This content was created by Tim Draper. This content was uploaded by Tim Draper. This is a YouTube interview titled "Don't Sell Too Much Equity | Favor & Sunroom CoFounder Ben Doherty" (published 2019-01-18) featuring Ben Doherty and an interviewer. In the excerpt Ben explains why his company lost ground to DoorDash: factors included timing, relocating to Austin to be capital-efficient, very strong early growth and retention but a smaller seed raise ($660,000 at roughly a $2M valuation) compared with DoorDash's $2.1M, and taking on investors/terms that caused excessive early dilution. He emphasizes how selling too much equity early and choosing the wrong investors can limit later upside and hinder competitiveness. The content focuses on startup fundraising strategy, equity dilution, and investor selection.
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Could you just talk a bit more generally about your experience? Because you did talk about how the DoorDashers got better partners compared to you guys. And what do you think we're missing? And what are in general most helpful in terms of investment partners?
Yeah, so more generally, so you're saying like, Why did we not beat those guys? Yeah. Yeah, no, I think that's a fantastic question. Like, yeah, why did we not beat those guys? You know, I think a lot of it has to do with timing, right? So we were just a tiny bit late. Like, we were really close and we were a tiny bit late and then they got, the really good investment partners earlier than us. What happened to us was we moved to Austin because we saw that we were trying to be capital efficient, and we saw that as being a city where we could both be capital efficient and it would be a meaningful market for us to win. Then we launched there and we were growing insanely fast. We were averaging about 40% month-over-month growth for the entire first year. So our metrics were really good and we had really good customer retention, which was one of the most important metrics for how VCs would measure us then. When we went out to fundraise, it was essentially just like, hey, you guys' metrics are unbelievable. I don't even know how your metrics look this good. But these other guys, they have the same metrics, or sorry, they have worse metrics, but they are just bigger in volume than yours currently. And what that meant was, was that at the exact same time that we went out and raised, we raised $660,000 in seed, our competitor DoorDash raised $2.1 million, right? Now, why was that? No particular reason except when we raised our seed funding, we were in Austin and we were working with Texas VCs. who pushed us, basically didn't give us a good deal, and we were trying to just get— we were anxious to get money in the door because we knew we were in an all-out race to win these markets. Because we were so quick to take that money in, we basically got a way worse deal than DoorDash did in the sense that the amount of money we raised, we gave away way more of our company than they did. And the moment you do that, you gotta be very careful when you are giving, or I mean selling any equity to anybody because if you give away too much early, you can sort of limit your upside for forever after that. And the reason for that is if you give too much of your company away early, all of the really good investors are not gonna be as excited to get involved later. Because anybody who's a really, really good investor, they want a certain piece of the company, otherwise it's not worth it for them to work with you. So we didn't understand this at the time, but by us taking only $660,000, and I think we raised it on like a, it was like a $2 million valuation, so it was low. And we gave away too much of the company early, and then that sort of limited our chances later. We were in the mindset, we need to get this money and grow really quick, but it's not just one sprint you're trying to win. You're trying to win a series of sprints, which become a marathon. And so we, I think that is honestly one of the big reasons why we ended up not really being able to compete with them, not because of lack of a good product or any sort of strategic move. We did a lot of the right moves there. We just made a mistake giving away too much of our company early to investors who weren't really trying to win the whole space. They were just happy with a base hit. And so I guess you can forever impact the growth trajectory of your company and just how big the company can be if you give away too much of the company early and you give away the company to the wrong people. Yeah, I mean there's obviously a lot of different ways that can go, but generally speaking that's true. Does that answer your question? Cool.
