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.
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.
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.
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.
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)... :/
> 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)... :/
Software VCs are so risk averse because startups have to find product market fit, which is already risky without throwing a bunch of tech risk on top of it.
That PMF bit is crucial: biotech VCs' don't follow that same pattern because they have relatively precise methods to identify product market fit, before the drug is even approved for sale. They have much more precise data on how many potential potential customers each drug could possibly have from public health data, how much they can afford from previous agreement and contracts with insurers combined with quality of life improvement estimates for the drug candidate, and a minimum of a 5 year monopoly which is usually closer to 14 years. Thanks to those factors, biotech companies have a damn-near-guaranteed exit strategy by phase 3 trials in the form of an acquisition or zero revenue IPO and the VCs can take much bigger risks.
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
For a large part you cannot be certain of a lot of things in a startup. So being honest is not entirely relevant. What matters is your genuine belief in making it a succes and are able to bring that message to the vc.
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.
I believe that the entire idea of accumulating runway from raising money is mostly a fallacy: VC expect money to be used for finding victory (and a bigger one, while you're at it), not for postponing defeat. All of that nice money is earmarked for doing things that you didn't did before, not for filing existing holes.
Staying within the aviation metaphor you get a longer runway, but also a heavier plane with many more seats. You'll better not have oversold on the capabilities of your engines.
> 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.
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.
One problem I had as a founder was that it was difficult to raise little money early. There are not enough angels around here. People wanted to push too much money on too early, so "seed" was not viable. There's nothing wrong with having extra money in the bank - the problem is that a lot of VCs expect you to spend the money you have raised, which often meant scaling before hitting PMF.
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.
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.
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.