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Raise Less Money (aaronkharris.com)
288 points by Harj on Aug 12, 2020 | hide | past | favorite | 107 comments

Aaron is very smart, but what this article is missing is that valuation often follows the amount of capital you raise. What I mean is your valuation is determined by the demand for your shares. VCs have a specific ownership % they need for their model to work. Whether that is 10% or 20%, large rounds at very high valuations happen because of bidding wars. More VCs are bidding over that 10% or 20% they are looking for and that drives the price up. Many successful entrepreneurs say its not the amount you raise that is dilutive, it’s the number of times you raise.

In addition, good seed VCs are happy to give you a higher valuation when you have investor demand, so you can take more capital. This was my personal experience. Before our round closed, we had $X committed at $Y valuation, giving up 20%. When more capital came calling, our lead was happy to raise the valuation so we could take more money and increase our odds of success.

Would be great for Aaron to address this point.

I've heard founders say this too. The mentality is "look, you'll end up giving away 20% of your company on the round anyways, so you might as well get more $$$ for that 20%". As if the % is fixed and immovable.

In my own experience, this minimum % ownership target is a very real issue and bar to jump over for most "proper" Series A VCs. At least the ones leading the round.

If I was in that position, and it was a great fund, it would be very hard to imagine saying "no, I'll value my company less, and take less $$$, for the same dilution." Human nature IMO basically favours taking more $$$ every time ONCE % is fixed.

However, Aaron might say that the best companies can easily push back on that fixed % approach, which is the true issue here. And that's a good counter point. But many of us, even as YC-backed companies, don't know how to effectively push back against that dynamic.

For me, out of the 5 Term Sheets I got for our Series A, I think all of the funds involved had a minimum % ownership target. Hard to negotiate around that. Normally if there is a term you don't like, and you have multiple sheets, you can just play them off each other. But it seemed pretty universal in my admittedly narrow experience.

One additional point. If you have existing investors who have pro rata rights, the larger the check from the new round lead investor, the more existing investor money is also being put in. And since all VCs are basically in a "I want to put as much capital into winners as I can", the insiders are likely OK with larger rounds / valuations in general, since they get to place more $$$.

This is it. These people are money managers that market based on owning x amount of one of the top 50 companies each year in order to raise a new fund. If they take smaller % the model fails both executively and from a marketing perspective.

I was at 2 successful companies that went against the normal VC path.

Vitria was able to move the VC % lower because they were already profitable and demonstrated potential before approaching the VCs. They were only using the VCs for their contacts and not for cash.

VMware never got VC funding. I am not sure why - but they tried. They finally sold themselves to EMC and were later spun out.

According to Crunchbase VMmare raised almost $400M


2/4 rounds (and the overwhelming majority of the $$$ raised) were years after the EMC acquisition, and immediately before the IPO. Not really what people think of when they talk about raising VC.

The 5 million and 20 million rounds in 2000 were strategic investments from partners who were going to resell ESX, and were done for reasons other than needing working capital. IBM and Dell were the 2 partner investors, IIRC.

Thanks - at any given round, dilution is driven by how much money the founder agrees to take. No outside party can force a founder to take dilution, it takes an agreement on both sides.

While VC ownership targets are part of their business models, founders don't actually have to agree to meet them. From what I've seen, those targets are far more flexible than anyone admits at the start of a negotiation.

While I tend to agree with you in principle, I'm curious how often YC is flexible on the ownership target :P

This is part of my point, founders don’t have to accept our deal even though we put it in writing ahead of time. It’s not the founders responsibility to make our business model work, it is their responsibility to build a great company. If we agree on an entry point for us to go along for the ride, great!

This is exactly the issue though? Investors say “hey you don’t have to raise from us if you don’t want to give up X% of the company”. Which leaves no room to negotiate.

The ONLY time you can expect to sell a smaller % of the company in a round is if you go to an investor and say “hey this OTHER investor wants the same % but is paying more, are you willing to take a lower % at a higher valuation?”. However, this seems very rare and the VC driving up the valuation is usually a higher tier VC in a bidding war, so founders are likely to go with them.

Long story short, if you want to convince founders to sell less of the company, you have to convince top tier VCs to take less, and founders will follow suit.

No outside party can force a founder to take dilution, but unless you are the hot oversubscribed startup, rounds are often just enough money and you find yourself coming back hat in hand to be diluted over and over.

The first time I read about this topic, the author suggested counter-offering a smaller investment for a slightly higher dilution/$ to soften the blow.

