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Raise Less Money

aaronkharris.com

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Re: Raise Less Money

#61

Post by anurag »

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).

Re: Raise Less Money

#62

Post by dcow »

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.

Re: Raise Less Money

#63

Post by [deleted] »

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…

[deleted]

Re: Raise Less Money

#64

Post by TuringNYC »

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.

Re: Raise Less Money

#65

Post by dustingetz »

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…

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

Re: Raise Less Money

#66

Post by digitaltrees »

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…

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.

Re: Raise Less Money

#67

Post by compumike »

virgilp wrote: post #60
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…

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.

Re: Raise Less Money

#68

Post by brettcvz »

itsoktocry wrote: post #50
jjeaff wrote: post #34

Earlier quoted context omitted.

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.

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”.

Re: Raise Less Money

#69

Post by reilly3000 »

itsoktocry wrote: post #50
jjeaff wrote: post #34

Earlier quoted context omitted.

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.

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.

Re: Raise Less Money

#70

Post by cjblomqvist »

adverbly wrote: post #57
Judgmentality wrote: post #41

Earlier quoted context omitted.

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 wa…

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)... :/

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