Listening to the a16z Podcast: Raising Money and Valuing Startups — What Happens When Things Don't Go As Planned? some ideas come up to my mind. Here are my thoughts.
During the podcast Scott Kupor mentions to Danielle Morrill how interested was the perspective of founders not actually knowing the size of the round they need to make or how much money they will need for the future: “underestimated how much capital they need”.
This is very interesting reality due to the fact that the money that you raise today will eventually affect your future ownership, board, market share, round and other ways. Because the future is uncertain you can’t determined the exact amount of money. The uncertainty on what you will need in the future makes people want to raise as much as possible.
Angel Investor Jason Calacanis try to explain in his great piece how much you should raise on your angel round. “How much should I raise in my angel round? How should I spend it?”
Kupor continued by mentioning what Morrill said “the round size on later stage are growing because the investors want to have some ownership that is meaningful in this company” (contrast to the reality that Mattermark raised two seeds rounds on convertible notes before going and raising the Series A).
For those that want to know more about raising rounds, you should read about Mattermark and Buffer, which are two great startups that are very open on telling their story and progress.
So, I'm not going to try to match both concepts that were mentioned: 1-How much money do you need for the future and 2-why are this valuations so big today? because they did a great job talking about it in the podcast.
So the concept I want to introduce is that the money that many startups are raising for the uncertain future needs to be enough to go through the storm but also enough to be able to hit into “nitro mode” when the time comes. Many are today fueling the “engine” that Danny Shader mention during the podcast. As Kupor and Shader discuss on raising money, “if you are going to stretch for valuation you better get as much money as you can”. But Shader also mentioned that he would actually don't do this so he could have space on the next round. So what to do?
I understand the feeling. You know there has never been a time so easy to raise money and you don’t know how long it will last or if you will be caught with less cash than you actually need it.
Storm. The money you raise needs to be enough for a “safety net” when the storm comes and also should give you a push in the “engine”. The problem is that as humans we are encourage to do the opposite. Spend when times are good, and cut down operations when they are bad. Whole countries rule themselves under this principle and even when knowing it, they still end up following the same path. Spend when the economy goes well, and cut when it goes bad. We all have been through recessions.
The higher valuations of everyone in moment of liquidity and too much competition makes the money inefficient when you try to acquire customers and grow fast. I don't want to discuss if there is a bubble or not. I really don't care, because one way or the other there will always be moments of prosperity and moments of crisis (to be clear, I'm crazy optimist). The important thing to understand is that when crisis/correction of market comes, most of the sound (startups without a real business model with loyal customers) will disappear and the ones stand will be strong than before. There will be plenty of opportunities and the growth will accelerate.
The price valuation will be redone into the real value of the company, which will come back to be higher than before because of the less existence of competitors and the generation of cash flow/user base and future new market of knowledgeable customers of preview competitors. Not only that, but the best talent from the failed startups will be acquired by the few standing, making them stronger.
So,what to take from this post?
1-Understand your market and the cycles
2-Know yourself well -startup & team (from the inside out)
3-Raise money for the storm
