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Raise Less Money

aaronkharris.com

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Re: Raise Less Money

#31

Post by twmahna »

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.

Re: Raise Less Money

#32

Post by Alex3917 »

akharris wrote: post #19
Alex3917 wrote: post #12

> 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 2…

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.

Re: Raise Less Money

#33

Post by daniel_levine »

akharris wrote: post #17
owens99 wrote: post #3

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…

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

Re: Raise Less Money

#34

Post by jjeaff »

itsoktocry wrote: post #28
owens99 wrote: post #3

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…

> 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…

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.

Re: Raise Less Money

#35

Post by thedogeye »

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.

Re: Raise Less Money

#36

Post by alasdair_ »

akharris wrote: post #19
Alex3917 wrote: post #12

> 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 2…

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.

> 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...

Re: Raise Less Money

#37

Post by YazIAm »

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.

Re: Raise Less Money

#38

Post by zackbrown »

> 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?

Re: Raise Less Money

#39

Post by picodguyo »

"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.

Re: Raise Less Money

#40

Post by akharris »

twmahna wrote: post #31

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 im…

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.

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