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Raise Less Money

aaronkharris.com

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Re: Raise Less Money

#41

Post by Judgmentality »

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…

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.

Re: Raise Less Money

#42

Post by akharris »

zackbrown wrote: post #38

> 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…

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/.

Re: Raise Less Money

#43

Post by codemac »

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…

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.

Re: Raise Less Money

#44

Post by rzwitserloot »

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…

> 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.

Re: Raise Less Money

#45

Post by dustingetz »

dustingetz wrote: post #24

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-...

AH - this is a Schelling Point https://en.wikipedia.org/wiki/Focal_point_(game_theory)

Re: Raise Less Money

#46

Post by nickbauman »

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…

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.

Re: Raise Less Money

#47

Post by luord »

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).

Re: Raise Less Money

#48

Post by lquist »

"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.

Re: Raise Less Money

#49

Post by smallgovt »

rzwitserloot wrote: post #44
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…

> 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 prod…

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.

Re: Raise Less Money

#50

Post by itsoktocry »

jjeaff wrote: post #34
itsoktocry wrote: post #28

Earlier quoted context omitted.

> 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 poten…

>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.

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