Funding Rules: 4 Things I Learned the Hard Way
By Venky Harinarayan, Co-Founder of Kosmix
As a co-founder of two companies and a venture capitalist, here are the four things I wish I had learned the easy way around. Perhaps, these can serve as a guide to some of the pitfalls others can avoid.
1. The Bad: Raising money when you really need it. In most things in life, you get the best deal if you can walk away. The power to say “no” and mean it truly works.
2. The Good: Raise money when your hype and reality are balanced. The company has achieved some credible milestones and there are big developments in the pipeline. It’s the robust pipeline that entrepreneurs miss most often – they try too hard to make the pipeline reality. They wait to close that key deal, or sign that partnership over the horizon before they raise money. Fund raising is a little like the television show: “Deal or No Deal.” Yes, you can keep opening those briefcases, but open a bad one, and your offer goes down — usually substantially. So, if you try to make something in the pipeline or the hype reality, kudos to you if you succeed. But if you don’t, your value in an investor’s eye is not stagnant, it’s usually much lower.
3. The Super-Good: You got this far? You are raising money at a nice healthy valuation and you have a lot of bidders. Raise a lot of money! Keep the dilution (amount of the company that you’re willing to give away) fixed and raise the most money that you can. Keep the amount raised fixed and reduce the dilution. As an example, let’s say you want to start of raising $10 million at a $40 million valuation and you get really lucky and get a valuation of $80 million; raise $16 million not $10 million keeping the dilution at 20 percent. Market environments change quickly and a reasonable valuation today may be a crazy valuation tomorrow. If that eventuality happens, you can ride it out if you have more cash in the bank. You do not want to end up with “the Ugly” situation: raising money when you really need it and with a crazy valuation.
4. The Inevitable: Ok you raised money at a great valuation and a lot of it. Congratulations! You breathe a huge sigh, open up the cheap champagne and after that wonder, what’s next. Almost every company I know takes a three month hit at a minimum after a fund raise, especially the early rounds. A great analogy is mountaineering. More people die descending Mount Everest than ascending – they relax more and get careless (http://paul.kedrosky.com/archives/2006/04/07/entrepreneurshi_2.html). Don’t relax – this was just the fuel, not the endpoint. Now, go out and build a great business and in the process have fun.
April 4th, 2008 at 9:57 am
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