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Raise Less Money

aaronkharris.com

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Re: Raise Less Money

#51

Post by icedchai »

bryanmgreen wrote: post #13

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.

Re: Raise Less Money

#52

Post by rabidrat »

curiousllama wrote: post #7

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 va…

> 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.

Re: Raise Less Money

#53

Post by akharris »

daniel_levine wrote: post #33
akharris wrote: post #17

Earlier quoted context omitted.

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!

Re: Raise Less Money

#54

Post by Mathnerd314 »

lquist wrote: post #48

"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 t…

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.

Re: Raise Less Money

#55

Post by the-dude »

Judgmentality wrote: post #41
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…

Self justification is powerful drug. Enjoy.

Re: Raise Less Money

#56

Post by manigandham »

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…

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

Re: Raise Less Money

#57

Post by adverbly »

Judgmentality wrote: post #41
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…

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.

Re: Raise Less Money

#58

Post by compumike »

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.

Re: Raise Less Money

#59

Post by CrazyStat »

dustingetz wrote: post #45
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)

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?

Re: Raise Less Money

#60

Post by virgilp »

compumike wrote: post #58

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…

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.

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