Aaron is very smart, but what this article is missing is that valuation often follows the amount of capital you raise. What I mean is your valuation is determined by the demand for your shares. VCs have a specific ownership % they need for their model to work. Whether that is 10% or 20%, large rounds at very high valuations happen because of bidding wars. More VCs are bidding over that 10% or 20% they are looking for and that drives the price up. Many successful entrepreneurs say its not the amount you raise that is dilutive, it’s the number of times you raise.

In addition, good seed VCs are happy to give you a higher valuation when you have investor demand, so you can take more capital. This was my personal experience. Before our round closed, we had $X committed at $Y valuation, giving up 20%. When more capital came calling, our lead was happy to raise the valuation so we could take more money and increase our odds of success.

Would be great for Aaron to address this point.

I think you're largely right -- a lot of founders get trapped in mediocrity because they raise so much that they don't feel enough pressure to execute. And that frequent, high-resolution fundraises are much more viable than they were ten years ago.

On the other hand, I'll offer two countervailing observations to keep in mind:

* In well-understood categories (e.g. horizontal B2B SaaS), there has been so much brainpower and cash deployed in the last ten years that customers are overwhelmed by noise and expect much higher quality products before they'll meaningfully adopt and pay. My experience is that founders are spending much longer in the initial build phase getting to an MVP than they were ten years ago.

* The oversupply of venture dollars is not evenly distributed. If you're building something that needs years in the lab (chips, batteries, robots, hardware, etc), the investor herd thins out quickly and many of the folks willing to make a purely conceptual bet are much less comfortable judging whether some-progress-but-no-product is worth continued investment.

Sometimes it can be smart to raise a lot from a true believer to bridge you to the spreadsheet jockeys.

@ Aaron - Thanks, as always, for the thoughtful note but I disagree with you on this. Yes, there is risk of over-dilution if you raise boatloads too much out of the gate (including the very real and potentially fatal risk of being undisciplined on spending). But at the end of the day, if a founder figures out the business in that first 12 month window and is still sitting on another 12-24 months of cash, she has so much more power than if she is 4 months to cash out. She can take capital now but exactly on her terms. She can decide to keep pushing and raise in 12-18 months when the business will be in even better shape (and valuations higher, etc). Time becomes her friend, not her enemy. In my opinion, one would be crazy not to take more capital when it's this insanely cheap (valuations for 2 people with a powerpoint have never been higher). As we've seen with so many great companies, p/m often takes more than 8 months. Take more than you need and buy time. It will come out in the wash. I know this may sound self serving given my VC Cloak but having raised my first venture round as a founder in 1998, it comes from a place of experience (and pain). Thanks for listening.

My guess is that this advice of "raise less money" is a result of hanging around too many successful founders.

That is, if you talk to successful founders, they will generally wish they raised less money (due to dilution).

And, if you talk to failed founders, they will generally wish they raised more money (to increase likelihood of true PMF).

Also, I think that fear is a useful mental state when there is real and imminent danger. In startup land, you are right to be fearful, because you are much more likely to die than stay alive.

If you don't have the luxury of unlimited shots at success (due to a lackluster safety net or other life goals), it makes sense to maximize the likelihood of success in your current venture. There is a lot of "startup cost" to working on a new idea, and in a lot of fields, you will eventually succeed if you just stay alive/don't die.

> "If you’re a good company, you’re either going to raise your Series A - or Series B - in the next 12 months or have significant revenue such that you won’t need more capital. If you’re doing badly, why would you want to keep working on this for 24 or 36 months? That’s a waste of your time."

I'm a big fan of Aaron and his posts, but strongly and respectfully disagree with this line of thinking. As a VC, I've worked with companies that raised after 12 or 15 months, but most require a lot more time. I'm guessing median time from seed to A these days is something like 20 months, and I've seen as high as 35-40 months (including for YC co's I've worked with). Some companies just take longer to figure things out because they need a few small pivots first, or they're creating a new category and need time to figure out how to message their product, or etc.

We've backed several companies at seed that are now worth $100m+ but took years to get from seed to A.

Anecdotally when I ask founders about their seed rounds, almost no one regrets raising too much, but a lot of people regret raising too little.

