to commit to, so take it seriously.
One successful founder/demo day alum even told me: "In most cases, you shouldn't take any checks at all on Demo Day proper. It's better to talk to everybody who's interested and set up a time to meet with them all individually over the following two weeks. As an added bonus, it will probably make the investors want you more, too."
Mistake #5: Not delegating fundraising to one person
Fundraising should be done by one founder. Ideally the CEO. Having your entire team of 2-4 founders go to every investor meeting is a huge waste of time for your company. The CEO should go to every investor meeting, and the other founders can come when they're explicitly asked to join.
Mistake #6: Comparing yourself to other companies
"OMG, did you hear that Frank closed his round before demo day? And it turns out that Mike is raising at a $15m pre -- but that's nothing compared to Jane's uncapped note!"
It's easy to get caught up in the success (or failure) of other startups in your class. Resist the temptation. Every startup is different, and the the correlation between your company's success and your friends' companies' successes is essentially zero. Don't get distracted and just focus on your own game plan.
Mistake #7: Trying to "game" the process
You don't need to manipulate facts or people to raise money. Don't try to create demand where there isn't any, and don't try to project linear growth onto a hockey stick curve. Occasionally those tactics work, but usually they simply backfire.
I hope you have fun during demo day, as it's a once-in-a-lifetime experience. Just remember, that the purpose is not to have fun or to raise the most money or to have the most famous investors, but to build the most solid foundation possible for your company.
 I know, I know, some people will read this and think, "well, of course a VC would ask founders not to raise at high valuations." I'm not advocating for lower valuations, I'm advocating for valuations that are fair. Those are better for VCs and for founders. I am against exorbitant valuations, but again unreasonably low valuations, too (e.g. step #3 of this post)
 For an excellent (and sobering) look at post-seed fundraising, check out: "What the Seed Funding Boom Means for Raising a Series A" by First Round Capital's Josh Kopelman. Every seed stage founder should read that article. Twice.Demo Day