Raising Money

Raising money is a frequently discussed topic for startups. It makes sense to be curious about this subject because it's sort of a black box from the outside.

Startups like to talk about raising money. When we first had over $1M in our bank account, we took a screenshot and it felt great. Why? Well, it was the biggest bank account we'd ever seen and it was also someone effectively stating that they believed the company that we'd built was worth millions of dollars. But at some point, the business of raising money gives way to the business of running a real company. Unless you're blessed like Snapchat or WhatsApp, you're going to have years of running your company, growing it, watching product margins and profitability, and trying to build a real, sustainable enterprise. Raising money is only a tiny piece of that.

 

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So now that TripleLift has become a bona fide enterprise, we approach fundraising very professionally. The considerations are: 1) why raise money - what does it get us, 2) what's the cost from a dilution perspective, 3) what's the cost from a control perspective, and 4) what's the cost from an expectation perspective.

1) What does the money get you. Can the money buy enable the company to have more employees, buy more hardware, and expand product X, Y or Z? What is the model for the money will be used and what's the net upside to the company? Could you get there without this money? These are the questions we're always thinking about. For some companies, raising money is a requirement because they lose too much money to stay in business, so they have to raise money.

2) What's the cost from a dilution perspective. I discussed preferred shares in a previous Lift Letter, describing the various rights and costs associated with them. When you raise money, you (almost always) raise preferred shares. But it has all sorts of impacts. If you raise $1M on a $4M pre-money valuation, then after the round, 20% (1 out of 5) shares will be new shares. So if you previously owned 1% of the company, now you own 1% * 4/5 = 0.8%. So hopefully you're getting 0.8% of a number that will be higher, whenever there's a liquidity event, than the 1% would have been without the extra money.

3) What's the cost from a control perspective. Are you bringing on more directors to your board? What approvals would they want? What are they like to deal with? Do they want to be very involved in lower-level decision making? Will they kill higher risk projects with unknown rewards for more predictable product lines?

4) What's the cost from an expectation perspective. VCs have a very different mindset from traditional portfolio managers. VCs basically want to have a portfolio of maybe 20 companies, and 1-2 really blow up to $1B or more, a few at several hundred million, and the rest - whatever. But the point at which you raise money because part of their expectation. If you're an early investor, 5-10x is a good return for investors, but they'd like higher. If you're later, 2-4x is generally pretty good. So when you're raising at $50M valuation, a $100M exit doesn't really excite investors, since it's generally at the bottom of their multiple range. This means they may even look to block an outcome. So the higher the valuation you raise at, the higher the expectations are for an outcome - and the more opportunities you may theoretically be limited from exploring.