The "certainty of over-dilution" is an important technical point. It seems to be a consequence of the illiquidity and high friction of conventional priced equity rounds. But it may be possible to design a fundraising instrument that avoids this problem.

For example: company raises $10M Series A, issuing 2 million new shares at $5. Let's modify our special Series A docs to include a provision where the company has the option to repurchase up to 1 million of these shares at any time. The pre-agreed repurchase price is $5 per share plus some time-based interest rate and/or a fixed markup. (Hmm, this sounds a lot like convertible debt...)

If the company becomes profitable quickly they may exercise the option to repurchase the 1 million shares, reducing dilution while providing both an immediate return and ongoing upside to the investor.

If the company needs the longer runway, or simply decides it's more beneficial to use the cash to fund growth, they already have it and the investor has correspondingly higher ownership.

It's sort of like a vesting schedule for investors.

If such a structure was agreed to, the headline "Raise Less Money" would probably become "Burn Less Money". Right now, the mere raising of the money causes the dilution; in this alternative structure, it's the actual net consumption of the money that causes the dilution, because the alternative use of that cash can always be to reduce dilution.

> If you're doing badly, why would you want to keep working on this for 24 or 36 months? That’s a waste of your time.

If you were writing a book and it was taking six months longer than expected, but was otherwise high quality, would you just abandon it? Or would you say that, you know what, in the big picture an extra six months isn't really material in terms of the expected benefits that will accrue over the next 20 years of my career?

I understand that by raising capital you're committing to provide a certain return on investment. But if you're actually making progress toward creating some asset of value, then structuring your business so that you need to shut it down if it's taking longer than expected seems to be not aligned with what would seemingly be in the best interests of any rational stakeholder.

There is an old saying that people respond to greed or fear. In fundraising, the greed is price, the fear is control.

When I fundraise, I start with the greed so investors optimize for it. Right before we hit an understanding (pre/post term sheet), I switch gears and exchange lower valuation for more control.

Works really well.

This article boils down to "all things equal, it is better to own your company than not." Yes, of course.

But it also ignores that the primary reason to raise money is to leapfrog: a business is not short-term sustainable, but IS long-term, and investor capital gets you over that hump.

With this view, the reason higher-value companies get diluted more is because the hump is larger: founders can only justify a high valuation with a significant influx of capital (the before-cash valuation is effectively 0), leaving the investors with the bargaining power, not the founders.

Yes, people should be less enamored by the VC hyper-growth model than they are, but that doesn't mean that people already in the forget-short-term-profits game shouldn't raise a lot of money.

"But I now realize that this is the wrong framing because simply staying alive is an inadequate goal for a company. Founders start companies to find product market fit and grow. Venture capital is designed to speed growth, not to extend runway."

PG says in his essay "How Not to Die": "If you can just avoid dying, you get rich. That sounds like a joke, but it's actually a pretty good description of what happens in a typical startup. It certainly describes what happened in Viaweb. We avoided dying till we got rich."

Aaron pre-empts this by saying that things have changed about the availability of funding to competent founders over the past 10 years, so the advice should change. I don't buy that. Shutting down early and raising new money for a new startup may give you a greater chance of the huge exit, but not dying is the best way to maximize likelihood of becoming rich. Maybe not unicorn rich, but FU money rich.

> If you’re doing badly, why would you want to keep working on this for 24 or 36 months?

Doesn't this run exactly contrary to the prevailing YC wisdom that "those who stay in the game are those who win?"

While pivoting in search of P/M fit, every startup is doing badly — until they're not.

Would you really suggest to pack it in after 12 months without traction or luck? Instead of pivoting and adapting? How many of YC's Top 100 wouldn't exist today if they operated by that advice?

The idea of raising money to speed up high quality execution instead of raising money to add “months of runway" is a powerful re-framing IMO. One of those reframes that sounds so simple one may overlook how different these two mindsets are, and how easy and tempting it is to fall into thinking about "months of runway".

I'd argue that general point is the most important idea in this article. Unfortunately I think the discussion on that more general point may get drowned out by the discussion of the weaker (and not as widely applicable) secondary idea in the title — raising less money.

