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Raise less, build more

trohan.com

21–30 of 73 posts

Re: Raise less, build more

#21
post #6
post #2

It's mad that this even needs said. A company's aim should be to be sustainable and profitable, not to be a receptacle for capital. Some companies need external capital to get to that point, particularly hardware or those operating in slow-adopting markets. If you don't need it, don't take it.

A couple of lifetimes ago, a business mentor of mine taught me a truth that has served me very well. There is a correct amount of money for starting a business, and it's probably less than you think it is. Too much money in a startup tends to gum up the works and can kill a business just as dead as not having enough. If you have too much money, you're not only going to blow it on things that don't matter, but when yo…

To add on, a company who spends a lot of money on frivolous things or over-hires will need to pay the internal cost of downsizing when the time inevitably comes. That means layoffs, fewer employee benefits for those still employed, and general tightening of the belt.

There is a huge cost when you let go of people who would otherwise be kept on payroll if you could continue to pay them. You will get fewer internal referrals to new hires and remaining staff become less engaged in their work. There is additional long lasting damage to your staff as a whole who survived the layoff this time. The culture at the company shifts and never fully recovers.

I don’t think businesses always fully appreciate the long term cost and damage layoffs do to small and medium sized companies, but see headcount reduction as a simple way to reduce its own costs.

Re: Raise less, build more

#23
post #19

> A typical venture fund has a 2% management fee… > A $100M fund which does 4x earns the GPs $80M ($in carry, plus $20M in management fees) Nope. 2% of $100M is $2M, not $20M. > A $1B fund which does 1.5x earns the GPs $300M ($100M in carry, plus $200M in management fees) Nope.

Management Fee are paid annually , and typically for 10 years if not more. It's 2M x 10 years (for each year of the funds life). Ditto for 20M (x 10 years)

Good point!

Re: Raise less, build more

#24
post #3

Earlier quoted context omitted.

Yeah sometimes it becomes clear founders forget the purpose of a company is to make money/turn a profit and not just to repeatedly raise money and be famous. I have worked at a company that forgot this. It feels kind of surreal sometimes.

You mean like Founder’s Syndrome [1]? Yeah, it’s exactly like that… [1] https://en.wikipedia.org/wiki/Founder's_syndrome

Does that happen sometimes? Surely. But more often than not, founder led companies who have personal attachment to the outcomes deliver far better than some self-interested, career stepping-stone, decision-by-committee corporate blob. See Nvidia, Facebook, Stripe, and Tesla compared to Intel, IBM, GM, and PayPal.

Re: Raise less, build more

#25
post #20

Generally shouldn’t the motivation to fund the “right” amount be with the VCs? Founders are going to ask for whatever they can right? But VCs don’t seem to be interested in funding less… Whatever magical market forces that might change how funding works, they don’t seem to be at play.

Well, founders have to give up equity to ask get more money from VCs. So, in theory, they should want to raise the least among of money at the highest valuation to keep the most amount of their company.

Re: Raise less, build more

#26
post #20

Generally shouldn’t the motivation to fund the “right” amount be with the VCs? Founders are going to ask for whatever they can right? But VCs don’t seem to be interested in funding less… Whatever magical market forces that might change how funding works, they don’t seem to be at play.

VCs aren't always the best capital allocators - a lot has succumbed to the money management + fees disease. They push you to raise more, force you to hire and burn when you really shouldn't / haven't figured out product market fit yet.

> Whatever magical market forces that might change how funding works, they don’t seem to be at play.

I think money is scarcer these days, and founders who are constantly being burned by VCs will think twice about riding the big VC train in the coming years. As a founder myself who work crazy hours getting the business going, it's painful / bad optics to see full time VCs doing weekend Vegas trips, browse art galleries on weekday afternoons and fine dining every couple of days, knowing I've sold a chunk of my / my team's hard earned equity on that bs. Of course there are great VCs, and some businesses needing to be VC backed, but oh boy, are there really bad apples out there.

Re: Raise less, build more

#27
post #9

In observing 100s of deals, advisor to dozens of early stage businesses I'd add: So many folk show up asking to raise because they only see how their company can work "at scale". They have forgotten to do things that don't scale. It's like they skip problem-market fit, jump way past MVP (but still call it that) and almost have to raise - then try to force the market to exist. Many (most?) of these companies I've seen…

> Like, do you want a 0.01% chance to raise money or a 2% chance to build a business that keeps you and a few others well paid and perhaps out of the rat-race.

Or, you do a raise; it keeps you out of the rat race for a couple years; and you move on when it implodes.

The problem VCs are having right now is that people have figured them out. If I have a business which can throw off cash, I don't need VCs unless I have a competitor I need to outrun. If I don't have a business which will get to cash, it's fine to take VC money to leave them holding the bag if I never find a "real" market.

Re: Raise less, build more

#28
post #9

In observing 100s of deals, advisor to dozens of early stage businesses I'd add: So many folk show up asking to raise because they only see how their company can work "at scale". They have forgotten to do things that don't scale. It's like they skip problem-market fit, jump way past MVP (but still call it that) and almost have to raise - then try to force the market to exist. Many (most?) of these companies I've seen…

It sounds cynical, but over the years I've met a lot of folks who just want to "build a business", and the actual product, MVP, etc is secondary or maybe doesn't even matter? They are in to raise money, hire lots, and "go big", etc.

Re: Raise less, build more

#29
This is us! I couldn't learn the rules of the game "how to raise from VC funds" so we built profitable scalable software-led business...took us a few pivots but here we are.

Re: Raise less, build more

#30
This is really nothing new for founders, who have always, generally speaking, wanted to optimize for control. And this path maximizes optionality. Hell even pg promoted the idea of raising a small seed and getting to profitability.

The problem is most early stage VCs don’t play this way. Their game is all about “selling” their investment to the next round up of VCs, who have a specific playbook for what that looks like. Rarely is that aligned with what makes most sense for your company.

Maybe in a post-boom era that’s going to change. Regardless, this blog post isn’t for founders. It’s for other VCs. So good for Terrence Rohan to try and evangelize the idea a little to the fast follow crowd.

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