7 ms·

Why We Said “No” to a $40M Round

192 points by pixelmonkey 9y ago

ChuckMcM 9y ago
Smart move, tough to do. Remember that Venture capital is the most expensive capital you will ever raise, it costs you equity, it costs you control, and it costs you opportunity. Something to consider once you are profitable is that banks are more comfortable extending a line of credit to you, that can be used for those 'unexpected' or 'opportunistic' capital requirements while not incurring a loss of equity now or in the future. Remember, banks make money the old fashion way, they charge interest on what they loan you :-).
- bkanber 9y ago
  Unfortunately these days banks don't extend large enough lines of credit for most growth businesses. There's a funding gap in between credit/debt and venture capital. SaaStr has a good writeup about it[1], and I've experienced the same thing at my company. Line of credit is good enough to bridge AR but not much more than that. [1] https://www.saastr.com/once-a-saas-startup-hits-initial-traction-shouldnt-it-only-raise-debt-instead-of-equity/ https://www.saastr.com/once-a-saas-startup-hits-initial-trac...
  - adventured 9y ago
    > Unfortunately these days banks don't extend large enough lines of credit for most growth businesses. That has been a universal problem for growth businesses in the US going back to the WW2 era (particularly cash thin product companies that have to plow their sales right back into growth). Phil Knight's Shoe Dog book has an almost unbelievable account of lines-of-credit hell (despite Nike's perpetual, extreme growth - basically doubling sales every year for the first ~15 years - they couldn't find any US banks willing to fund the growth; a Japanese import/export bank ended up saving them numerous times as several large US banks dumped their business).
  - tsunamifury 9y ago
    Both Wells Fargo and Chase Manhattan have extended $1 billion plus lines of no equity credit in the last 6 months to two different startups. This is changing.
    - bkanber 9y ago
      Who are the startups? I'm betting that $1B is still in the 25-50% ARR range.
    - deleted 9y ago
      [deleted]
- fossuser 9y ago
  Isn't it easy to raise money when you don't need it and hard to raise money when you do? Why not just take the $40M if you can negotiate a strong position (which you can if you're willing to say no to it anyway) and just have more runway to protect yourself?
  - methodover 9y ago
    Isn't the problem with that that investors expect that their capital be deployed immediately, and if you can't do that they aren't interested?
    - jacquesm 9y ago
      > Isn't the problem with that that investors expect that their capital be deployed immediately, and if you can't do that they aren't interested? That strongly depends on the investors. The vast majority is perfectly content with a spending schedule that runs over one or more years.
    - mgkimsal 9y ago
      My (limited) experience is less about the immediacy of use, but more the expected return and valuation it establishes. A 'too-high' valuation would likely make things more difficult in the future if expectations aren't met/exceeded.
    - elmar 9y ago
      rule of thumb the money of a round is to spent 1 to 2 years.
  - SandersAK 9y ago
    There are no hard rules for raising money. Let's say Parsley took $40m but at like $200m post - that means it's about 20% of the company. Depending on how that deal is structured - liquidation preferences, board seats, voting rights of the preferred stock (which the vcs would get), you're probably giving up some control here. It also raises expectations that, well you got $40m to deploy, go out and do it and eat up all that market share. This assumes that your product / market fit is not only super bulletproof and solid, but also that you've assessed every type of market up to your valuation (ie $200m worth of value) and have a go-to-market ready for each. Ok let's say you even had some semblance of that - deploying GTM on each vertical at that speed puts pressure on the sales team to close aggressive deals. This means that some deals might not be 100% fit but maybe 90% fit. Well if you're expected to grow at 10x what you initially thought, those 10% inefficiencies start to stack. Ok NOW product team is starting to feel the heat to accommodate for all these not 100% perfect fit deals. So what do you do? Start hiring people on product to try and keep up. The problem with rapidly scaling growth, esp in enterprise, is that inefficiencies and edge case situations compound significantly at scale. In frothy markets like right now, it's up to the founders to figure out the right amount of money because not enough can kill you but so can too much.
