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Raise Less Money

aaronkharris.com

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Re: Raise Less Money

#71

Post by [deleted] »

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…

[deleted]

Re: Raise Less Money

#72

Post by manquer »

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…

Well , keep in mind that making money with real revenue , making money of an strategic sale and Improving / solving a real problem are all not always aligned. It is fairly common to achieve one or two of the three and still fail or succeed.

VC funds needs to make money, that only comes of an exit , if you can have real revenue before getting an exit it is great , if you are solving a real problem even better, but those two are not going to help VC meet their goals directly .

You as founder are spending 5-10 years on one thing , for the VC your startup is one among the dozen he is getting on, their tolerance of your failure is far higher than your own tolerance for your failure

Re: Raise Less Money

#73

Post by datanecdote »

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…

Worth keeping in mind the principal agent problem literature. Selling equity in a company is vulnerable to “lemon” problems. Startups with product market fit want to minimize dilution and keep executing before raising at a higher valuation in {12} months. Startups without PMF want to maximize runway to maximize probability of finding PMF. VCs know this, and startups know VCs know this, and etc. Unfortunately this can create perverse signaling incentives on both sides.

Re: Raise Less Money

#74

Post by pge »

brettcvz wrote: post #68
itsoktocry wrote: post #50

Earlier quoted context omitted.

> 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”.

While I am not going to argue that valuations are wholly rational (and specifically the fact that valuations increase with investment size), it is also true that having more capital may make the company able to accomplish more, and thus raise the expected exit value for the investor. If so, that provides a rational basis for increasing the valuation of the company when giving it more capital. (Present valuation being the discounted future valuation)

Re: Raise Less Money

#75

Post by aaronblohowiak »

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.

Outcomes are roughly binary though

Re: Raise Less Money

#76

Post by avrionov »

maire wrote: post #29
corry wrote: post #15

Earlier quoted context omitted.

I've heard founders say this too. The mentality is "look, you'll end up giving away 20% of your company on the round anyways, so you might as well get more $$$ for that 20%". As if the % is fixed and immovable. In my own experience, this minimum % ownership target is a very real issue and bar to jump over for most "proper" Series A VCs. At least the ones leading the round. If I was in that position, and it was a grea…

I was at 2 successful companies that went against the normal VC path. Vitria was able to move the VC % lower because they were already profitable and demonstrated potential before approaching the VCs. They were only using the VCs for their contacts and not for cash. VMware never got VC funding. I am not sure why - but they tried. They finally sold themselves to EMC and were later spun out.

According to Crunchbase VMmare raised almost $400M

https://www.crunchbase.com/organization/vmware/company_finan...

Re: Raise Less Money

#77

Post by afarrell »

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 think that fear is a useful mental state

How much time have you spent in actual _fear_, as opposed to merely having very clear goals?

Re: Raise Less Money

#78

Post by ska »

codemac wrote: post #43
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.

The "hire fewer people" can often be restated as "have fewer projects". One real problem with raising too much money early can be making it too easy to say yes to ideas. That, coupled with a focus on time-to-market that overbalances validation can yield you a lot of half finished products that were never likely to work.

Re: Raise Less Money

#79

Post by gnicholas »

anurag wrote: post #61

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 r…

Did you take less from each investor, or cut out some of the interested investors?

Re: Raise Less Money

#80

Post by azinman2 »

Some things take longer, because they’re harder to do (space, AI) or the nature of the beast requires length of time outside of your control (selling to enterprises/gov, bio/pharma trials).

This feels like advice squarely pointed at something like social that’s often easy to build but hard to get market penetration.

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