Your VC Round Stats Are Vanity Metrics
In praise of capital efficiency
While bigger private funding rounds and massive valuations are celebrated as a validation and/or milestone achievement in the startup community, in reality they are often a Faustian bargain and set entrepreneurs up for failure.
Instead of raising as much money as you can for the highest possible valuation (a cultural byproduct of the VC “Power Law” dynamics I recently wrote about), focus on becoming capital efficient and raise as little as possible.
Many successful startups never raised venture funding or did so quite judiciously. For instance,
- MailChimp (acquired by Intuit for $12B) never raised any outside capital
- Lynda (acquired by LinkedIn for $1.5B) only raised growth equity after its 18th year in business
- Shopify (went public with market cap of $98B as of March 2024) raised their first venture round 6 years after founding
- WhatsApp raised less than $60M before being acquired by Meta Facebook for $19B.
Here’s why you too should raise less capital:
1. Minimize Unnecessary Dilution
With each round of financing, you give away ownership of your startup. Thus, the more you raise, the more ownership you give up. Many founders end up owning less than 10% of a startup by the time Series B or C rolls around. This dilution both erodes your control over the destiny of your startup and reduces your upside in an exit event. Reduction in ownership percentages can also reduce motivation and the sense of ownership among your team, sapping power away from the very engine of innovation in your startup.
2. Cultivate Discipline and Efficiency
Operating with less capital forces you and your team to scrutinize every expense, prioritize your most promising projects, and stretch every dollar. This lean approach fosters a culture of discipline and efficiency, encouraging innovative problem-solving and focusing resources on what truly moves the needle.
History is replete with examples of empires stretching too thin, crumbling under their own weight. Startups are no different. Limited resources compel ingenuity and resourcefulness. WhatsApp, with a modest team, managed to connect billions. Your startup’s constraints are not shackles but rather a crucible, forging a lean, focused, and resilient enterprise.
3. Avoid Premature Scaling
An abundance of capital can tempt you to scale operations before your product or service is fully ready or before you have even reached product-market fit. This premature scaling can lead to wasted resources and potentially force you to grow in a direction that is a ultimately a dead-end. The more capital you raise, the more committed you become to a specific course of action (i.e., the plan that you pitched to investors), making it harder to pivot if needed or even keep your confirmation bias in check to stay grounded in market reality. By raising less, you’re more likely to remain open to experimentation and growing at a pace that’s sustainable and aligned with market demand, ensuring a stronger foundation for your business.
4. Prevent Inflated Valuations
A hefty funding round can lead to an inflated startup valuation, which might seem advantageous at first glance. However, this can become a double-edged sword when attempting to raise future rounds of funding or when setting option pricing for employees. An unrealistic valuation can deter future investors and complicate your financial strategy, hindering your ability to attract talent and secure additional capital.
A valuation grounded in reality is not a constraint but a clear-eyed assessment of where you stand, guiding your path forward with integrity. An inflated valuation, much like a mirage, offers a false sense of progress. Many of the roughly 900 current unicorns face challenges with raising capital after their Covid-era sky high valuation, highlighting the difficulties in meeting inflated expectations in subsequent funding rounds and operations.
5. Maximize Exit Options
The amount of capital you raise directly impacts your exit options. Companies burdened by high valuations and significant external investment find themselves with limited exit opportunities, as they need to achieve a much larger exit to satisfy their investors’ expectations. The more money you raise, the smaller the universe of potential acquirers becomes.
By being prudent with your fundraising, you keep a wider range of exit paths available, from financial to strategic, that might not require a blockbuster sale price. So, when your competitors raise a lot of money, don’t necessarily be dismayed, as they may have done you a favor by leaving you as the most attractive and actionable acquisition target in your space.
👉 As an entrepreneur, it’s essential to challenge the conventional wisdom that more capital at highest possible valuation is always better. By understanding the benefits of raising what you need — no more, no less — you position your startup for long-term success. This approach requires careful planning, clear-eyed assessment of your needs, and the courage to focus on building value rather than chasing after the next funding round.