As in, “I don’t need $50m (for 20%), how about $23m for 10%?”

I have never been to any of these meetings, but it seems like the guy who just skyrocketed your valuation for his 20% is going to be “louder” than the earlier investors who also own 20%. The % of investment versus the % of investors will probably skew things a bit, too.

>our lead was happy to raise the valuation so we could take more money and increase our odds of success.

VC is such a strange world.

"Valuation" is a measure of the fair-value of an asset. How can a lead investor decide "to raise the valuation"? Why would anyone looking to invest base the valuation on people who already have money in, rather than their own due diligence? Why wouldn't the optimal valuation be as high as possible?

This game is kind of confusing.

Because in a startup, valuation is generally calculated by the investor rounds rather than revenue.

An investor can raise the valuation by putting in more money for the same ownership percentage or same money for less percentage.

They wouldn't generally want to boost valuation for their round because that reduces their return. But there is probably some wisdom in hyping up valuations to get customers and future potential investors excited.

Additionally, if it is a follow-up round, they probably want to invest at a higher valuation just for their own investor confidence. No one wants to have a "down round" because it throws cold water on the hype train for all the other investors.

>An investor can raise the valuation by putting in more money for the same ownership percentage or same money for less percentage.

That's the confusing part, and it seems backwards. The valuation should determine how much money you are willing to put in for a specific ownership share. It should be an input, not an output.

The valuation is established by the person writing the check. It’s based on their perceptions of the market and how the team is tackling it. VCs don’t really care about dividends, they care about exits. They are trying to buy part of a startup for less than they can sell it to a buyer or the markets. The financial capacity of potential acquirers and their relative need for the startup’s business drives what that check writer is willing to pay. IE the market for a startup’s equity is the input, and the valuation is the output.

As PG recently shared, when an investor puts money into a company it is a calculated bet that the company is actually worth _more_ than the valuation they are investing at. No one invests $1 for a 10% chance of making $10. So if the valuation goes up, it basically eats into an investors expected “profits”.

While I am not going to argue that valuations are wholly rational (and specifically the fact that valuations increase with investment size), it is also true that having more capital may make the company able to accomplish more, and thus raise the expected exit value for the investor. If so, that provides a rational basis for increasing the valuation of the company when giving it more capital. (Present valuation being the discounted future valuation)

I would also add that having more/too much capital may also be the downfall of many companies.

Outcomes are roughly binary though

It's a bit confusing but does make sense. Imagine wanting to buy 20% (or 100%) of Apple in the public markets. If you try in normal trading it will either take months based on trading volume or you'll bid up the price as you're buying.

People looking to own larger pieces of a business are often willing to pay a premium to folks trying to buy smaller pieces.

The game is called financial engineering and it's how most SV startups actually generate an eventual exit/profit for the investors.

Optimising for a good valuation (over a good business that you own lots of) is missing the point.

Worth keeping in mind the principal agent problem literature. Selling equity in a company is vulnerable to “lemon” problems. Startups with product market fit want to minimize dilution and keep executing before raising at a higher valuation in {12} months. Startups without PMF want to maximize runway to maximize probability of finding PMF. VCs know this, and startups know VCs know this, and etc. Unfortunately this can create perverse signaling incentives on both sides.

This sounds like a variant of the winner’s curse. https://en.m.wikipedia.org/wiki/Winner's_curse

I think Aaron is talking about seed and stage A rounds more so than later rounds

I’m also referring to seed and A rounds.

I think you're largely right -- a lot of founders get trapped in mediocrity because they raise so much that they don't feel enough pressure to execute. And that frequent, high-resolution fundraises are much more viable than they were ten years ago.

On the other hand, I'll offer two countervailing observations to keep in mind:

* In well-understood categories (e.g. horizontal B2B SaaS), there has been so much brainpower and cash deployed in the last ten years that customers are overwhelmed by noise and expect much higher quality products before they'll meaningfully adopt and pay. My experience is that founders are spending much longer in the initial build phase getting to an MVP than they were ten years ago.

* The oversupply of venture dollars is not evenly distributed. If you're building something that needs years in the lab (chips, batteries, robots, hardware, etc), the investor herd thins out quickly and many of the folks willing to make a purely conceptual bet are much less comfortable judging whether some-progress-but-no-product is worth continued investment.

Sometimes it can be smart to raise a lot from a true believer to bridge you to the spreadsheet jockeys.

