New venture capitalist Jeremy Liew writes an "interesting" piece about how entrepreneurs should avoid raising too much money--it's a classic post.
Right off the bat Jeremy talks about an unnamed company who he tried to invest in. That's a huge no-no Jeremy. Being a good VC requires discretion, especially when you DON'T get a deal done. Giving the company a hard time screams of sour grapes even if your intent was good or even if they gave you permission. Now, I'm sure you had the right intent, I mean a VC would never give startups horrible advice like take a lower valuation right?!?
To be fair, Jeremy puts in the lamest disclosure in the history of blogging: [Disclaimer: As a venture capitalist, I benefit from investing at lower valuations.] I'm still laughing at that one! Really?!?! The lower the valuation the better a VC does!??!? I had no idea!
Now, the second big no-no with Jeremy's post is that the company he didn't do a deal with is still raising capital.
Dude!!! You don't talk about OPD (other people's deals) publicly, especially when they are still on the road. That, for the record, is called "sandbagging" an entrepreneur and it's NOT cool. If I was the entrepreneur Jeremy was talking about in his post I would NOT be pleased.
Interestingly Jeremy's post comes a couple of hours before the creator of Netscape, Marc Andreessen, raised a MONSTER $44M round of capital for Ning: a $44M C-round. Coincidence?
I don't so think since Jeremy quotes Marc in the piece, but who knows. Of course Marc takes the aggressive--and correct--position to the question "how much should I raise?" saying "In general, as much as you can."
DING! DING! DING! We have a winner!
There are only two things a rational entrepreneur does in a hot market: sell or raise money. In down market, of course, you don't sell and you build. To recap: hot market you raise money/sell, down market you don't sell/you build.
Again, if Jeremy teed up this post knowing about Marc's raise that is strike three: VCs who blog need to show extra discretion. The rule of thumb for blogging VCs is best summed up as: don't talk about other people's deal.
Jeremy points to an article about downrounds and how horrible they are. Let me tell you something, if you're in a downround situation the company is going south or sideways and it doesn't event matter because you should probably move aside and let someone else take over. If you've raised enough money you--of course--never get to this point because you have the resources to figure it out.
Frankly, there is little risk to raising too much money as Marc points out.
The risk is if you SPEND to much money. The risk is if the money in the bank DISTRACTS you from doing your job (i.e. you worry more about designing your office space then design your product or business plan). No company ever went out of business because they had too much working capital, but countless have gone out of business for not having enough.
Here is some good advice: the market will tell you the upper limit of what you can and should raise. Raise money aggressivly when you can and if 9 out of 10 folks tell you "no" when you tell them what you're looking to raise don't worry: you only need one person to say yes. In fact, it's just a fact that you're not getting the best deal if you don't get turned down a bunch.
Your job as an entrepreneur is to have as many resources as possible--without diluting yourself down too nothing--to fight the big fight. Your job is to get the best deal you can for shareholders.
Jeremy is a first time VC and Marc is a master entrepreneur who has hit the ball out of the park twice, and is about to do it a third time with Ning.
Take it from Marc (and to lesser extent Jason): raise money when you can.
[ Disclosure: Marc created Netscape, Jeremy and I were both GMs of Netscape at different times--Marc did a better job than the two of us put together times ten. :-) ]
Should you raise a lot of money or not? (Hint: Listen to successful entrepreneurs not the first-year VC)
Reader Comments
(Page 1 of 1)2. Elegant critique, we are all just trading baseball cards in the school yard. The same rules apply tehn and now!
Posted at 1:11AM on Jul 10th 2007 by rich
3. "See, boys, that's how you do it!" - Jason Calacanis, D Conference, 2007, to his employees also at the table when talking about SmugMug being profitable and growing fast - with $0 invested. :) (Sorry, Jason, couldn't resist!)
It's a hot market, I'm an entrepreneur, and I'm not selling *or* raising money. I think you're missing a niche there (granted, a very small one in the web space) made up of people who are actually in this for the long haul because they love the business. And if it's a good, solid business, it'll be even better during bust times than boom - because everyone else has died off.
Only time will tell if I'm right, but plenty of other companies have taken the long-and-slow route to success...
Posted at 3:09AM on Jul 10th 2007 by Don MacAskill
4. Jason -
I don't think that the matter is as cut and dry as you make it. I think there are some circumstances where there are "risks for taking too much money". I outline them here:
http://redeye.firstround.com/2007/07/the-unintention.html
Josh
Posted at 3:33AM on Jul 10th 2007 by Josh Kopelman
5. "The risk is if you SPEND to much money. The risk is if the money in the bank DISTRACTS you from doing your job (i.e. you worry more about designing your office space then design your product or business plan)."
YES!!!!!!!!!!
"No company ever went out of business because they had too much working capital, but countless have gone out of business for not having enough."
YES!!!!!!!!!!
"In fact, it's just a fact that you're not getting the best deal if you don't get turned down a bunch."
YES!!!!!!!!!!
In the spirit of taking all sides, I also agree with Josh Kopelman's well reasoned points. However, I'd argue it's even a little more nuanced than Josh presents. Here's why:
The acquisitions of StumbleUpon, Delicious, and Weblogs Inc. were great for their entrepreneurs and great for their early-stage investors (disclosure: I was an angel investor in Delicious). I don't know the StumbleUpon people but I do know Josh and Jason and I think they made rational, well thought out, judicious decisions to sell when they did and that clearly their sales count as big successes.
BUT, and here's the big but, I think certainly in the cases of Delicious and Weblogs Inc., had they waited and built their businesses for another year, two years, three years, they would have built much bigger businesses and ultimately would have sold for a lot more money.
