Raising Money

  • It is difficult to raise money.
  • Raise only what you need and spend only what you must.
  • The funding eco-system is structurally exploitative. Yet, the funding eco-system has principled and ethical people.
  • Take money from the “right” investors.

Why do I suck at raising money?

  • We got good at spending money carefully. Just “sipping” it like precious water on Arrakis. And it made us focus on monetizing our product and that produced revenue as well. There’s nothing as nice as revenue to offset your burn rate.
  • We always raised less than we wanted to raise. But that meant we gave away less of our stock at a low price. There is no such thing as cheap money. When I hear an entrepreneur say “We just took some more money because the terms were so good we couldn’t turn it down”, that makes no sense to me. $100 you raise today when your company is worth $5M is 10x more expensive than the same $100 you raise when your company is worth $50M.
  • When someone invests in your company, it is a long-term relationship. Most people in the world may be fine acquaintances, but you don’t know enough about them to get into a long-term relationship. You want to be extremely careful who you take on as an investor at every stage. Unlike most other relationships, you cannot get out of a relationship with an investor. Our investors ended up being people who really believed in us, stuck with us, and helped us. They were “right” as principled people, they were “right” for us as advisors for our company, and they were “right” for as colleagues.

Pre-seed stage (2012 - 2014)

  • “Fixers”: these are people who say they can help you raise money if you give them a cut or give them a retainer. Steer clear.
  • “Angel groups” : every city has some kind of “alliance” or “band” or some such group of angel investors. Keiretsu. TiE. Maybe there are exceptions, but I found them all to be in the business of beating you down to low valuations that destroy your ability to build a valuable company. Do understand, if your valuation is too low, no good person is going to join your team because your stock is not worth much. And the next round will have a low valuation too. So you set up a long-term feedback loop that will kill your company on top of all the other challenges you have. Steer clear. If you ever actually see a band of real angels, it means you are probably dead already.
  • “Incubators/Accelerators”: Accelerators are places that market the startup dream, but the reality is more murky. We participated in a Techstars class in 2013. In general, accelerators take anywhere from 5% to 10% of the company in exchange for some seed capital (usually $50K or less) plus “mentorship” and connection with investors. In my opinion, unless you are early in your career, desperate for a small amount of money, and have no ability to make connections on your own, avoid accelerators. Let’s assume they only took 5% (which is at the low end) and they gave you $50K for it (which is at the high end). So they valued your company at $1M total. That’s even worse than those low valuation “angels”. Yes, you will learn something from the 3 month program. But amazing people are generous with FREE advice for entrepreneurs. So if you start paying huge chunks of stock for advice, it better be insanely brilliant and transformative for your company. Legend has it that YC is something like that, but going to Techstars or any of the other accelerators doesn’t do that. You will struggle just as much as you otherwise would to get funding. And you just handed off enough stock to have hired your entire first set of critical talent. Was it really Techstars fault — no, they had well-intentioned people who tried to help us. It was my fault. I imagined they had some startup magic sauce but of course they did not.
  • “Famous VCs”: every founder thinks it will be amazing to get Sequoia or Accel or <your favorite VC> to fund me. It will feel great in the moment, but it sets you up with a lot of risk. Let me explain. You’re a first-time entrepreneur and you’re at the pre-seed stage, nothing is proven yet. Anyone investing in it is betting on the founding team plus the broad idea space. It is easy for a big VC to write a $1M check to “take an option” on your company if they like it. Their terms and valuation will usually be decent. But actually, you should not take money from a big VC at this stage whatever the terms and valuation. I’ll explain this by analogy. This holiday break, our family bought four tickets for a Seahawks game in Seattle on Dec 26th. That morning, it snowed heavily and the roads were icy. So did we go for the game? You’ll realize it depends on how much we paid for the tickets. If we paid $10 per ticket, then we’d just say forget it and stay home. If we paid $100 per ticket, then we’d brave the roads and go. When the big VC writes you a $1M check from a $1B fund, they are just buying a $10 ticket to the game. When it comes time to “go to the game” (actually fund your next round with a bigger check), they may look at the weather forecast (your traction) and decide to stay home. Or they may decide to watch a basketball game (fund a competitor) on TV instead. If they do, your company is in serious trouble because nobody else will fund you. They’ll all want to know why the famous VC isn’t funding you anymore. This is the “signaling” problem. This happened to multiple entrepreneurs I know. So the rule is — big checks from big VCs, small checks from small VCs.
  • Individual angel investors: you want people who are investing their own money, not other people’s money. They must have high enough net worth that they can afford to lose their investment and not lose sleep over it (or blame you for it).
  • Seed stage VCs: these are small VCs where you avoid the signaling risk. They explicitly do not lead subsequent rounds, so it avoids problems. But there’s a few things you should understand about small VCs. Despite their name and whatever they may say, VCs are risk averse and looking for sure bets. The smaller the fund size, the less risk they want to take. So they write small checks. But many VCs live by this formula that whatever check they write, they want to own at least 20% of your company. So recognize that when you go with a small VC, they have a limit on check size and that probably limits your valuation.

Desperately seeking Series A (2015–2018)

Series A (our only priced round)

  • VC investors get preferred stock, not common stock (like the rest of the “common” people who work at the company). The preferred stock gets preferential treatment when the company is acquired (which is relevant if it is acquired at a price lower than the last priced round). In other words, VC investors are more likely to get their money back. The employees who put their sweat and blood into the company for years are treated as less important. Every VC does this. It is considered normal and is part of the system. But it feels obviously wrong to me.
  • In some contracts, there are nasty additional clauses like aggressive liquidation preferences (eg: a VC could demand that they get 2X their money back before any of the common stock holders get anything). This stuff is total crap. I believe the best VCs don’t do this anymore. Shasta and NEA had no such terms.
  • There’s a lot of legal work associated with a priced funding round. Our expensive company lawyers had to review and negotiate contract details with the expensive lawyers for the VCs. Now here’s the thing — — guess who pays for the VCs lawyers? Our company! Yes, you got that right. That is considered normal and part of the VC eco-system. It is done to discourage companies from negotiating the contracts. So out of the hard-earned money you just raised, you’ll write out $50K or more of combined legal fees. And if you don’t spend the money, the contracts may be detrimental to your company. This also feels wrong to me.

Slow burn vs blitz scale




Engineer at Google, ex-CEO at AppSheet, ex-engineer at Microsoft, ex-professor at Cornell. Dad, husband, son.

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Praveen Seshadri

Praveen Seshadri

Engineer at Google, ex-CEO at AppSheet, ex-engineer at Microsoft, ex-professor at Cornell. Dad, husband, son.

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