You're spot on with both observations and it has been our experience with the venture circuit. Especially for enterprise accounts, the bar is set significantly higher for what companies are willing to shell out money for. Good high-quality software that enterprises are willing to adopt generally takes 1-2 years of full time development. There's definitely a need for true believers but for founders, without a solid network, it's hard to find.

@ Aaron - Thanks, as always, for the thoughtful note but I disagree with you on this. Yes, there is risk of over-dilution if you raise boatloads too much out of the gate (including the very real and potentially fatal risk of being undisciplined on spending). But at the end of the day, if a founder figures out the business in that first 12 month window and is still sitting on another 12-24 months of cash, she has so much more power than if she is 4 months to cash out. She can take capital now but exactly on her terms. She can decide to keep pushing and raise in 12-18 months when the business will be in even better shape (and valuations higher, etc). Time becomes her friend, not her enemy. In my opinion, one would be crazy not to take more capital when it's this insanely cheap (valuations for 2 people with a powerpoint have never been higher). As we've seen with so many great companies, p/m often takes more than 8 months. Take more than you need and buy time. It will come out in the wash. I know this may sound self serving given my VC Cloak but having raised my first venture round as a founder in 1998, it comes from a place of experience (and pain). Thanks for listening.

Always enjoy our debates.

I think we're mostly on the same page here. I'm less concerned with companies that raise 18-24 months of runway than the ones who are coming out of seed rounds with 36 months or more. I think balance is critical, and I'm hoping that founders find more of that balance vs. the recent pattern I've observed of founders taking every available dollar.

Is it still possible these days to found a startup and raise funding based on just powerpoint slides? Are there examples of this?

Yes very common.

Almost always however there is something special about the founders e.g. they previously exited a successful startup or are simply a rockstar who all the VCs follow on Twitter.

It's not recent but Canva got funding with just a Powerpoint. And I can't imagine Justin Kan needing an MVP for Atrium in order to get into YC.

My guess is that this advice of "raise less money" is a result of hanging around too many successful founders.

That is, if you talk to successful founders, they will generally wish they raised less money (due to dilution).

And, if you talk to failed founders, they will generally wish they raised more money (to increase likelihood of true PMF).

Also, I think that fear is a useful mental state when there is real and imminent danger. In startup land, you are right to be fearful, because you are much more likely to die than stay alive.

If you don't have the luxury of unlimited shots at success (due to a lackluster safety net or other life goals), it makes sense to maximize the likelihood of success in your current venture. There is a lot of "startup cost" to working on a new idea, and in a lot of fields, you will eventually succeed if you just stay alive/don't die.

A response in two parts:

1) I spend more time with founders who have yet to succeed or who have failed than with founders who succeed. This is true of many early stage investors. The advice here is built off watching both groups.

2) I generally think it makes sense to model advice on what successful people have done while incorporating learnings from the mistakes that all types make.

Founders need to believe they're going to succeed, though of course they should mitigate risks where possible.

I had a company, and I was not particularly successful at raising money. I'm quite confident the main reason for this is because I was brutally honest about what was and was not possible, as investors offered me millions if I would just try X or Y. I would analyze their proposals, and come back and say "this will never make money and I can show it with incredible certainty." They then gave that money to someone else who offered to do that, and they failed because it was a terrible idea.

If I had raised more money, I would have wasted even more years before coming to the very painful reckoning that my startup was just untenable. I realize my tangent is unlikely related to your point and is separate from the article, but for a first time founder I am very glad I stuck to my integrity and only lost a few years of my life learning a valuable lesson instead of a decade.

In fact, I recently had an epiphany - if my startup succeeded and I'd become rich, I'd be a much shittier person today because of it. That failure fucking wrecked me but I needed it.

It physically hurts me to think about how dead accurate this is.

You tell someone exactly why something won't work? Get rewarded with a door to the face. You save precious time because you care about actually building something of value. But you get no money.

Yes Man comes along. Takes the money. Fails spectacularly. Yes Man doesn't give two shits about improving anything and walks away rich(which is all they even wanted).

So hilariously ridiculous, but this kind of thing happens. All. The. Time.

Being right in the middle of that I have to say I'm surprised by a lot of the investors we've talked to and how they seem to want to fit everything into easy, simple and existing templates. Basically, risk aversion. The big downside of that is that that means non-innovative (not novel/new). Non-innovative projects usually doesn't work out - after all, they're not innovative.

