A toxic fundraising round provides funding but makes it difficult for the startup to raise follow-up funding.

Here are some signs of a toxic round:

Giving up too much equity for an early stage round of funding.

This makes it difficult to provide enough capital to future investors.

Raising too much funding at the early stage. 

This gives up too much equity for the launch leaving little room for growth investors.

Raising funding at too high a valuation.

The question to ask is, “If you raise the round at this valuation, will you be able to raise the next round at a higher valuation?”

If you don’t think you can do so, then you should raise at a lower valuation on this round. 

Giving up control of the company at the early stage.

This makes it difficult for the founder to grow the business since they don’t control the cap table.

Down rounds.

This can crush early-stage investors and send a signal to new investors that no one is safe.

Taking on debt in the early stage.

Follow on investors will want to see their investment go to growing the business and not paying off previous investors or lenders.

Some fundraising rounds become toxic and should be canceled.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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Disclaimer:
Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.