Ryan Petersen raised $2.4 billion and warns founders to avoid fundraising unless the company would die without it. He reveals how VCs collude on pricing through reference checks, and advises keeping a secret growth metric to reveal in a tight 90-day window with visual tricks to make it look steeper.
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You've raised what I believe $2.4 billion from some pretty awesome investors like a16z and SoftBank. So I guess, you know, looking back, you know, what are some of your biggest, I would say, like learnings from fundraising? It's a very risky process. It's a total nightmare. And I think you should avoid doing it at all costs unless you have to, unless the company's going to die if you don't. Don't do it because you think it'll be good or you think you're hot and everybody wants a piece, like, don't get full of yourself because it can go sideways really fast. I've had 3 different, 2 different, at least 2 fundraisers go completely sideways and had to get rescued by a previous investor. Thankfully, Founders Fund is awesome and they did that on good terms for us. But But it can be even a hot company. And the thing is about venture capital is that it's a great job to be a venture capitalist. You make a lot of money, millions of dollars a year. You don't have a real boss. Nobody can measure your performance except on a 10-year cycle. And even then it might be luck. And you don't have to be anywhere. You can be in, you can do it from anywhere in the world. That's like a really great job. So the number one objective therefore of a venture capitalist is not to lose that job. And the way that they lose the job is to be seen as being dumb or crazy or doing bad deals. Not by doing bad deals, it's by being seen as doing bad deals. And therefore, You can't take a lot of risk. You have to reference check. You have to check everything you do with other, with your peers and with your, whether that, and often it's, you don't want to do that internally because then you're like, oh, this guy doesn't know what he's talking about. So you do it with your friends at other firms, sharing notes, colluding, we call this. And then that leads to regression to the mean. It means that you think you're talking to 3 different firms that are independent, you're running a bidding process. Actually, they're all talking to each other and setting the price. You know, they work with each other nonstop. They're all friends. They all hang out all the time. And it is a very dangerous landscape for an entrepreneur to charge into thinking that they're the best. You're not the best. You're up against literally all the best companies in the world are your competition, even though they're not in your industry. That's who you're competing with for mindshare and ultimately for the dollars of the VCs. And You should just avoid that world as much and as long as you possibly can. And if you do raise money, treat it like it's the last money you're ever going to get. Keep the headcount super low. Keep the— and that, you know, this is not what I did, so it's easy. Well, I ran many companies for a long— I ran companies for a long time with no venture capital and made them super profitable. And I think the flip side of that is like, you can get these hype cycles in your favor if all the VCs like you, then, and then And there's a herd mentality to chase into your deal, then that can be, you can use this to your advantage. And then second is, and related, how do you do that is you need to be able to show crazy hockey stick graphs. Like when you're a VC, you see nothing but incredible graphs up and to the right. If you don't have a hockey stick, like true exponential growth, then like don't bother. Then they're not They're not, they're not gonna get excited. And so you need to be able to have that graph. And how do you get that? Well, for one, don't share any metrics with the VCs ever until you're really fundraising, because once you've shared a metric, now you're expected to make that metric that you shared go into a hockey stick. You can't just find whichever metric does happen to look like a hockey stick and use that. Which is of course the answer is find something in your business that looks like that and then claim that that's the most important thing and that's the one you've been optimizing for and that's what they should pay attention to. Well, once you've shared metrics in the past that weren't that one, you know, you lose the ability to go back and ex post sample the variables that are going like that. 2 is, When you find something that is working like that, you want to be raising in that window of like 90 days. And you, you know, you show that for 30 days it's gone like this. You call the VCs, you go, hey, we figured it out. We cracked the code. Look at this. And then you need to be able to sustain that exponential growth for another 60 days so that you get the funding done. And then after that, you know, back to doing whatever's best for the business. But you've got to be able to have this hockey stick Also, when you, whenever you present a graph, the best way to, the easiest way to make a hockey stick is just make sure you tighten that aspect ratio on your graph. So if you compress it sideways, it'll look steeper. And so to do that, you can put, always put some text on one side, like a bunch of bullet points about the graph. And then that way the graph is only half as wide, or you could put 3 graphs on horizontally next to each other and they'll each look really steep. The human brain is very susceptible to these tricks, so you need to use them to your advantage. And then, yeah, making sure that the other thing is, you know, if this hype cycle, they're reference checking you. So the best thing that could happen is that a VC, you're looking for an outlier, but the process in itself is leading to regression to the mean. Because these guys all talk to each other and they get to regression to the mean. But you want an outlier, you need somebody who's going to value you more than everybody else. That means actually, you know, in a pure play kind of auction, the more participants you have, the more likely you are to get a high price. But when all the auction participants are colluding with each other, then actually you may— that's not true. You don't want a lot of people at the table. You just want a few people who will really fall in love. And then when they go to reference you with other people, like no one's ever heard of you, that's like ideal. Because then they feel like they're doing a great job. They have proprietary deal flow. They're sourcing, you know, a hot company that no one knows about. Man, I'm the best. People want to think that they're the best. And then they can let themselves get carried away and And value at a high level. Nobody, no investor wants to be in a competitive dynamic. They'll avoid it like the plague if they're good. So there's like, you think like, oh, I'm going to run this process and get 12 funds at the table and I'll take the highest winner. Like actually that's probably going to scare away the best funds. And yeah, there's no right answer. There's no generic for this though. Every company's different in a, from a fundraising standpoint. But my general advice would be try to avoid it, stay away from it.
