Silicon Muse Startup Lessons from HBO’s Silicon Valley
Why Smart Money Matters
Startup Lessons From Season 6 Episode 2 of Silicon Valley
If you’re in the startup game HBO’s ‘Silicon Valley’ is must-see television. In its sixth and final season my own Gen Z’er has informed me that ‘Silicon Valley’ has pretty much ‘jumped the shark’, but after investing five years in this groundbreaking series I feel obligated to finish it. So throughout the season I’ll be covering each episode in a series I’m calling Silicon Muse. In these posts I won’t bother to recap the episode, but instead I’ll attempt to discuss an interesting startup theme related to it.
Episode 48: Blood Money (Recap)
In the second episode of the season the Pied Piper team learns that all investor money isn’t created equal. Who you choose to raise capital from is almost always more important than the amount or valuation of the investment. Smart money is actually a thing and entrepreneurs should attempt to raise the smartest money they can find.
Once again Colin is out of control leveraging the data he is able to pull from Pied Piper to deliver real time advertising and as a result Richard is desperate to raise capital to enable him to kick Colin off his network.
After being shunned by traditional venture capitalists Richard runs into Maximo Reyes, an oligarch whose money comes from his family’s enslavement of the Chilean people. He offers to invest a billion dollars in Pied Piper in exchange for 10% of the company — valuing the company at ten billion dollars. Eventually Richard decides not to accept the investment, but Rayes threatens to visit “unspeakable brutality” upon him if he isn’t allowed to invest.
The most important decision a startup founder will make in the life of their startup is who to raise money from. If you’ve ever watched poker on television you may notice that in tournament after tournament the same few players end up at the final table. This is true in the VC space, but more so because successful VCs attract the best deals reinforcing their success as investors. Startups that attract the best investors benefit from their VC’s halo. Simply being able say that your startup is backed by Sequoia, Benchmark, or Andreessen Horowitz will ensure you get regular and positive press coverage, the best employees, and access to marquee clients. The best VCs will not only give your startup the sort of social proof it needs, but they’ll also provide you and your team access to their networks. The value of smart money is most obvious when it is time to raise additional capital or exit. Your investor will have likely funded most of the potential M&A prospects or co-invested with the potential investors you’ll be talking to — making the prospects of a deal far more likely.
The good news is that it is really easy to determine which VCs are considered ‘smart money’. Tomer Dean, Co-Founder & CEO of Bllush, reminds us that, “Ninety-five percent of VCs aren’t actually returning enough money to justify the risk, fees and illiquidity their investors (LPs) are taking on by investing in their funds.” Make sure you pick the right one — here is a good place to start:
The Top 20 Venture Capitalists of 2018
We partnered with The New York Times to develop a data-driven ranking of the world's best venture capital partners…
These Go to Eleven
Ironically, I’ve had my own Maximo Reyes situation. When I was in my twenties I had put together a $15 million round for my first startup. Before close, but after we had almost $15 million in the bank, we discovered that one of our executives had an undisclosed legal matter. Our lawyers advised that it would be advisable to return the money we had received, handle the matter, disclose it, and then redo the raise. It took almost six months before we put together terms for the new raise. Instead of $15 million we decided to raise $10 million albeit at a higher valuation. We found a new lead investor and gave the prior investors the opportunity to join the new round. In the prior, aborted raise, George Soros (through his proxies) invested $5 million and we didn’t even bother to reach out to him for the second raise as we were oversubscribed. When Soros learned that he was being ‘cut out’ of the raise his proxies contacted me and threatened to sue us if we didn’t include them in the round. I begged for forgiveness and allowed them to invest $1 million — increasing the size of the raise to $11 million (from that moment forward everyone asked why we picked 11 instead of 10 and I claimed it was an ode to Spinal Tap).
At the end of the day you really should attempt to focus on raising capital from the smartest money available. I’d recommend raising less and/or at a lower valuation if you can raise it from a successful VC.
About The Author
Alexander Muse is a serial entrepreneur, author of the StartupMuse and Sous Vide Science, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.