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It totally depends on the investors. In the given example of raising at 3m and selling at 10, a lot of investors would call that a failure and push instead to r

It totally depends on the investors. In the given example of raising at 3m and selling at 10, a lot of investors would call that a failure and push instead to raise more for a bigger eventual exit. It sucks, but the failure rate of a startup is so high that it's understandable when VCs need their successes to make it big. On top of that, for a founder that ~5m exit may be life-changing. For the investor, probably not.

reducesuffering 3y ago
But that's the point isn't it? If you only raise one round, like the $3m, a round is only like ~15% of the company so they don't have the power to dictate whether you attempt a bigger exit or not. I also don't understand why this "third way" isn't more common because you get the initial big boost of being able to hire a team, but you still retain 70-85% of the company instead of repeated dilutions where founders end up with 5-10%. I know I know, 5% of $1b is more than 85% of $50m but it usually seems like you become worse off and just another job you don't have control of where someone else is putting their thumbs on the scale and you can get ejected from.
- sv123 3y ago
  I think the point is it may be hard to get investors to ever give you $3m if you don't have the 100x exit in mind.
  - avisser 3y ago
    The counterpoint is that it's impossible for the seed investor to read minds or force a majority-owning founder to take more funding.
- BadCookie 3y ago
  Liquidation preferences make a difference to the math here. For example, a 3x liquidation preference would guarantee the investors the first $9 million of proceeds from any exit in the $3 million investment example.
  - morgante 3y ago
    Liquidation preferences rarely kick in until later rounds. Most seed rounds are just 1x.
    - xyzzy_plugh 3y ago
      I know some late stage startups with multiple rounds where _all_ are 1x. Most likely ZIRP but still.
      - siegel 3y ago
        1x IS a liquidation preference. I very, very rarely see in excess of a 1x liquidation preference, regardless of the round.
- tptacek 3y ago
  Right, but you more or less have to lie to raise money for that strategy.
  - xyzzy_plugh 3y ago
    I think that distinction firmly lies in what founders decide to tell themselves. Imagine, founders _lying_ in their pitch decks.
    - tptacek 3y ago
      Founders are wishful in their pitch decks, but that's not the same thing as misrepresenting their intentions.
  - reducesuffering 3y ago
    Really? You might've been in these investor meetings. AFAIK, founders are telling investors about the big vision, we'll raise money right now and wishfully become very big. In what way are investors stipulating, "ok we'll fund your seed/A but only so that you can hit certain benchmarks that you will definitely be raising a series B in a year or two." Is it that direct?
itslennysfault 3y ago
They can "push" for whatever they want. I think this is the trap a lot of founders find themselves in. I know someone that did a couple rounds (2 plus a bridge) and pretty much just stopped listening to the VCs after that. They essentially pivoted it into a lifestyle business with no dreams of IPO or exit. They pay themselves (and a small handful of employees) a nice salary. The company is minimally profitable and very stable. The VCs are never going to see a dime of return. I think its kinda hilarious.
- morgante 3y ago
  The VCs won't see a return, but what's the upside for the founder there? Paying yourself a "nice salary" is not a win considering how hard it is to get a company off the ground.
  - brianwawok 3y ago
    Who are you to judge what someone picks for their own life?
    - morgante 3y ago
      It's fine if they're happy with it. I'm just saying that this would be just as much a "failure" as it would be for their investors. I know I never would have quit my well-paid, enjoyable job to start a company if this was the outcome.
      - willsmith72 3y ago
        to you it would be a failure. to many a sustainable, profitable small business is the dream
      - cqqxo4zV46cp 3y ago
        It’s fine if they’re happy with it, but you then go on to again state that there’s some sort of objective failure here. There’s not. If you think that there is, you’re living in a bubble.

reducesuffering 3y ago

But that's the point isn't it? If you only raise one round, like the $3m, a round is only like ~15% of the company so they don't have the power to dictate whether you attempt a bigger exit or not. I also don't understand why this "third way" isn't more common because you get the initial big boost of being able to hire a team, but you still retain 70-85% of the company instead of repeated dilutions where founders end up with 5-10%. I know I know, 5% of $1b is more than 85% of $50m but it usually seems like you become worse off and just another job you don't have control of where someone else is putting their thumbs on the scale and you can get ejected from.

sv123 3y ago
I think the point is it may be hard to get investors to ever give you $3m if you don't have the 100x exit in mind.
- avisser 3y ago
  The counterpoint is that it's impossible for the seed investor to read minds or force a majority-owning founder to take more funding.
BadCookie 3y ago
Liquidation preferences make a difference to the math here. For example, a 3x liquidation preference would guarantee the investors the first $9 million of proceeds from any exit in the $3 million investment example.
- morgante 3y ago
  Liquidation preferences rarely kick in until later rounds. Most seed rounds are just 1x.
  - xyzzy_plugh 3y ago
    I know some late stage startups with multiple rounds where _all_ are 1x. Most likely ZIRP but still.
    - siegel 3y ago
      1x IS a liquidation preference. I very, very rarely see in excess of a 1x liquidation preference, regardless of the round.
tptacek 3y ago
Right, but you more or less have to lie to raise money for that strategy.
- xyzzy_plugh 3y ago
  I think that distinction firmly lies in what founders decide to tell themselves. Imagine, founders _lying_ in their pitch decks.
  - tptacek 3y ago
    Founders are wishful in their pitch decks, but that's not the same thing as misrepresenting their intentions.
- reducesuffering 3y ago
  Really? You might've been in these investor meetings. AFAIK, founders are telling investors about the big vision, we'll raise money right now and wishfully become very big. In what way are investors stipulating, "ok we'll fund your seed/A but only so that you can hit certain benchmarks that you will definitely be raising a series B in a year or two." Is it that direct?

itslennysfault 3y ago

They can "push" for whatever they want. I think this is the trap a lot of founders find themselves in. I know someone that did a couple rounds (2 plus a bridge) and pretty much just stopped listening to the VCs after that. They essentially pivoted it into a lifestyle business with no dreams of IPO or exit. They pay themselves (and a small handful of employees) a nice salary. The company is minimally profitable and very stable. The VCs are never going to see a dime of return. I think its kinda hilarious.

morgante 3y ago
The VCs won't see a return, but what's the upside for the founder there? Paying yourself a "nice salary" is not a win considering how hard it is to get a company off the ground.
- brianwawok 3y ago
  Who are you to judge what someone picks for their own life?
  - morgante 3y ago
    It's fine if they're happy with it. I'm just saying that this would be just as much a "failure" as it would be for their investors. I know I never would have quit my well-paid, enjoyable job to start a company if this was the outcome.
    - willsmith72 3y ago
      to you it would be a failure. to many a sustainable, profitable small business is the dream
    - cqqxo4zV46cp 3y ago
      It’s fine if they’re happy with it, but you then go on to again state that there’s some sort of objective failure here. There’s not. If you think that there is, you’re living in a bubble.