I suspect the same is true for StumbleUpon -- perhaps the biggest surprise in my own blog stats is the amount of traffic that comes from StumbleUpon -- not that that means anything per se, but if they were getting into a position where they were driving a significant amount of attention (more than any other single source in my case), then they had a much bigger opportunity than today's sale price would indicate.
Finally, planning your business and your fundraising around the idea that you're going to sell early has its own risks. Namely: (a) if you build your company with the assumption you're going to sell early, you are probably not doing some of the things required for it to be a long-running standalone business, and then what happens if you DON'T get bought early?; and (b) if you deliberately keep the amount of capital you raise low, and then you don't get bought as fast as you think, what happens if the fundraising window closes in the meantime?
Posted at 6:11AM on Jul 10th 2007 by Marc Andreessen
6. One other important factor is the cost of capital. In times when there is an abundance of venture money, at relatively low rates (high valuations), that cost is also low. Oftentimes better to buy more when the cost is low versus when, as Marc says above, the funding window closes and that cost increases. Of course, with everything, it is a nuanced balance.
Posted at 6:35AM on Jul 10th 2007 by Andrew Weissman
8. The moral of the story: Marc Andreessen knows his stuff. Man I love his blog.
Posted at 10:23AM on Jul 10th 2007 by rick
9. I wonder how many entrepreneurs have pitched VCs, or started through the process of negotiating with them, only to find their stories aired on VC blogs, even if the VCs use discretion to not "name names."
Posted at 11:39AM on Jul 10th 2007 by Ben Yoskovitz
10. Jason,
I think that you missed the key point of my post - that there are risks to raising money at both too high and too low a valuation, and that these risks are not symmetric. Entrepreneurs should bear both risks in mind while raising money.
PS congratulations to both you for raising your recent round at Mahalo and to Marc for his recent round at Ning.
Best regards
Jeremy
Posted at 12:16PM on Jul 10th 2007 by jeremy liew
11. The real rules are:
1. Raise as little money as possible
2. Generate as much revenue as possible
3. Spend as little as possible
4. Plow all your profits back into the business
5. Never sell
6. Never, never, never, ever go public
7. Leave your business to your relatives
It's worked for Rupert Murdoch, Richard Branson and George Soros.
Posted at 6:36PM on Jul 10th 2007 by John Maxwell Hobbs
12. I responded more fully on my blog: http://slashstar.com/blogs/tim/archive/2007/07/10/valuation-sometimes-you-can-take-too-much-money.aspx
To summarize: I do think it's possible to take too much money - not because of what it means to subsequent rounds, but because what it means to your exit expectations.
"The real problem with raising too much money is that it creates certain expectations for an exit that might not be in the company's, or the founders', best interests."
Thoughts?
Posted at 10:33PM on Jul 10th 2007 by Tim Marman
13. the reality is there is no RIGHT answer - it depends and it is often situational. if as entrepreneur u are focused on true long term lasting value - multi year build and beyond in staying power, my rec is if u can, then raise the most you can at max if possible or reasonable if not and spend 100% of your time on the product and service not raising money. if you are good, and the product is, then u will reap fantastic rewards. if u are so obsessed about equity percentage (note 100% of 0 is still zero) and not bldg a dominating product then yes u may get into an odd situation with your vc/partners regarding a sale price if an opp to sell turns up and its not at the multiple - the risk of any partnership.
i like the idea of raising but not spending a lot - enabling more time on exceeding customers expectations is a win, and generally the wins lead to high valuation and more value in future.
Posted at 5:44PM on Jul 11th 2007 by matt coffin
14. good discussion.
in the spirit of "discretion" i will not name names but i've been involved in a bunch of companies that did indeed raise too much money at too high a valuation.
it got in the way of a sale, it got in the way of future rounds of financing, and it got in the way of management and founders making money.
money has a cost. and its not just dilution.
but i've argued this point with Jason before and he's got his view and i've got mine.
Fred
Posted at 8:30PM on Jul 11th 2007 by fred wilson
15. Jason,
You entirely missed the core of Jeremy’s thesis: which is “ pay attention to the risks of having valuations being both too high and too low, and understand the asymmetries in those risks.”.
Using ridicules as a tool to advance an argument is puerile. It is pure argumentum ad hominem.
Posted at 8:01AM on Jul 12th 2007 by amisare
16. Amisare: I get it, but we all know raising too little is a problem--JL states this is obvious in his post. His post is about the high valuations 95%. He may mention the low valuation issue--the most obvious issue ever--but it's in passing. His whole point is about the high valuations that he doesn't buy into.
Also, this is blogging.... when your write something dumb you're gonna get ridiculed. If you don't want to get called out on something dumb either don't blog or don't write something that's, well, dumb.
17. It has nothing to do with blogging (or other forms of dialogue). It is to do with the substance & the methodology of the arguments. As a critic, you are entitled to your opinions and the manner you deliver them. The readers are entitled to expose the flaws – the fallacies and unsoundness- of the arguments.
You either fail to distinguish between the interlocution and the interlocutors, or refuse to do so. Your piece contains many fallacies and unsound premises. Ad hominem is a fallacious argument and does not add one iota to the validity of your argument.
The syllogistic conclusion in the penultimate paragraph of your blog (X is inexperienced, don’t take it from him) is invalid as it is based on an unsound premise. If it is, change the perspective around: try substituting “first time startup” in X instead of VP and ponder on the inconsistencies of your argument!
Posted at 9:56PM on Jul 14th 2007 by amisare
18. Okay everyone. Time to put your (funny) money where your mouth is.
http://www.blubet.com/bet/Your_start_up_is_raising_its_first_round_of_funding_Should_you_raise_a_lot_or_a_little
1. Thanks for pointing out an obviously self-serving post.
I like the way you think.
Posted at 11:52PM on Jul 9th 2007 by One Man