So, in other words, investors are looking for non-innovative projects (due to their blind risk-aversion). Why would you do that? If you are looking for low risk, index funds are available. There are lots of options if you want to spread your risks. I guess the simple answer is most I've talked to simply aren't that smart (as investors anyway)... :/

> So, in other words, investors are looking for non-innovative projects (due to their blind risk-aversion). Why would you do that? If you are looking for low risk, index funds are available. There are lots of options if you want to spread your risks. I guess the simple answer is most I've talked to simply aren't that smart (as investors anyway)... :/

Software VCs are so risk averse because startups have to find product market fit, which is already risky without throwing a bunch of tech risk on top of it.

That PMF bit is crucial: biotech VCs' don't follow that same pattern because they have relatively precise methods to identify product market fit, before the drug is even approved for sale. They have much more precise data on how many potential potential customers each drug could possibly have from public health data, how much they can afford from previous agreement and contracts with insurers combined with quality of life improvement estimates for the drug candidate, and a minimum of a 5 year monopoly which is usually closer to 14 years. Thanks to those factors, biotech companies have a damn-near-guaranteed exit strategy by phase 3 trials in the form of an acquisition or zero revenue IPO and the VCs can take much bigger risks.

Well , keep in mind that making money with real revenue , making money of an strategic sale and Improving / solving a real problem are all not always aligned. It is fairly common to achieve one or two of the three and still fail or succeed.

VC funds needs to make money, that only comes of an exit , if you can have real revenue before getting an exit it is great , if you are solving a real problem even better, but those two are not going to help VC meet their goals directly .

You as founder are spending 5-10 years on one thing , for the VC your startup is one among the dozen he is getting on, their tolerance of your failure is far higher than your own tolerance for your failure

What % of first time founders who are failed founders, end richer than they started?

For a large part you cannot be certain of a lot of things in a startup. So being honest is not entirely relevant. What matters is your genuine belief in making it a succes and are able to bring that message to the vc.

In many cases "raise less money" is actually "hire less people".

When seeing it as a "we hired too quickly", I see the same problem in failed, pivoted, and successful startups. It is your basic mythical man month problem, and most if not all VCs encourage this management mistake.

The "hire fewer people" can often be restated as "have fewer projects". One real problem with raising too much money early can be making it too easy to say yes to ideas. That, coupled with a focus on time-to-market that overbalances validation can yield you a lot of half finished products that were never likely to work.

I believe that the entire idea of accumulating runway from raising money is mostly a fallacy: VC expect money to be used for finding victory (and a bigger one, while you're at it), not for postponing defeat. All of that nice money is earmarked for doing things that you didn't did before, not for filing existing holes.

Staying within the aviation metaphor you get a longer runway, but also a heavier plane with many more seats. You'll better not have oversold on the capabilities of your engines.

> That is, if you talk to successful founders, they will generally wish they raised less money (due to dilution).

Yes, there is a bit of a self-selecting bias involved here, but the thesis of _WHY_ you should take less valuation is (in the linked article) not based at all on the notion that you then end up with a large piece of the success pie.

It's based on: Hey, take what you need to prove that you have a good product, and don't take more, because taking more just means you'll be chasing a failure for that much longer.

The central tenet of "stop worrying about runway so much, you want as much runway as you need to prove your product and any more runway is just wasting everybody's time. Runway is a tool; not a goal." sounds rather compelling to me, at any rate.

I agree with that piece of the article. That is, we should make efficient use of our time and resources. I just don't think it follows that you should raise less money.

Raising more money (especially on non-onerous terms, as suggested in the article) grants you additional optionality down the road (when shit inevitably hits the fan). This sort of optionality is a great way to mitigate risk in what is already a very risky endeavor.

At the end of the day, there's nothing stopping you from being just as efficient with your time/capital. If you want, just set aside that extra money as a safety net, and if you don't want to use it, close shop and return it to your investors.

One problem I had as a founder was that it was difficult to raise little money early. There are not enough angels around here. People wanted to push too much money on too early, so "seed" was not viable. There's nothing wrong with having extra money in the bank - the problem is that a lot of VCs expect you to spend the money you have raised, which often meant scaling before hitting PMF.

Right a startup looking for funding (by its very nature) means you're creating a situation where your company will be in the process of going out of business the moment you get your capital. Your job is to prevent that eventuality.

So think of a new restaurant that loses money on every customer until they figure out how to take more money in through the till than they're paying out.

Fear often results in miscalculation that creates worse results. One of the main objective of management training, leadership coaching, or even military training is eliminating fear based decision making.