- CalChris 9y ago
  > it costs you equity, it costs you control, and it costs you opportunity Obviously VC costs you equity. I think control is something you have and lose depending on your ability to deliver. Larry has it. Travis lost it. I really don't understand the opportunity part. Can you give an example? I'm just drawing a blank.
  - ChuckMcM 9y ago
    Surprisingly, I've met people where the true equity cost was not well understood. The equity comes from three things, the money invested, the efforts of the employees, and the value created by that effort. As the company grows and matures, the benefit of that growth is bestowed based on 'equity ownership' not 'equity invested.' What that means is that if you've traded ownership equity for cash, especially cash you don't actually need, then your sweat equity is diluted. That time you're killing yourself on weekends to get the product just right to satisfy the customer that is going to take you to the next level, is rewarded in an exit to the guy that wrote the check, not the guy that did the work. All you have to barter with are 'shares' and the people most likely to make you successful are working for you. Equity that you give to a guy that writes a check is sets a 'value' on the act of writing the check. If you over raise, you're valuing 'cash' more than you are valuing your own and your employee's efforts. Not a choice to make lightly. The opportunity costs are choices. If you raise $40M you're investors really aren't willing to see you 'exit' for just $80M, they will want you to go for way more than that. If you don't raise the $40M and someone offers you $80M for the company, you can take it and everyone benefits. Or another scenario, some very important strategic company wants to partner with you but this big equity load that is being held by VCs is a disincentive against future possible M&A activities. Now this only discussed raising money that you don't need which is the case here. The author points out they needed some money, but the investors they talked to were trying to push them to take a lot more than they needed. The thing about bank loans is that their 'liquidation preference' is always very close to 1.0 and they don't tell you how to run your business if you're making your payments :-). That also speaks to control.
andrewstuart 9y ago
Just a UX comment .... often one of the key values of a blog is to draw people to your website to find out about your product/service. For me, the typical flow is to go to blog and click on the logo at the top. For the optimum marketing outcome, the top logo links to your main website. In this case, the top logo links back to the blog. This site possibly lost the marketing opportunity because now I have to go to the trouble of clicking in the URL and changing it to www from blog. Might not sound like much but I think some people are willing to spend a few seconds having a look at something if it is incredibly easy to do so, but can't be bothered to make it happen if it requires anything more than a click.
- stevenleeg 9y ago
  I see this mistake on so many company blogs! It's always frustrating and usually ends up with me dropping off.
  - danek 9y ago
    It's a joyful surprise for me when the logo actually links to the right thing. Also it's not just blogs--any subsite, like documentation sites, forums, company wikis, etc.
  - rhizome 9y ago
    vBulletin and their ilk do this almost as a rule. The corner logo is always to the board index and no company link anywhere.
  - askz 9y ago
    My most frustrating issue is when you have some "home" link and it points back to the home of the blog, logic right ? But why do you have "articles" or even "blog" link aside ?
- justboxing 9y ago
  One more thing on the home page (full screen view). Simply saying > "Do incredible things with your data." with a "Get Started" button below it, tells me nothing about what you actually do, so I didn't click your CTA.
bkanber 9y ago
