Chapter 15
To raise, or not to raise?
The million-dollar question: to raise, or not to raise?
If you can run your startup without external funding, that’s definitely the best option. But in most cases, especially when you are still investing in R&D, building your brand and sales capability, this is not possible. If you can’t continue to self-fund your startup, then you are going to need to find an investor. I can’t emphasise enough: it’s not just about the money – once you take the cash, you are joined at the hip. The key is finding an investor who will give you the cash at a fair valuation AND bring some value add to your company. They all say they do, but I suggest that you call as many of their portfolio companies as possible and make sure that their actions match their words. You don’t want to screw up this important decision. When I decided to take in a private equity partner, I worked with Michael Traill from Macquarie Bank. My logic being that if I were to go out with Mike and his wife Jenny for dinner, it was not because I had to, it was because I wanted to. That was in 1992, and 30 years later I’m still mates with Trailly. Of course, I wanted a fair valuation – but I would rather have taken a lower, but reasonable, valuation to work with Mike than a higher valuation to work with someone who was not culturally aligned with Com Tech. It turned out to be an excellent decision for both Mac Bank and Com Tech.
A VC partnership is like a marriage. You don’t take a chance with what may appear to be the best option – the highest valuation – unless there is great chemistry. You must be working as a team, not as adversaries. Even though you may not be working with each other day to day, choosing a VC partner is almost like selecting a co-founder. Try and find a partner who will not only write a cheque but will also bring complementary skills. If you are a tech founder, then a sales and marketing oriented partner may be a good fit.
The next key decision is how much you should raise. Founders often suffer from what I refer to as ‘founders’ euphoria’. They believe that because they love their idea – and you must, as a founder, or nobody will – everybody else will love it too and customers will be salivating to get their hands on the product or service. Unfortunately, it doesn’t usually work like that. Remember, it always takes longer and costs more than you think. I always advise founders that they can’t afford to be reckless in either direction regarding capital raising. Don’t take on too much capital and don’t take on too little. Make sure that you have enough runway to give yourself the best opportunity to execute on your business plan – and to enable you to get to the next raise, or to an exit. But don’t take on too much, or you could end up so diluted that you may not own your idea at the next raise.
To help provide a clearer explanation, I thought it would be useful to give a couple of examples based on VC investments that I’ve been involved with.
One of our best founders raised $2 million for a Series A to execute on his business plan. He told me that he was going to hire ten salespeople with the funding. I advised him that if he did that, it wouldn’t be long before he would be laying off eight non-performing salespeople and coming back to us for more capital – and then we would own his business. I didn’t want that. We back founders and we want them to be heavily incentivised for us to succeed – we are not looking to back salaried managers with limited equity. For the stage his business was at, there was nobody better suited than the sales-orientated founder to win those key anchor tenants, making it much easier for the second, third and fourth salespeople to come on board and reference those happy customers. Enterprise selling is a body contact sport. I needed that founder pounding the streets to win those first few customers. He later told me that this was the best advice he ever got. In two years, he has grown his revenues from $250,000 of annual recurring revenue (ARR) to over $15 million of ARR; he still owns 45 per cent of his company, and those original customers that he closed helped him to build his business. Using $2 million to build a sales team at that early stage would have been a reckless decision.
Recently, we met some awesome tech founders who had built an amazing product that was quickly getting traction across the globe with incredible customers. They had bootstrapped the company with their own funds and were now faced with the following choices:
We were really keen to invest in the startup, but I wanted to give them candid advice, whether they went with us or not. It’s the only way to operate.
I advised the founders that doing nothing would be conservatively reckless. They had an amazing opportunity in front of them, and if they failed to seek extra funding they would not be giving their startup the best chance to build the market-leading solution for the problem they were solving. Some of their customers were asking them to raise funding so that they could continue to invest in adding new features and functionality to their product. They needed to raise cash!
As they were tech founders, I suggested that they take on an Australian-based VC company for their Series A (hopefully us), to help them build the systems and infrastructure they would need to eventually expand offshore. Their next raise should be in the USA – but not this one. Taking a large US round at this early stage would have been reckless too. Going from bootstrapping, to having millions of dollars in the bank to spend, requires a completely different mindset. And why would you want a partner 15,000 kilometres away at this critical time for the business?
It’s a fine balance, calculating how much runway you’ll need in order to execute, how much dilution you can stomach and which VC partnership is the right one for your startup. It’s going to be one of the most important decisions that you will make in your early career as a founder – consider it wisely.
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