Should you raise a lot of money or not? (Hint: Listen to successful entrepreneurs not the first-year VC)
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.
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. ]