Better advice would be to follow this simple rule of capital allocation: If you're stock is over-valued, sell it. If your stock is undervalued, don't sell any and instead try to buy it back.

"Confident, competent founders should take the risk of running out of money vs. the certainty of over-dilution" -- I strongly disagree with the author on this point. I would argue that founders preferring "risk of running out of money" to "certainty of over-dilution" might very well be considered irresponsible (or, at least, not responsible enough) instead of "confident".

Firstly, because it is extremely difficult to accurately estimate future financial needs of an early startup (due to lots of unpredictable factors, including R&D taking longer than expected, external/internal events and even potential pivots). Secondly, because it just makes much more sense to avoid running out of money (which is a well-known #2 reason for startup failure[1]) than to save some equity. What are you going to do with (more) equity of a failed company? Not to mention that, if a startup's team includes other people, one of the founders' top priorities should be caring for their fellow team members (and protecting company is one of the relevant aspects).

[1] https://www.cbinsights.com/research/startup-failure-reasons-...

Relevant PG tweet:

> assuming I got in [to YC] I would not get sucked into raising a huge amount on Demo Day.

> I would raise maybe $500k, keep the company small for the first year, work closely with users to make something amazing, and otherwise stay off SV's radar. In other words, be the opposite of a scenester.

> Ideally I'd get to profitability on that initial $500k. Later I could raise more, if I felt like it. Or not. But it would be on my terms.

> At every point in the company's growth, I'd keep the company as small as I could. I'd always want people to be surprised how few employees we had. Fewer employees = lower costs, and less need to turn into a manager.

(https://twitter.com/paulg/status/1132012625527750661)

Probably a good example of a confident, competent founder (Founders who raise too much capital are acting out of fear rather than acting out of confidence. // Confident, competent founders should take the risk of running out of money vs. the certainty of over-dilution.) as described on this essay :)

I have not raised recently, but when we tried to raise in 2013, the silliest thing was the "requirement" to move from NYC to SF/SV. Operating in NYC (as opposed to SF/SV) alone would allow us to raise less. I'd raise less, but i'd love to also base myself in a lower C-o-L location than SF/SV.

I hear this isnt as common now, but i'd love to hear fresh stories.

I think a lot of what he's talking about boils down to basic communication issues.

Venture Capital would be helped by a formal renaming of funding rounds. "Series A" or "Series B" is not indicative of what that money is for. Even "Seed" doesn't really mean anything these days. It would help clarify expectations for founders and VC.

This is great advice that has been ignored for the 16 combined years I've been fundraising as an entrepreneur and investing as a VC. No reason it'll change now though hopefully writing about it helps a bit.

One of the great myths in company-building is that increasing runway beyond 24-36 months increases chances of success.

Didn't HBO's Silicon Valley do a bit about this?

"How much could you get done in the next 12 months with the amount of capital you are planning to raise? If you’re a good company, you’re either going to raise your Series A - or Series B - in the next 12 months or have significant revenue such that you won’t need more capital"

I think getting to significant revenue such that you won't need more capital is an underrated approach that seems to be brushed off in the venture world. It's totally possible – if you really believe your equity is that valuable, then build something valuable enough to earn some revenue and constantly reinvest that back into the business to grow.

As someone who chose to raise only 40% of what was available at the same terms, the decision seems even better in hindsight.

VC funding comes with expectations for how new capital will be deployed until the next round, and if you raise a lot in the A but don't have enough progress to show for it before the B, you're going to be in a tough spot.

So it's not just about dilution; you're reducing your risk for the next round if you raise less because it's much harder to deploy large amounts of capital without lowering returns (in this case revenue, customers, and hiring).

Huge fundraises are celebrated because it is the only thing simple enough that anyone can understand (customers, employees, investors and other sheeple whose attention the founder must compete for).

"Airtable CEO Howie Liu on the continued importance of getting a ‘unicorn’ valuation" https://techcrunch.com/2019/02/19/airtable-ceo-howie-liu-on-...

Really depends on what you are trying to achieve. VCs are very focused on the ROI for their fund. A co-founder is generally focused on generating wealth for themselves.

In the perfect case where the business finds a high growth, product market fit then VCs and the entrepreneur align. Few businesses fit this model.

