Musings on cap table construction: arm yourself as you level up
By Luke Skertich
It feels like more and more we hear about cap tables being constructed in a concentrated manner. On the one hand, it makes sense. Why not let a fantastic Tier 1 lead come in, give you a stack of cash, and take most of the equity in the round, making you feel warm and cozy with a class act by your side?
On the other, it makes no sense at all to limit yourself to a single (or too few) partner(s) that has/have a core competency that coalesces around a single point of value. The optimal strategy is to arm yourself with a diverse group of investors. This is true despite the proliferation of large, platform shops, that do it all. Oh yeah, the no asshole rule applies to all of your selections.
If you, like me, were an absolute nerd growing up (and are also over the age of 30), you might know the game RuneScape. Let’s use this as an analogy for how to take on (and upgrade) your armor, weapons, and amulets as you level up round by round.
Friends & Family
You start the game with nothing but the shirt on you back, much like the startup is just an idea brewing in that noggin of yours.
Effectively, you’re a n00b. If you’re rich or your immediate network is flush with money, you have an inherent advantage: access to capital. If not, you might need to skip this step. If you are second or third time founder, you’re also pre-equipping some items.
General metrics for F&F:
- Raise Amount: $250k — $500k
- Runway: ~6 months; keep burn manageable
- Armor: n/a
Pre-Seed
You’re still a n00b. Think of finding a lead here as your first weapon. They’ll help you start slaying little monsters. There are many more generalist funds at this stage than model/industry specific and that’s okay. You can also start taking on angel tickets. Don’t take on angels because you think they’ll be obligated to buy your product (mostly talking about B2B here). Sell them first and then bring them on as angels. Do take on angels that can give you (1) differentiated access to potential customers (2) are experts in your market (3) are experts in the business model (4) have sold in the same geos or to similar customers, etc. etc. Angels and follower funds at this point should be taken if (1) you need more cash or (2) they bring a different value than your lead.
General metrics for pre-seed:
- Raise Amount: $500k-$2M
- Runway: ~18 months; continue to experiment & iterate
- Armor: iron sword (generalist pre-seed fund), bronze body armor (strategic angel that founded a non-competitive Series C company in your space), black cape (wealthy angel that deploys checks as often as they play blackjack)
Seed
Time to level up your weapon and protect yourself with some better armor. Again here, there are many more generalist funds at this stage than model/industry specific. That said, you’d do well to look for either (1) model expertise (2) sector focus or (3) a generalist fund with a thesis that aligns with what you’re building. Watch out for late stage funds that are tourists at the early stage and won’t protect their position. As mentioned above, if you have sold into companies already, you can gather up value-additive angels. If not, wait to bring them in (can always bring them on top of post-money). Look out for influencers that make sense to work with or leaders of communities that you want access to.
General metrics for seed:
- Raise Amount: $2M-$5M
- Runway: 24 months; feeling a bit closer to PMF or doubling down in a hypothesis
- Armor: steel scimmy (angel who is a GTM guru), steel armor (business model-specific seed & Series A fund), ammy of defense (small amount of venture debt to avoid dilution)
Series A
You’ve got early signs of product market fit, depending on the business model — and your unique journey — early revenues that are showing 10%+ MoM promise (or maybe 3x+ YoY already), you’re tracking KPIs that lead to retention, and you are ready to pour fuel on the fire given your thesis. Same advice goes for the lead’s focus. Since you are forming a board now (if not already), you must index for fit even more. Think about what you are struggling with or what weak spots you have today that you aren’t ready to hire yet. Look out for follower checks that strengthen those areas and get you on track over the next 6+ months. Consider bringing in a follower that plays at later stages too and can bring in capital at Series B from outsiders (that your Series A lead may compete with).
General metrics for Series A:
- Raise Amount: $5M-$20M
- Runway: 24 months; don’t run wild but time to start spending on your thesis (starting the 3x, 3x, 2x, 2x, journey)
- Armor: adamant long sword (follow-on fund with specific business model focus), gilded mithril armor (top tier thesis-driven fund), ammy of power (small strategic check NOT from someone you’d exit to but has connections)
Series B
Very impressive. Few companies make it this far. If you’ve gone model or sector specific in the past, you can double down, but it might be better to go back to generalist or thesis-driven. Has a partner operated in your space? That’s great too. While angels may not be as helpful now for size of check, they can be for very specific value add. You can consider deals with industry experts (like the Property Brothers with Properly). You should also consider family offices from successful entrepreneurs or large public companies. Don’t index on potential exit. Maintain optionality. Do not just take the highest valuation. This is a critical moment for you where you need to scale your infrastructure to catch up with your growth and continue doubling to tripling.
General metrics for Series B:
- Raise Amount: $20M — $30M
- Runway: 24+ months; invest in growth and get yourself in position to continue scaling
- Armor: gilded Rune everything (cross-over fund with deep pockets), dragon scimmy (combination of value-add follow-on funds), ammy of strength (handful of C-levels from public companies)
Beyond
It’s dealers choice with all the potential elements I’ve mentioned prior. Eventually, the thing to optimize for is deep pockets + experience with IPO, M&A, and additional lines to exit.
General metrics for Series C+:
- Raise Amount: $50M+
- Runway: 24+ months; if you can keep doubling without burning too much, great
- Armor: Dragon armor (PE fund looking to juice IRRs), Dragon scimmy (cross-over fund doubles down), ammy of glory (Mark Cuban gives you that funny money)
NET: optimize for the value you need at the stage you need it. Don’t get tricked into one firm taking all of the round. Bring in partners that TOGETHER create the best shot of your company succeeding.