Modern guidelines for valuing a tech company in an M&A: - The technology asset is worth $3-5M, no matter what it is. - Higher AWS bill = better product. - EBITDA is not important, you can ignore that. - What's the QoQ revenue growth for the last 8 quarters? Doesn't matter if margins are going down. Only revenue growth matters. - More employees = better company. Obviously. - Valuation should be directly proportional to venture capital raised. - You have a remote engineering team in the US? Why not go offshore or nearshore? - Make sure it's an asset deal, not a stock deal, so that you can write it off but the founders get double-taxed. - Design earnouts such that they are unachievable.
- deleted 9y ago
  [deleted]
- nunez 9y ago
  Here's something I've always been confused about. How does employee headcount get factored into an acquisition or public offering? Why is having so many more employees than needed a "good thing" in these situations?
  - moxious 9y ago
    The poster is a bit making fun of this mindset; more employees isn't obviously better. But the "growth at all costs" mindset is real, and in that worldview rapid growth is a sign of success because you're building capacity to capture the market. In reality the plan is everything because without a great plan more people means just more burn, and hitting the wall sooner.
  - murbard2 9y ago
    Hiring people is expensive, a large team of people used to working together is a valuable asset in and of itself.
softbuilder 9y ago
There is a scene from Silicon Valley about taking less: https://www.youtube.com/watch?v=s1w5R2PGCb4 https://www.youtube.com/watch?v=s1w5R2PGCb4 (NSFW language)
- cableshaft 9y ago
  Just saw that episode again recently. There's some logic to accepting less on purpose, yeah.
btilly 9y ago
It was written some time ago, and was based on a study of spinoffs rather than startups, but The Innovator's Dilemma spoke directly to this point. One of the consistently common and bad mistakes that they found is to over-invest for a market segment. If you give people $100 million for a market segment with growth potential that can only currently support a $20 million company, they will spend it and then must find a way to justify it. Which means that they will be forced to search for a business opportunity that may not exist, rather than being satisfied with the one which clearly does. This may be a special case, exactly because the spinoffs were into an inferior (but cheaper) technology for an existing market, and their eventual success is based on the prospect of an existing market switching to a new technology in a way that wipes out established vendors. So it was critically important is that the spinoff successfully embed itself into the marginal current market. But I still like the way they summarized their observations of many attempts at spinoffs. "Bad money is impatient for growth and patient for profit. Good money is impatient for profit and patient for growth." Don't over capitalize. Focus on being profitable. Be in the right line of business, and growth will come.
justinzollars 9y ago
Good for you. You made the right move for your team and yourselves.
CurtMonash 9y ago
Actually, Microsoft was pretty much self-funded. (Except perhaps for some help from the Bank of Dad.) They eventually took a bit of VC mainly to get the outside advice.
- vit05 9y ago
  Bill Gates talks about that. They eventually receive 5 million but didn't use the money. https://youtu.be/cBHJ-8Bch4E?t=8m24s https://youtu.be/cBHJ-8Bch4E?t=8m24s
- adventured 9y ago
  > Except perhaps for some help from the Bank of Dad. Based on what both Gates and Allen have said, it was completely self-funded to get started. The Gates family contributed no money. Microsoft was founded with a few thousand dollars and they were profitable / break-even almost immediately. Gates and Allen had just made a nice chunk of money doing contract work on a large scale power system before pursuing the Altair opportunity.
  - jlebrech 9y ago
    it's nice to get free food and lodgings while building a company
unabridged 9y ago
Imagine how much they could have raised in an ICO. Probably could have got $40M without even giving up more than 10% equity and no strings or board members attached.
rootedbox 9y ago
sidenote Their blog loads faster than their website.
danschumann 9y ago
I'd be trolling if I said the lesson of the article was that when you (only) need $5m, the key is to realize that you already have it; so I'll say the lesson is to leave no stone unturned, especially the stones closest to you.

