Venture Hacks

Summary: Raise as much money as possible. With these caveats: (1) maintain control at any cost, (2) monitor your liquidation preference, and (3) act like you don’t have a lot of money. Also understand that if you do raise a lot of money, you will have to (1) “go big or go home” and (2) make a lot of progress if you ever want to raise money again. Alternatively, if you would rather maintain your exit options, at least raise enough money to run two experiments.

How much money should you raise? As much as possible—with some caveats. But hey! don’t take our word for it.

Two investors’ opinions.

Eugene Kleiner, Founder of Kleiner Perkins:

“When the money is available, take it.”

William Janeway, Managing Director of Warburg Pincus:

“Failure to execute operationally is not the only source of risk; every venture is also subject to volatility in the price and availability of capital due to the volatility of the stock market. After the collapse of the Internet Bubble, many promising companies foundered because their funding dried up.

“By contrast, our biggest successes at Warburg Pincus (VERITAS, BEA) have come from inverting the normal venture funding model, with the visionary investor as company co-founder… And we have supported the multi-year process of building a sustainable business by underwriting all of the capital needed to reach positive cash flow, thereby not only enabling management to focus full-time on the business but also insuring against the risks generated by a volatile stock market…

“In the post-Bubble world, long-term financial commitments are required to fund the ventures that will fulfill the long-term technological vision and implement the long-term commercial promise of the Internet Age.”

Two founders’ opinions.

Mike Ramsay, Founder and CEO of Tivo:

“One of the reasons that TiVO is thriving today is that we were well-capitalized. We were able to power our way through the downturn—that early 2000 period when [our competitor] Replay went away. We were capitalized enough that we knew we could ride through it. While we had to make a few adjustments at the company, there was never a question that we were going to survive. We knew we were going to survive.”

Marc Andreessen, inventor of the bendy-straw:

“So how much money should I raise?

“In general, as much as you can.

“Without giving away control of your company, and without being insane.

“Entrepreneurs who try to play it too aggressive and hold back on raising money when they can because they think they can raise it later occasionally do very well, but are gambling their whole company on that strategy in addition to all the normal startup risks.

“Suppose you raise a lot of money and you do really well. You’ll be really happy and make a lot of money, even if you don’t make quite as much money as if you had rolled the dice and raised less money up front.

“Suppose you don’t raise a lot of money when you can and it backfires. You lose your company, and you’ll be really, really sad.

“Is it really worth that risk?

“…Taking these factors into account, though, in a normal scenario, raising more money rather than less usually makes sense, since you are buying yourself insurance against both internal and external potential bad events — and that is more important than worrying too much about dilution or liquidation preference.”

Make sure you read Marc’s full article for his caveats: How much funding is too little? Too much?

Guidelines to consider no matter how much you raise.

No matter how much money you raise,

1. Maintain control at any cost.
2. Monitor your total liquidation preference and avoid liquidation preferences above 1x non-participating. You will have to sell the company for at least the liquidation preference before the common stockholders see a penny.
3. Raise enough money to run more than one experiment. Some companies need 12 months of runway to do two or more experiments, others might need 24 months. Seed stage companies that can’t raise enough money to run more than one experiment should keep their burn down to extend their runway.
4. Act like you don’t have money.

Guidelines to consider if you do raise a lot of money.

If you do raise a lot money,

1. Understand that your investors will have very high expectations. You have will have to “go big or go home”.
2. You will have to make a lot of progress with this round if the company ever wants to raise money again.

Alternatively, if you would rather keep your liquidation preference low and maintain your exit options, at least raise enough money to run two experiments.

Raise too little money and you may go out of business when you run into trouble. Raise too much money and you may make less (or zero) dough when you exit. Take your pick: disaster vs. dilution.

Image Sources: Marty Katz for The New York Times, SFGate, Wired.