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This is why I hate investing in startups raising $500k or less. You won't be able to raise again unless you have significant upwards progress.
by joshu 12y ago
This is why I hate investing in startups raising $500k or less. You won't be able to raise again unless you have significant upwards progress.
- api 12y agoInteresting... What effect does this have on your criteria for investment? Or are you saying that raising less might in and of itself make the investment riskier by implying that they've under-estimated how much runway they might need? I've often heard the advice that "it's not much harder to raise a million than it is to raise $250k, so you might as well raise a million" or some variation thereof. Is that true in your opinion?
- joshu 12y agoNo, the ones that raised <$500 were raising as much as they could. Perhaps startups that COULD raise $1m but didn't are a different case.
- paul 12y agoSeveral of my best investments have been from startups raising less than $500k. Justin.tv/Twitch returned 97x my original investment, and Weebly will likely be even more.
- super_sloth 12y agoPresumably those were a while back? Do you think the climate has changed since then to make it much harder?
- paul 12y agoThe climate has changed in that it's easier for startups to raise more, but even those that do not can still be very successful. Justin.tv or Weebly would not require any more money to start today than they did six years ago -- if anything it's gotten cheaper.
- kenrikm 12y agoI remember David from Weebly noting that they narrowly avoided the pinch by becoming profitable (circa 2009?) Now AFAIK they are kicking ass.
- paul 12y agoYes, the Weebly story is amazing. He covered part of it at Startup School a few years ago: https://www.youtube.com/watch?v=l_b228qEVi8 https://www.youtube.com/watch?v=l_b228qEVi8
- gotothrowaway 12y agoWeebles wobble, but they don't fall down.
- _nedR 12y agoI keep mistaking your nick for pg's on comment threads. I am gonna call you "the other paul"(of yc) in my head from now on if you don't mind :)
- cwilson 12y agoI think one thing that is happening here is that certain types of startups are throwing money at problems that need to be solved in order to grow enough that raising additional funds is easy and/or not required. An example would be that the founding team isn't skilled enough to get through the product market fit stage, so they hire in order to fill those gaps. Or maybe it's a chicken & egg problem, which often requires lots of time and luck to crack. With the high salary requirements that engineers and designers have today, especially in Silicon Valley, this means burn-rates get very high very fast, even with only a few employees. I remember five years ago in most cases you'd take a major salary cut (which was made up for in equity) when joining a startup as a first hire. You took a big risk to be employee number one or two. These days the landscape is so competitive you not only get equity, but a great salary as well. I wonder if this has something to do with what you're hinting at?
- mamcx 12y agoProbably is easier to be frugal with limited resources. With a lot, is easier to overspend at first and later get burned. Limited resources from the star could help to focus more. I have never get investment (rarely in my country) but always thinking that I prefer a small push than a huge one.
- jonathanmarcus 12y agoWeebly's traction and capital efficiency are remarkably impressive.
- joshu 12y agoDid they have progress when they raised again?
- paul 12y agoFor some definition of progress, certainly, but neither company was an obvious winner in the first couple of years. The key is to stay very lean until you have definite product/market fit and can raise a huge growth round.
- danieltillett 12y agoWill investors let companies do this? Is it going to be OK if you only grow 100% per year because you are living within your means or aiming to become profitable as soon as possible?
- davidu 12y agoIf you have a SaaS business, growing 100% Y/Y is just fine until you hit $100m ARR. -David
- mrkurt 12y agoMaybe after you pass $10mm ARR. :)
- danieltillett 12y agoYes I think this is the rub. I don't think you can expect right now to get funding at the A round if you have only shown 100% Y/Y growth.
- jameshk 12y agoMaybe this is because smaller investments = early stage, and at something like YC you can get more hands-on to help the founder succeed?
- loceng 12y agoAs I get farther along in development I realize the cost and time to becoming profitable and break-even is smaller and smaller than I originally expected. It may slow down development if taking smaller investment, however from my experience so far being forced to move slower has its benefits - perhaps including less dilution.
- K2h 12y ago$450k X 97 = $43.7M. WOW! if I could just pick one of those in my lifetime.
- deleted 12y ago[deleted]
- sama 12y agoon the contrary, most of my best investments have been in rounds of <$500k. i'm more afraid of startups raising megarounds as their initial round.
- kenrikm 12y agoIn the current climate what would you recommend the size of a seed round be? Clearly the answer is not "as much as you can get" right?
- lpolovets 12y agoIf you're trying to maximize your chances of raising a Series A (which may not be the ideal metric), then $600k+ is pretty good and $900k+ is great. (Based on this post: http://tomtunguz.com/seed-followon-rates/ http://tomtunguz.com/seed-followon-rates/)
- joshu 12y agoInteresting. For me, all but one that raised < $500k died.
- bcx 12y agoSam, out of curiosity, what is the average raise for a post-demo-day YC company now-a-days? (if it's public). I wonder this 500K benchmark is still something useful to investors in the valley. My guess would be that there end up being only a few YC companies each batch raising <500K and I doubt the amount raised ends up being a good predictor of success.
- lpolovets 12y agoAgreed. Here's some data that backs up what you're saying: http://tomtunguz.com/seed-followon-rates/ http://tomtunguz.com/seed-followon-rates/. This is probably the blog post that I share most often with founders I talk to.