192 points by pixelmonkey 9y ago

Smart move, tough to do. Remember that Venture capital is the most expensive capital you will ever raise, it costs you equity, it costs you control, and it costs you opportunity. Something to consider once you are profitable is that banks are more comfortable extending a line of credit to you, that can be used for those 'unexpected' or 'opportunistic' capital requirements while not incurring a loss of equity now or in the future. Remember, banks make money the old fashion way, they charge interest on what they loan you :-).

bkanber 9y ago
Unfortunately these days banks don't extend large enough lines of credit for most growth businesses. There's a funding gap in between credit/debt and venture capital. SaaStr has a good writeup about it[1], and I've experienced the same thing at my company. Line of credit is good enough to bridge AR but not much more than that. [1] https://www.saastr.com/once-a-saas-startup-hits-initial-traction-shouldnt-it-only-raise-debt-instead-of-equity/ https://www.saastr.com/once-a-saas-startup-hits-initial-trac...
- adventured 9y ago
  > Unfortunately these days banks don't extend large enough lines of credit for most growth businesses. That has been a universal problem for growth businesses in the US going back to the WW2 era (particularly cash thin product companies that have to plow their sales right back into growth). Phil Knight's Shoe Dog book has an almost unbelievable account of lines-of-credit hell (despite Nike's perpetual, extreme growth - basically doubling sales every year for the first ~15 years - they couldn't find any US banks willing to fund the growth; a Japanese import/export bank ended up saving them numerous times as several large US banks dumped their business).
- tsunamifury 9y ago
  Both Wells Fargo and Chase Manhattan have extended $1 billion plus lines of no equity credit in the last 6 months to two different startups. This is changing.
  - bkanber 9y ago
    Who are the startups? I'm betting that $1B is still in the 25-50% ARR range.
  - deleted 9y ago
    [deleted]
fossuser 9y ago
Isn't it easy to raise money when you don't need it and hard to raise money when you do? Why not just take the $40M if you can negotiate a strong position (which you can if you're willing to say no to it anyway) and just have more runway to protect yourself?
- methodover 9y ago
  Isn't the problem with that that investors expect that their capital be deployed immediately, and if you can't do that they aren't interested?
  - jacquesm 9y ago
    > Isn't the problem with that that investors expect that their capital be deployed immediately, and if you can't do that they aren't interested? That strongly depends on the investors. The vast majority is perfectly content with a spending schedule that runs over one or more years.
  - mgkimsal 9y ago
    My (limited) experience is less about the immediacy of use, but more the expected return and valuation it establishes. A 'too-high' valuation would likely make things more difficult in the future if expectations aren't met/exceeded.
  - elmar 9y ago
    rule of thumb the money of a round is to spent 1 to 2 years.
- SandersAK 9y ago
  There are no hard rules for raising money. Let's say Parsley took $40m but at like $200m post - that means it's about 20% of the company. Depending on how that deal is structured - liquidation preferences, board seats, voting rights of the preferred stock (which the vcs would get), you're probably giving up some control here. It also raises expectations that, well you got $40m to deploy, go out and do it and eat up all that market share. This assumes that your product / market fit is not only super bulletproof and solid, but also that you've assessed every type of market up to your valuation (ie $200m worth of value) and have a go-to-market ready for each. Ok let's say you even had some semblance of that - deploying GTM on each vertical at that speed puts pressure on the sales team to close aggressive deals. This means that some deals might not be 100% fit but maybe 90% fit. Well if you're expected to grow at 10x what you initially thought, those 10% inefficiencies start to stack. Ok NOW product team is starting to feel the heat to accommodate for all these not 100% perfect fit deals. So what do you do? Start hiring people on product to try and keep up. The problem with rapidly scaling growth, esp in enterprise, is that inefficiencies and edge case situations compound significantly at scale. In frothy markets like right now, it's up to the founders to figure out the right amount of money because not enough can kill you but so can too much.
CalChris 9y ago
> it costs you equity, it costs you control, and it costs you opportunity Obviously VC costs you equity. I think control is something you have and lose depending on your ability to deliver. Larry has it. Travis lost it. I really don't understand the opportunity part. Can you give an example? I'm just drawing a blank.
- ChuckMcM 9y ago
  Surprisingly, I've met people where the true equity cost was not well understood. The equity comes from three things, the money invested, the efforts of the employees, and the value created by that effort. As the company grows and matures, the benefit of that growth is bestowed based on 'equity ownership' not 'equity invested.' What that means is that if you've traded ownership equity for cash, especially cash you don't actually need, then your sweat equity is diluted. That time you're killing yourself on weekends to get the product just right to satisfy the customer that is going to take you to the next level, is rewarded in an exit to the guy that wrote the check, not the guy that did the work. All you have to barter with are 'shares' and the people most likely to make you successful are working for you. Equity that you give to a guy that writes a check is sets a 'value' on the act of writing the check. If you over raise, you're valuing 'cash' more than you are valuing your own and your employee's efforts. Not a choice to make lightly. The opportunity costs are choices. If you raise $40M you're investors really aren't willing to see you 'exit' for just $80M, they will want you to go for way more than that. If you don't raise the $40M and someone offers you $80M for the company, you can take it and everyone benefits. Or another scenario, some very important strategic company wants to partner with you but this big equity load that is being held by VCs is a disincentive against future possible M&A activities. Now this only discussed raising money that you don't need which is the case here. The author points out they needed some money, but the investors they talked to were trying to push them to take a lot more than they needed. The thing about bank loans is that their 'liquidation preference' is always very close to 1.0 and they don't tell you how to run your business if you're making your payments :-). That also speaks to control.

andrewstuart 9y ago

Just a UX comment .... often one of the key values of a blog is to draw people to your website to find out about your product/service. For me, the typical flow is to go to blog and click on the logo at the top. For the optimum marketing outcome, the top logo links to your main website. In this case, the top logo links back to the blog. This site possibly lost the marketing opportunity because now I have to go to the trouble of clicking in the URL and changing it to www from blog. Might not sound like much but I think some people are willing to spend a few seconds having a look at something if it is incredibly easy to do so, but can't be bothered to make it happen if it requires anything more than a click.