> I think that fear is a useful mental state

How much time have you spent in actual _fear_, as opposed to merely having very clear goals?

> "If you’re a good company, you’re either going to raise your Series A - or Series B - in the next 12 months or have significant revenue such that you won’t need more capital. If you’re doing badly, why would you want to keep working on this for 24 or 36 months? That’s a waste of your time."

I'm a big fan of Aaron and his posts, but strongly and respectfully disagree with this line of thinking. As a VC, I've worked with companies that raised after 12 or 15 months, but most require a lot more time. I'm guessing median time from seed to A these days is something like 20 months, and I've seen as high as 35-40 months (including for YC co's I've worked with). Some companies just take longer to figure things out because they need a few small pivots first, or they're creating a new category and need time to figure out how to message their product, or etc.

We've backed several companies at seed that are now worth $100m+ but took years to get from seed to A.

Anecdotally when I ask founders about their seed rounds, almost no one regrets raising too much, but a lot of people regret raising too little.

Those delays seem correlated with the OP’s point: those earlier rounds are too large. If the rounds were smaller, they wouldn’t wait 40 months between rounds.

The cases I'm referring to are involuntary waiting. The long seed->Series A times are because the companies are not at a stage where investors would fund the company again; the waits are not something the founders are doing voluntarily.

Right, so the prior round was too large, the company is not putting the investment to as effective use As a company that can turn it around quicker.

The "certainty of over-dilution" is an important technical point. It seems to be a consequence of the illiquidity and high friction of conventional priced equity rounds. But it may be possible to design a fundraising instrument that avoids this problem.

For example: company raises $10M Series A, issuing 2 million new shares at $5. Let's modify our special Series A docs to include a provision where the company has the option to repurchase up to 1 million of these shares at any time. The pre-agreed repurchase price is $5 per share plus some time-based interest rate and/or a fixed markup. (Hmm, this sounds a lot like convertible debt...)

If the company becomes profitable quickly they may exercise the option to repurchase the 1 million shares, reducing dilution while providing both an immediate return and ongoing upside to the investor.

If the company needs the longer runway, or simply decides it's more beneficial to use the cash to fund growth, they already have it and the investor has correspondingly higher ownership.

It's sort of like a vesting schedule for investors.

If such a structure was agreed to, the headline "Raise Less Money" would probably become "Burn Less Money". Right now, the mere raising of the money causes the dilution; in this alternative structure, it's the actual net consumption of the money that causes the dilution, because the alternative use of that cash can always be to reduce dilution.

But why would an investor agree to that? It's more risk with less upside:

- if the company does well enough that its share price rises, it's only normal to buy back your share (why wouldn't it? they just raised better-valued round! Not buying you out is just leaving money on the table)

- if the company doesn't do well, there's no reason for it to pay the markup, they'll simply continue to burn the money.

So you risk the entire sum, but stand to gain significantly only from the non-repurchasable portion of it. I could _maybe_ see it working for a time-based interest rate (if the rate was high enough), but not for the fixed markup. Unless we're talking about a really hot startup that the investors are dying to buy into and would accept pretty much any terms.

Convertible debt agreements address this problem by making subsequent financing/acquisition/IPO trigger an immediate conversion to equity. (Similarly, in my alternative, it could simply disable the repurchase option.)

This lets you achieve high resolution financing based on the amount of cash you have in the bank immediately before the next financing/acquisition/IPO. If you raised $10M but only spent $6M before raising the next round, you may use the remaining $4M in the bank to perform the repurchase. But you can't use the new Series B money for the repurchase. If you consumed $9M then you only have $1M remaining for the repurchase and will eat more dilution.

Effectively, your dilution becomes a function of how capital efficient you've been. Investors may agree to it because it might encourage people to build profitable companies: it encourages companies toward capital efficiency as they search for product-market fit, while giving companies enough runway to weather hard times.

For founders, this means your net dilution is now a stronger function of how well you operate over time (and a weaker function of how well you fundraise). That may be a good optimization for the startup ecosystem.