As an entrepreneur you have to raise money to suit your business plan (and risk profile). Personally I prefer my customers to be the boss rather than investors.

Some things take longer, because they’re harder to do (space, AI) or the nature of the beast requires length of time outside of your control (selling to enterprises/gov, bio/pharma trials).

This feels like advice squarely pointed at something like social that’s often easy to build but hard to get market penetration.

"If you’re a good company, you’re either going to raise your Series A - or Series B - in the next 12 months or have significant revenue such that you won’t need more capital. If you’re doing badly, why would you want to keep working on this for 24 or 36 months? That’s a waste of your time."

This black and white view of "good" and "bad" companies is so insulting. Same with "good" and "bad" founders as referenced in this article and even by PG elsewhere. How patronizing! I personally know "bad" founders who were running "bad" companies because they loved and believed in their business, and only 3, 5, or even 10 years into it found the right opportunity and had life-changing outcomes.

A response in two parts:

1) I spend more time with founders who have yet to succeed or who have failed than with founders who succeed. This is true of many early stage investors. The advice here is built off watching both groups.

2) I generally think it makes sense to model advice on what successful people have done while incorporating learnings from the mistakes that all types make.

Founders need to believe they're going to succeed, though of course they should mitigate risks where possible.

I had a company, and I was not particularly successful at raising money. I'm quite confident the main reason for this is because I was brutally honest about what was and was not possible, as investors offered me millions if I would just try X or Y. I would analyze their proposals, and come back and say "this will never make money and I can show it with incredible certainty." They then gave that money to someone else who offered to do that, and they failed because it was a terrible idea.

If I had raised more money, I would have wasted even more years before coming to the very painful reckoning that my startup was just untenable. I realize my tangent is unlikely related to your point and is separate from the article, but for a first time founder I am very glad I stuck to my integrity and only lost a few years of my life learning a valuable lesson instead of a decade.

In fact, I recently had an epiphany - if my startup succeeded and I'd become rich, I'd be a much shittier person today because of it. That failure fucking wrecked me but I needed it.

In many cases "raise less money" is actually "hire less people".

When seeing it as a "we hired too quickly", I see the same problem in failed, pivoted, and successful startups. It is your basic mythical man month problem, and most if not all VCs encourage this management mistake.

> That is, if you talk to successful founders, they will generally wish they raised less money (due to dilution).

Yes, there is a bit of a self-selecting bias involved here, but the thesis of _WHY_ you should take less valuation is (in the linked article) not based at all on the notion that you then end up with a large piece of the success pie.

It's based on: Hey, take what you need to prove that you have a good product, and don't take more, because taking more just means you'll be chasing a failure for that much longer.

The central tenet of "stop worrying about runway so much, you want as much runway as you need to prove your product and any more runway is just wasting everybody's time. Runway is a tool; not a goal." sounds rather compelling to me, at any rate.

One problem I had as a founder was that it was difficult to raise little money early. There are not enough angels around here. People wanted to push too much money on too early, so "seed" was not viable. There's nothing wrong with having extra money in the bank - the problem is that a lot of VCs expect you to spend the money you have raised, which often meant scaling before hitting PMF.

Right a startup looking for funding (by its very nature) means you're creating a situation where your company will be in the process of going out of business the moment you get your capital. Your job is to prevent that eventuality.

So think of a new restaurant that loses money on every customer until they figure out how to take more money in through the till than they're paying out.

Fear often results in miscalculation that creates worse results. One of the main objective of management training, leadership coaching, or even military training is eliminating fear based decision making.

> I think that fear is a useful mental state

How much time have you spent in actual _fear_, as opposed to merely having very clear goals?

But why would an investor agree to that? It's more risk with less upside:

- if the company does well enough that its share price rises, it's only normal to buy back your share (why wouldn't it? they just raised better-valued round! Not buying you out is just leaving money on the table)

- if the company doesn't do well, there's no reason for it to pay the markup, they'll simply continue to burn the money.

So you risk the entire sum, but stand to gain significantly only from the non-repurchasable portion of it. I could _maybe_ see it working for a time-based interest rate (if the rate was high enough), but not for the fixed markup. Unless we're talking about a really hot startup that the investors are dying to buy into and would accept pretty much any terms.