stevenleeg 9y ago
I see this mistake on so many company blogs! It's always frustrating and usually ends up with me dropping off.
- danek 9y ago
  It's a joyful surprise for me when the logo actually links to the right thing. Also it's not just blogs--any subsite, like documentation sites, forums, company wikis, etc.
- rhizome 9y ago
  vBulletin and their ilk do this almost as a rule. The corner logo is always to the board index and no company link anywhere.
- askz 9y ago
  My most frustrating issue is when you have some "home" link and it points back to the home of the blog, logic right ? But why do you have "articles" or even "blog" link aside ?
justboxing 9y ago
One more thing on the home page (full screen view). Simply saying > "Do incredible things with your data." with a "Get Started" button below it, tells me nothing about what you actually do, so I didn't click your CTA.

bkanber 9y ago

Modern guidelines for valuing a tech company in an M&A: - The technology asset is worth $3-5M, no matter what it is. - Higher AWS bill = better product. - EBITDA is not important, you can ignore that. - What's the QoQ revenue growth for the last 8 quarters? Doesn't matter if margins are going down. Only revenue growth matters. - More employees = better company. Obviously. - Valuation should be directly proportional to venture capital raised. - You have a remote engineering team in the US? Why not go offshore or nearshore? - Make sure it's an asset deal, not a stock deal, so that you can write it off but the founders get double-taxed. - Design earnouts such that they are unachievable.

deleted 9y ago
[deleted]
nunez 9y ago
Here's something I've always been confused about. How does employee headcount get factored into an acquisition or public offering? Why is having so many more employees than needed a "good thing" in these situations?
- moxious 9y ago
  The poster is a bit making fun of this mindset; more employees isn't obviously better. But the "growth at all costs" mindset is real, and in that worldview rapid growth is a sign of success because you're building capacity to capture the market. In reality the plan is everything because without a great plan more people means just more burn, and hitting the wall sooner.
- murbard2 9y ago
  Hiring people is expensive, a large team of people used to working together is a valuable asset in and of itself.

softbuilder 9y ago

There is a scene from Silicon Valley about taking less: https://www.youtube.com/watch?v=s1w5R2PGCb4 https://www.youtube.com/watch?v=s1w5R2PGCb4 (NSFW language)

cableshaft 9y ago
Just saw that episode again recently. There's some logic to accepting less on purpose, yeah.

btilly 9y ago

It was written some time ago, and was based on a study of spinoffs rather than startups, but The Innovator's Dilemma spoke directly to this point. One of the consistently common and bad mistakes that they found is to over-invest for a market segment. If you give people $100 million for a market segment with growth potential that can only currently support a $20 million company, they will spend it and then must find a way to justify it. Which means that they will be forced to search for a business opportunity that may not exist, rather than being satisfied with the one which clearly does. This may be a special case, exactly because the spinoffs were into an inferior (but cheaper) technology for an existing market, and their eventual success is based on the prospect of an existing market switching to a new technology in a way that wipes out established vendors. So it was critically important is that the spinoff successfully embed itself into the marginal current market. But I still like the way they summarized their observations of many attempts at spinoffs. "Bad money is impatient for growth and patient for profit. Good money is impatient for profit and patient for growth." Don't over capitalize. Focus on being profitable. Be in the right line of business, and growth will come.

justinzollars 9y ago

Good for you. You made the right move for your team and yourselves.

CurtMonash 9y ago

Actually, Microsoft was pretty much self-funded. (Except perhaps for some help from the Bank of Dad.) They eventually took a bit of VC mainly to get the outside advice.

vit05 9y ago
Bill Gates talks about that. They eventually receive 5 million but didn't use the money. https://youtu.be/cBHJ-8Bch4E?t=8m24s https://youtu.be/cBHJ-8Bch4E?t=8m24s
adventured 9y ago
> Except perhaps for some help from the Bank of Dad. Based on what both Gates and Allen have said, it was completely self-funded to get started. The Gates family contributed no money. Microsoft was founded with a few thousand dollars and they were profitable / break-even almost immediately. Gates and Allen had just made a nice chunk of money doing contract work on a large scale power system before pursuing the Altair opportunity.
- jlebrech 9y ago
  it's nice to get free food and lodgings while building a company

unabridged 9y ago

Imagine how much they could have raised in an ICO. Probably could have got $40M without even giving up more than 10% equity and no strings or board members attached.

rootedbox 9y ago

sidenote Their blog loads faster than their website.

danschumann 9y ago

I'd be trolling if I said the lesson of the article was that when you (only) need $5m, the key is to realize that you already have it; so I'll say the lesson is to leave no stone unturned, especially the stones closest to you.