I agree with you 100% that "you risk the entire sum" but limit the upside. There are more knobs but it may be possible to set them in a way that investors agree to. Imagine my 2M shares @ $5 Series A. Suppose 1M are repurchasable at $6 (a 20% markup) plus 10%/yr interest rate. At t=0-, the investor has $10M and the company has $0. At t=0+, the company has $10M in the bank and investor has 2M shares. At t=1yr, suppose the company has spent $2M getting launched ($8M remaining) and hits some great milestone (i.e. becomes profitable, raises a new round, or gets acquired), and it exercises the repurchase option. After repurchase, the company has 8-6.6 = $1.4M remaining in the bank, and the investor has $6.6M cash plus 1M shares. The investor's effective purchase price of their remaining 1M shares is $3.40/share, thanks to the $1.6M in profits from the repurchase discount and interest.

> If you're doing badly, why would you want to keep working on this for 24 or 36 months? That’s a waste of your time.

If you were writing a book and it was taking six months longer than expected, but was otherwise high quality, would you just abandon it? Or would you say that, you know what, in the big picture an extra six months isn't really material in terms of the expected benefits that will accrue over the next 20 years of my career?

I understand that by raising capital you're committing to provide a certain return on investment. But if you're actually making progress toward creating some asset of value, then structuring your business so that you need to shut it down if it's taking longer than expected seems to be not aligned with what would seemingly be in the best interests of any rational stakeholder.

Each endeavor you undertake will have different hurdles for how to define worthwhile progress. You need to evaluate what you're doing against a the right framework.

To use your example - if you're writing a book as your full time job and, after 12 months, haven't finished the first page of your manuscript, it would make sense to seriously reconsider whether or not you should be writing that book.

I agree with reconsidering whether or not to continue if you're not hitting your milestones. But by raising the minimum amount of money necessary to hit your milestones, you're not giving yourself the ability to reconsider unless you're default alive.

So I guess what I'm saying is that if you're default alive, this strategy makes a lot of sense. But if you're default dead, it seems reckless. E.g. there was nothing structurally wrong with a lot of the companies that got wiped out due to covid, and I'm sure there were lots of founders that would have happily just scaled down for six months or whatever but were locked into agreements that didn't leave them with the ability to do that.

> To use your example - if you're writing a book as your full time job and, after 12 months, haven't finished the first page of your manuscript, it would make sense to seriously reconsider whether or not you should be writing that book.

Hopefully no one shows this comment to George RR Martin...

>If you were writing a book and it was taking six months longer than expected, but was otherwise high quality, would you just abandon it?

That's the opposite of doing badly. If success is only a few months away then you can simply ask for more funding.

There is an old saying that people respond to greed or fear. In fundraising, the greed is price, the fear is control.

When I fundraise, I start with the greed so investors optimize for it. Right before we hit an understanding (pre/post term sheet), I switch gears and exchange lower valuation for more control.

Works really well.

This article boils down to "all things equal, it is better to own your company than not." Yes, of course.

But it also ignores that the primary reason to raise money is to leapfrog: a business is not short-term sustainable, but IS long-term, and investor capital gets you over that hump.

With this view, the reason higher-value companies get diluted more is because the hump is larger: founders can only justify a high valuation with a significant influx of capital (the before-cash valuation is effectively 0), leaving the investors with the bargaining power, not the founders.

Yes, people should be less enamored by the VC hyper-growth model than they are, but that doesn't mean that people already in the forget-short-term-profits game shouldn't raise a lot of money.

> a business is not short-term sustainable, but IS long-term, and investor capital gets you over that hump.

Unfortunately, investor capital changes the dynamics such that what would be long-term sustainable without investment, may very well not be long-term sustainable with investment.

"But I now realize that this is the wrong framing because simply staying alive is an inadequate goal for a company. Founders start companies to find product market fit and grow. Venture capital is designed to speed growth, not to extend runway."

PG says in his essay "How Not to Die": "If you can just avoid dying, you get rich. That sounds like a joke, but it's actually a pretty good description of what happens in a typical startup. It certainly describes what happened in Viaweb. We avoided dying till we got rich."

Aaron pre-empts this by saying that things have changed about the availability of funding to competent founders over the past 10 years, so the advice should change. I don't buy that. Shutting down early and raising new money for a new startup may give you a greater chance of the huge exit, but not dying is the best way to maximize likelihood of becoming rich. Maybe not unicorn rich, but FU money rich.

I think there's also "death by VC": raising too much money, losing control of the company, and then the company heads in an infeasible moonshot direction. One example might be Google's buy-and-kill strategy. But PG's essay is really about the early months of a startup, whereas this is later in the game.

> If you’re doing badly, why would you want to keep working on this for 24 or 36 months?

Doesn't this run exactly contrary to the prevailing YC wisdom that "those who stay in the game are those who win?"

