Don't believe the myth: August is one of the best months to fundraise
Editor's note: This is a guest post by Jake Chapman, a partner at Sazze Partners
Every year on July 31st at or around midnight it happens.
All the venture capitalists on the planet ascend into the heavens and are gone for a month. Deal making stops, founders closet themselves away to obsess over runway, and tech journalists busily write fictional stories about companies getting funded so that they have something to write about.
At least, this is what everyone would have you believe. Is the Silicon Valley trope that August is a bad time to fundraise true? As it turns out, the answer is more complicated than a simple yes or no.
For many companies, August is a great time to kick off fundraising and may actually be the single best time of year to do so. Founders who ignore August are wasting their most precious resource, time, and may mistakenly be raising during a substantially worse time of year.
To come to grips with whether August is a bad month to fundraise I examined five years of Mattermark fundraising data, covering the calendar years 2010-2014.
Why August is a terrible time to fundraise...
It makes sense to everyone that VCs take August off because, according to Gallup, August is the second most popular month for vacation (July comes in first). Given this common sense belief, most people are more than willing to repeat the myth without really questioning its validity. Compounding the problem, many “insiders” happily confirm the myth with anecdotal evidence. Ask any law firm or accounting firm that works with VCs and they will tell you that they use August to catch up because the VCs are all checked out. While most people are content to accept the folklore, if anyone had ever looked beyond anecdote and common sense, the surface level fundraising data would have seemingly confirmed the myth as well.
In terms of dollars raised, for the period between 2010 and 2014, August fell 18% below the median. Perhaps even more damning, it ranks eleventh out of twelve for dollars raised by month (February ranks 12th).
If this is where we stopped the analysis we would feel comfortable saying that August is a bad, if not the worst, time to fundraise. Thankfully, this is not where the analysis stopped.
Why August is an OK Time to Fundraise...
Founders do not wait until they only have thirty days of runway before kicking off their next fundraising process. That is because fundraising is at best a sixty-day marathon and is often more like a ninety-day ironman. Given that fundraising processes take closer to sixty days, the most important aspect of road show timing that should concern founders is the day of the year that opens the best sixty to ninety day window for fundraising, not the discrete month in which the most amount of money is raised.
Once the key timing issue is reframed in this way we can segment the calendar year into twelve separate periods, Jan 1 – Feb 28; Feb 1- Mar 30, etc. (see Fig. 2). Reframing the question in this manner produces some very interesting results. The August-September sixty-day window is better than six of the other periods. In fact, it beats the median dollars raised by 0.5%. The reason the August-September period is so strong is because September is essentially tied for the single strongest month of the year. From August to September there is a massive surge in fundraising activity, which results in a 40% increase in the amount of money raised in September over August. This 40% increase is the largest differential between two adjacent months.
Given that we know most deals aren’t closed in the span of a single month, what we can infer from these details is that a great many deals are actually getting done in the month of August but the vacation schedule of VCs means that a lot of these August deals aren’t actually getting closed until everyone is back in September. Do VCs go on vacation in August? Yes. Does this mean that founders should take a month off from fundraising? Absolutely not.
Why August is a Great Time to Fundraise:
Taking the analysis one level deeper, if we believe August is below average largely as a result of VC vacations slowing down the procedural closing processes but not necessarily a result of vacations stopping the substantive deal making process, then we would expect to see a larger portion of early stage deals closing in August. This is because early stage deals (Deals where less than $3MM is being raised) tend to have less due diligence, fewer problems to work through and simpler financing documents. In short, the procedural portion of these financing rounds is short and lends itself to being completed remotely. Contrastingly, while the substantive processes for early and late stage deals are similar, late stage deals have significantly more procedural hurdles. These deals have thousands of pages of due diligence, complicated board relationships and potentially tricky issues that must be carefully worked through.
So, what do the numbers show? They align perfectly to the model. For seed stage deals, money raised in August falls squarely on the median (it is 0.04% higher). More seed money is raised in August than in February, March, May, June, November or December. If we next look at later stage rounds (where $10MM or more was raised) we see that money raised in August falls almost 20% below the median (see Fig. 5).
The other phenomenon we would expect to see if our model is correct is a spike in later stage deals as VCs return from vacation in September. What the data shows is that later stage fundraising for September comes in 17% above the median. More importantly, at the seed stage we see 10% more money being raised in September than in August. However, in later stage deals an astounding 45% more money is raised in September than is raised in August (see Fig. 3).
According to the best data available, August is, at the very least, a fine time to begin the fundraising process no matter the stage of your company. That said, when we look at sixty-day fundraising windows for seed stage companies we find some very interesting results.
At the seed stage, the sixty-day window beginning August 1st is the second best window of the year in which to kick off fundraising, behind only September/October. (see Fig. 4) Seven percent more money is raised in the sixty-day August-September window than is raised in a median month. Obviously if we were looking at 90 day fundraising windows this would also mean that the absolute best time of the year to kick off fundraising at the seed stage would be August.
The Worst Time to Kick-off Fundraising:
Myth busted. August is a good time to start your fundraising roadshow. On the other hand, the worst time to fundraise is clear: February.
As shown in Fig. 1, February is twenty-five percent below the median in dollars raised and March isn’t substantially better at seven percent below the median. The sixty-day February-March window is the worst sixty-day window of the year at fifteen percent below the median (see Fig. 5). Surprisingly, the February-March weakness holds across all fundraising stages. Compounding the problem, the April-May window is only just slightly above median. In short, it isn’t until June that there is a real uptick in fundraising. If you are a founder trying to game the fundraising system, you would be well advised to avoid the early portion of the year.
At the end of the day, founders are able to close fundraising rounds all year long. Great companies will always be able to find great investors with whom to partner. More than anything, what the data shows is you can’t take what everyone “knows to be true” as fact. How many founders have sat out the month of August and have blown opportunities because of it? We’ll never know for sure but certainly many have. Remember, venture capital is not a perfect market and there are still many inefficiencies and myths remaining to be busted. That is what makes it so much fun.