Venture Hacks

Q: What’s the biggest mistake entrepreneurs make when they’re raising money?

Entrepreneurs focus on valuation when they should be focusing on controlling the company through board control and limited protective provisions.

Valuation is temporary, control is forever. For example, the valuation of your company is irrelevant if the board terminates you and you lose your unvested stock.

The easiest way to maintain control of a startup is to create good alternatives while you’re raising money. If you’re not willing to walk away from a deal, you won’t get a good deal. Great alternatives make it easy to walk away.

Create alternatives by focusing on fund-raising: pitch and negotiate with all of your prospective investors at once. This may seem obvious but entrepreneurs often meet investors one-after-another, instead of all-at-once.

Focusing on fund-raising creates the scarcity and social proof that close deals. Focus also yields a quick yes or no from investors so entrepreneurs can avoid perpetually raising capital.

Q: What’s the biggest mistake VCs make?

The biggest opportunity for venture firms is differentiation. VCs compete for deals, and differentiation is the only way to compete.

Most firms offer the same product: a bundle of money plus the promise of value-add. And the few firms that are differentiated don’t communicate their differentiation to entrepreneurs. Y Combinator is an example of differentiated capital with excellent marketing communications.

Venture firms that thrive by investing in game-changing businesses have barely begun to differentiate themselves, let alone changed the rules of their own game.

Note: These excellent questions are adapted from Ashkan Karbasfrooshans’s Venture Hacks interview.

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