Should you take more funding for your start-up?
“When the anti-dilution tail wags the start-up dog”
Let’s face it — no one, if given the choice, wants to own less of the company they have created. And why would they, or why should they?
More is better, right? The answer of course is a resounding yes… unless retaining more ownership interferes with — -aka ‘dilutes’ — your ability to get to the promised land, hire the team you need to scale the business, and have the resources required to accelerate customer growth.
Over and over again we see cases of early-stage founders, most of whom have little of their own capital invested in the business, being reticent about raising sufficient early-stage financing. This reticence often takes the form of “we don’t need that much money to achieve our near-term objectives“ or “we feel confident that with this level of funding we can get to a strong Series A at a much higher valuation,” and so forth.
Sometimes, they are absolutely right. Look — in a world of billion dollar early-stage funds, we VCs are often responsible for trying to put 10 pounds of financing into a 5 pound bag, even when the company does not need as much money as the VC wants to deploy.
Other times, the reticence to take on sufficient capital doesn’t stem from fear of dilution, but rather a lack of understanding that the talent, marketing, and sales required to scale a business is expensive. Everything takes more time and costs more money than you expect.
This is a far more common theme among first time founders.
So relative to assessing if the anti-dilution tail is wagging the early-stage start up dog, here are two recommendations for fellow VCs, and three questions for early stage founders:
VCs:
1). Peel back the layers to understand the source of reticence to take on additional capital. Is it ignorance of the actual cost of starting the scaling process (talent, marketing, etc.)? Or is it in fact a desire to keep some mythical ownership percentage that they have become attached to? In our experience, this will require some digging, wrestling, and probing.
2) This process can be used as a great opportunity to assess the early-stage founder’s willingness to learn, accept a POV different from their own, and embrace coaching. Depending on their response, you can often get very clear warning signals that a founder is not going to be receptive to coaching/advisers. If you smell this, run the other way. Fast! One thing we do know is that people who have not been down the road before, need to embrace coaching from those who have. Or, their chances of success will be dramatically diminished.
Founders:
1) Ask yourself: have I ever built/scaled a company before? If not, why do I think I know how much it costs to do that? Why would I not listen to people who have been down that road before, and have experienced those challenges — many times.
2) Scaling a company, showing that you have the ability not just to build a great product or service, but to produce, market, and distribute it to increasing numbers of people, month after month, requires a very different skill set/experience from your team. Have you budgeted for acquiring that type of talent, now? Instead, what we often hear is, “after we raise our Series A we will hire heavy hitters.“ Be forewarned: it will be orders of magnitude easier to raise a Series A when you can point to meaningful month-on-month growth. This type of growth usually requires people on your team who have been down the road before and know how to make it happen. People who typically cost more money than your earliest employees did. Finding, converting, and on-boarding customers costs money! It is a process that often requires a good bit of iterating on the marketing mix, which also costs money. Have you budgeted sufficiently for a process which is inherently iterative?
3) Finally, have you fully internalized the three “laws of nature“ that apply to start-ups: first, it always takes longer than you think it will (which means it will cost more); second, It always costs more than you budgeted for (which means that it will cost more); and third, “shit happens“, and when “shit happens“, it always costs more!
Remember that your job as a founder or leader is to always make sure you have sufficient gas in the tank to get to your destination, drive the vision of the company, and hire the best possible people to do everything else.
One final thought: I don’t believe we have ever heard a smart, successful early-stage founder utter the words “I wish I had raised less money.”
-Andy Greenfield, TIA Ventures
