4 ms·

Ya, but what I don't get is why an iPad app needs to raise $8 million or why Slide.com that just sold to Google for $180 million raised $87 million. I must be m

• jswinghammer 16y ago
  Well I can speak from my own experience but the spending on marketing and sales for some companies ends up being a lot more than engineering. The way my company works is that we developed what we think/hope is a scalable business model and we are scaling our marketing and sales operations to sell the product. We're trying to self fund that but some people don't want to bother or can't for any number of (mostly) good reasons.
• mattmaroon 16y ago
  There are a number of factors. 1. As PG points out, startups are sorta pass or fail. If you could raise $1m for 25% of your company, or $8m for 25% of your company (which, btw, is a realistic possibility when comparing angel vs VC investors) you would take the $8m because your business has much less chance of going broke. Clearly I'm simplifying here, as there are a lot of other relevant factors (who the investors are, terms, the needed valuation for an exit afterward, etc.) but you get the point. 2. They probably have a lot of ambition. In the case of Flipboard, my guess is they're not thinking "we're just making an iPad app." They're probably setting out to change the way people interact with social media, and the iPad app is just the first step along a very long road. 3. Peace of mind. As an entrepreneur I can tell you, there's something very nice about knowing you're not going to run out of funding for awhile. Everyone breathes easier, and it lets you take bigger gambles when not every product has to be a winner. If you're already wealthy from a previous startup, and you're shooting for a massive exit, your path will involve hiring a lot of people and possibly a large marketing budget. To not have to worry about money requires raising a lot. (This is one of the primary advantages, for first timers, to raising angel money. They don't need an IPO increase their net worth by a factor of 100.) 4. It's what worked for them before. The companies that merged to become PayPal presumably raised a lot along the way. I know TellMe had one $47m round. When people raise a lot of VC money, then have an enormous exit, they're probably going to tend to do the same again. It's what they know, and they have empirical evidence that it can work. 5. Because they can. That shouldn't be a reason, but it definitely is. A big VC round is the startup equivalent of a trophy wife.
  • sbaqai 16y ago
    Another reason could be this: My understanding is that most PE/VC funds typically have a "2 and 20" compensation structure. 20% of profits, and 2% annual fee on committed capital. That incentivizes, regardless of performance outcome, committing as much capital as possible.
    • mattmaroon 16y ago
      That combined with taking board seats (which is why it's better for a VC to put $20m into one company than $10m into 2) is why VCs want to fund big rounds, but founders don't have any such incentive to take them.
• jasonlbaptiste 16y ago
  The biggest trap of raising too much money is what I call "Maserati Limbo". You have raised $70,80,90,etc. million and have a huge staff to support current operations. You might be just about break even or even worse, not profitable. With that amount of money raised you're sort of in a limbo while maybe driving a Maserati: 1) You're limited to being acquired by a handful of select companies. If they don't want you, yikes. 2) You would need to go public, but you don't have the rev numbers to justify it. So what often happens is the following: massive layoffs, fire sale occurs, and founders make diddly squat. The investors maybe make their money back and possibly .5-1x more due to liquidation prefs.
  • blackguardx 16y ago
    Why do you have to be acquired or go public? Can't you just run the company while drawing a high salary for several years?
    • jasonlbaptiste 16y ago
      Not when you've raised 90 million dollars. You're on borrowed time baby.