While pivoting in search of P/M fit, every startup is doing badly — until they're not.

Would you really suggest to pack it in after 12 months without traction or luck? Instead of pivoting and adapting? How many of YC's Top 100 wouldn't exist today if they operated by that advice?

I don't agree that that's the prevailing wisdom at YC. As with any other broadly stated piece of advice, the specifics matter.

I think about this in this way: https://blog.ycombinator.com/shutting-down/.

The idea of raising money to speed up high quality execution instead of raising money to add “months of runway" is a powerful re-framing IMO. One of those reframes that sounds so simple one may overlook how different these two mindsets are, and how easy and tempting it is to fall into thinking about "months of runway".

I'd argue that general point is the most important idea in this article. Unfortunately I think the discussion on that more general point may get drowned out by the discussion of the weaker (and not as widely applicable) secondary idea in the title — raising less money.

Better advice would be to follow this simple rule of capital allocation: If you're stock is over-valued, sell it. If your stock is undervalued, don't sell any and instead try to buy it back.

"Confident, competent founders should take the risk of running out of money vs. the certainty of over-dilution" -- I strongly disagree with the author on this point. I would argue that founders preferring "risk of running out of money" to "certainty of over-dilution" might very well be considered irresponsible (or, at least, not responsible enough) instead of "confident".

Firstly, because it is extremely difficult to accurately estimate future financial needs of an early startup (due to lots of unpredictable factors, including R&D taking longer than expected, external/internal events and even potential pivots). Secondly, because it just makes much more sense to avoid running out of money (which is a well-known #2 reason for startup failure[1]) than to save some equity. What are you going to do with (more) equity of a failed company? Not to mention that, if a startup's team includes other people, one of the founders' top priorities should be caring for their fellow team members (and protecting company is one of the relevant aspects).

[1] https://www.cbinsights.com/research/startup-failure-reasons-...

Relevant PG tweet:

> assuming I got in [to YC] I would not get sucked into raising a huge amount on Demo Day.

> I would raise maybe $500k, keep the company small for the first year, work closely with users to make something amazing, and otherwise stay off SV's radar. In other words, be the opposite of a scenester.

> Ideally I'd get to profitability on that initial $500k. Later I could raise more, if I felt like it. Or not. But it would be on my terms.

> At every point in the company's growth, I'd keep the company as small as I could. I'd always want people to be surprised how few employees we had. Fewer employees = lower costs, and less need to turn into a manager.


Probably a good example of a confident, competent founder (Founders who raise too much capital are acting out of fear rather than acting out of confidence. // Confident, competent founders should take the risk of running out of money vs. the certainty of over-dilution.) as described on this essay :)

I have not raised recently, but when we tried to raise in 2013, the silliest thing was the "requirement" to move from NYC to SF/SV. Operating in NYC (as opposed to SF/SV) alone would allow us to raise less. I'd raise less, but i'd love to also base myself in a lower C-o-L location than SF/SV.

I hear this isnt as common now, but i'd love to hear fresh stories.

That seems to be the case less and less.

I think a lot of what he's talking about boils down to basic communication issues.

Venture Capital would be helped by a formal renaming of funding rounds. "Series A" or "Series B" is not indicative of what that money is for. Even "Seed" doesn't really mean anything these days. It would help clarify expectations for founders and VC.

Fund round naming is basically a joke. I know a guy who raised "pre-seed" money because he thought the amount he was looking for was too small to call a "seed" round. I know another guy on his 4th "seed" round in as many years. The cumulative value of these seed rounds is more than some series A's in the last decade.

This is great advice that has been ignored for the 16 combined years I've been fundraising as an entrepreneur and investing as a VC. No reason it'll change now though hopefully writing about it helps a bit.

One of the great myths in company-building is that increasing runway beyond 24-36 months increases chances of success.

Would it have changed outcomes for you as an entrepreneur?

The only thing I wish I had done differently was reduce dilution, which is exactly what Aaron mentions here.

Didn't HBO's Silicon Valley do a bit about this?

Exactly my first thought

"How much could you get done in the next 12 months with the amount of capital you are planning to raise? If you’re a good company, you’re either going to raise your Series A - or Series B - in the next 12 months or have significant revenue such that you won’t need more capital"

I think getting to significant revenue such that you won't need more capital is an underrated approach that seems to be brushed off in the venture world. It's totally possible – if you really believe your equity is that valuable, then build something valuable enough to earn some revenue and constantly reinvest that back into the business to grow.

