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What a top Silicon Valley VC thinks about fundraising during COVID-19, short runways, and your level of product readiness when you pitch

Tim Guleri, Managing Director at Sierra Ventures, talks about how product readiness and his perspective on fundraising in this climate.

Q&A with Tim Guleri, Managing Director, Sierra Ventures

Tim Guleri is a Managing Director at Sierra Ventures, a Silicon Valley-based fund that invests early – primarily Seed and Series A – and looks for proven product-market fit, disruption in the market, and strong IP. Here’s what Tim thinks about product readiness in a pitch deck, early-stage fundraising in this climate, and more.

Our research found that early-stage investors seem to prefer investing in companies that at least have a beta product. What level of product readiness do you look for in a deck and what can a founder do if they haven’t yet achieved it?

For Seed level investments, our focus is primarily on the entrepreneur(s) and the product-market fit for the solution, so we need to see evidence of a viable product roadmap and a beta is a great way to validate the solution, but if the beta is not finished, we look to their work with design partners and potential customers for data points. To this effort, we can bring the considerable network of the 60 plus CXOs from the Sierra Ventures CXO Advisory Board, that can be great validators of these early products.

When looking at pitch decks during the current economic environment is there anything specific you want to see?

While projections are important, we are especially interested in the various scenarios that the founder sees for the economy and how they plan to manage in a “best case” and “worst case”. There is no right answer for projections as we don’t have certainty on the future, but the thought process is critical for us. Additionally, presenting a “penicillin” value proposition (as opposed to a “vitamin” value proposition) is critical, and we look for customer-driven insights and no-brainer value propositions in these uncertain times. Companies that have “Product- Led Growth” as evidence of efficient go-to-market are the ones that catch our attention. It is my opinion that COVID will force that muscle to get developed for the best companies, which will grow even faster, post the COVID era.

It’s also important to note that as early-stage investors, we are very focused on the founder(s), and it is incredibly hard to build a relationship online when we otherwise would have had multiple in-person meetings both formal and informal (ie. over dinner). If a founder can address ways we can get comfortable – for example, providing customer or industry/investor references and sharing their network with us, it helps us bridge this gap and build additional data points.

We recently did a survey and found that 65% of the founders we talked to reported that their business was either maintaining or growing. Do you think that’s reflective of how adaptable tech has been during the pandemic?

The importance of technology and digital-first approaches have become powerful accelerators in this period of a slowing economy. Software and tech does literally power the world, and while some industries are experiencing huge pains, like the travel industry, others like “anything digital” are exploding and tech is at the center. That said, we believe that the best founders in any industry are incredibly adaptable and we encourage that kind of thinking while they are managing to the current economic uncertainty.

Another interesting finding was that only 9% of the companies fundraising had 12 months or more of runway. Do you have any advice for founders who are currently raising on short runways?

There is no question that the current situation surprised everybody. As an early-stage investor, we don’t like to overfund companies (which can lead to bad business behavior) and good founders want to balance the amount raised with dilution. Our target for early-stage companies is to raise funds to provide 18 – 24 months of runway. Many companies that may have been in the middle of that model in March have seen months of runway erode as growth projections come to a screaming halt. All founders we are advising have tightened expenses, taken across the board pay cuts, and have taken a moderate outlook to 2021, unless things improve. I think the good news is that short runways are the new normal, and investors are becoming sensitive to this environment, but, conversely, until there is more certainty in the recovery, we feel that valuations will be more measured.

Many founders we spoke with report that they’re sticking with their current valuations despite the economic changes. Are you seeing any major shifts in valuation?

Many venture funds are taking a “wait and see” approach to interim valuations, to gain more clarity on the depth and length of the economic impact that COVID-19 has created. We have companies that are trending up during this period as well as companies who are having to reduce their forecasts. We are confident that we will recover, although the timing is unclear, but we want to be careful in these analyses as these decisions impact employees, founders, and investors. That said, with projections being difficult to prepare for the next 12+ months, we do think that founders have to be realistic if they are fundraising today, as their prior growth targets are almost certainly going to be spread out and there is a higher risk of achievement than six months ago. The key is to keep the balance sheet funded, and survive to thrive at a later date.  The good news is that your competition is also going through the same pain. To quote an old adage, one does not have to “outrun the lion”, just “don’t be the slowest person that the lion is chasing.”

Is there anything you think founders should be thinking about right now or anything you want to add?

There is no question that the way we do business is going to change forever, and the founders that adapt the most and the fastest are going to win. We look forward to offering our help and assistance in this new journey.

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