As someone who chose to raise only 40% of what was available at the same terms, the decision seems even better in hindsight.

VC funding comes with expectations for how new capital will be deployed until the next round, and if you raise a lot in the A but don't have enough progress to show for it before the B, you're going to be in a tough spot.

So it's not just about dilution; you're reducing your risk for the next round if you raise less because it's much harder to deploy large amounts of capital without lowering returns (in this case revenue, customers, and hiring).

Did you take less from each investor, or cut out some of the interested investors?

Just less money from the lead investor.

Huge fundraises are celebrated because it is the only thing simple enough that anyone can understand (customers, employees, investors and other sheeple whose attention the founder must compete for).

"Airtable CEO Howie Liu on the continued importance of getting a ‘unicorn’ valuation" https://techcrunch.com/2019/02/19/airtable-ceo-howie-liu-on-...

Isn't the whole idea of Schelling points that they arise when the parties can't communicate with each other? Surely there's plenty of communication and coordination possibilities in investment rounds?

Really depends on what you are trying to achieve. VCs are very focused on the ROI for their fund. A co-founder is generally focused on generating wealth for themselves.

In the perfect case where the business finds a high growth, product market fit then VCs and the entrepreneur align. Few businesses fit this model.

As an entrepreneur you have to raise money to suit your business plan (and risk profile). Personally I prefer my customers to be the boss rather than investors.

Some things take longer, because they’re harder to do (space, AI) or the nature of the beast requires length of time outside of your control (selling to enterprises/gov, bio/pharma trials).

This feels like advice squarely pointed at something like social that’s often easy to build but hard to get market penetration.

"If you’re a good company, you’re either going to raise your Series A - or Series B - in the next 12 months or have significant revenue such that you won’t need more capital. If you’re doing badly, why would you want to keep working on this for 24 or 36 months? That’s a waste of your time."

This black and white view of "good" and "bad" companies is so insulting. Same with "good" and "bad" founders as referenced in this article and even by PG elsewhere. How patronizing! I personally know "bad" founders who were running "bad" companies because they loved and believed in their business, and only 3, 5, or even 10 years into it found the right opportunity and had life-changing outcomes.

Is there any "raise a bit of money to sustain myself with a side project for a year" in exchange of, I don't know, 50%? Like a partner who will bet that this side project will be able to sustain two people, while one work on it. Example:

I want to make a small startup, I need $24k to sustain myself for one year ($2k per month). Someone gives me that in exchange of 50%. The idea is to make this sideproject to earn $48k per year, so we can both have that $24k anually after a while.

As far as the article puts it, raising too much money could be seen as built-in sunk cost and avoiding that is sound, but other comments have raised valid justifications for extending runway.

I feel inclined to agree with the article. If I ever have the fortune of raising money for a startup I created, I would be very unlikely to ask for money explicitly just to extend the time waiting for it to take off.

PS: Off-topic but I remember that a similar point was raised in Silicon Valley (the series).

How can you expect to raise money on good terms when you have your back to a wall and 4 months of runway left? Is the implication that you should fail at this point rather than try to fix the business? In my experience VCs know exactly how to leverage the fact that they are patient people and will patiently wait for you to run out of money before raising on your terms if your back is to a wall.

Marc Andreessen's comments on raising too much / not enough ring true here.

See https://pmarchive.com/guide_to_startups_part6.html.

We know that in general if you have more money you will end up spending it faster, but has anyone ever tried to quantify this?

If it turned out to be a square root or even a cube root function, I would not be surprised.

Just my likely outdated experience from a different country. Another reason to have a long runway is to avoid having to go through the fundraising process and rather work on the product.

>Venture capital is designed to speed growth, not to extend runway.

Isn't it a combination of the two? That seems to be the nuance. Just take a look at YCombinator. Investing in founders, not ideas.

Practice what you preach.

Why not do a Wework, raise 'more money' if you can find people fool enough to hand it over. then launder it by having the company buy or lease stuff from you at inflated prices. In the end the companies success is not really the goal now is it?

"Good founders".

I think it's prudent to at least take a minute, step back and examine the potential cognitive bias going on in one's head when the belief system is built on something like "there's plenty of food on the table for good people."

In this case the word "good" is used synonymously with "profitable" or "on a trajectory to be profitable". So there is no bias or belief system at work here. It's a direct correlation.

This entire article is geared towards people who actually have a business that _can_ make money, and that they should have more faith in their abilities to make do with less.

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