Should You Raise Venture Capital? Insights for Founders.

Hey, welcome to the Venture Capital Podcast. This is Peter Harris and I'm John Bradshaw. We are your hosts of one of the top VC podcasts in the world.

Great.

I cover the founder topics. I'm the. We've got two businesses, codebase.com and appointment.com. one's a service business, one's a SaaS business. And Peter, do you want to introduce yourself?

Yep. I'm a partner at University Growth Fund. We invest in early and growth stage businesses will simultaneously giving students unparalleled experiential education as it relates to venture investing.

And it's phenomenal. And Peter's job and my job is to debate like a married couple is what some of our listeners tell us to bicker.

I don't know if it's our job, but it certainly ends up that way.

The yin and the yang. So the today's episode, the Peter. The question that Peter proposed is, should you raise venture capital? Do you want to tee this off.

Well, so I guess actually backing up a little bit. So one of our friends posted on LinkedIn and he was like looking for advice as it relates to fundraising from both founders that have been in the trenches and done it and also from VCs and what are some of the biggest mistakes? And as I thought about it, the thing that came to mind and what I posted was that I think one of the biggest mistakes that founders make is they, they optimize for the wrong things when they're fundraising. In my opinion, oftentimes they're optimizing for like how much of the company that they own and control. They optimize for the valuation and they're not in my opinion, like valuing the right things which are get the right amount of money, you need to hit your next valuation inflection point with buffer with the right partner who's going to be great to work with at a valuation that doesn't screw you for the next round. And what I mean by that is there's, if you look back at 2021, there are so many great companies, like phenomenal companies that raised at valuations that are so high now that even though they continue to be great companies, they are terrible investments. Right. You know, like, you know, I think about deals like Airtable where the preference stack is worth as much as the entire company, which means that the investors like have a right to get paid out first before anybody else. The almost the entire value of the entire company. Which means if you put more money in today, like it's gonna be really hard to get a Good return on that. Otherwise you have to do it at such a, like, huge down round. And that's like, so discouraging to employees and to founders and so forth. It just leaves these companies in a bit of a. Like a no man's land. And so. And like, I've seen that happen at the growth stage, like big companies, I've seen it happen with smaller companies where the founder was so focused on getting the very pot, best possible valuation and then they weren't able to grow into it. And that could be their own fault, but frankly also could just be like, markets turn on them and now they're not as sexy as they used to be or whatever, or valuations come down broadly. And now they're in a really tough spot, right? And it's not that their business is bad, it's not that they're bad founders, it's that they raised it too high of a valuation and they couldn't reach that big milestone. The other thing I've seen happen quite a bit in my own portfolio and outside is founders raised too much money because what happens is the VCs come in and they're like, hey, I now manage, you know, I'm lightspeed. I now manage a $3 billion fund, which means I need to write a really big check into your company. And on top of that, I need to own a certain ownership percentage. So what these VCs will do is they'll go to the founders and they'll say, hey, I need to Write like a $20 million check into your Series A. The company's like, I only need 10, right? And they're like, well, I'll tell you what, we'll bump the valuation up so you're not giving up as much equity, and we'll write you this bigger check. And what happens is these companies now have a ton of cash, but they also have these really high valuation expectations that they need to hit. And unfortunately, when you have that much cash in the bank, it's just really tempting to spend it on things that aren't as necessary and not to be as disciplined with it. And so I've seen a ton of companies where, like, they get this huge cash infusion and they start growing revenue and they're doing well, and then, you know, they start burning through a lot of that cash. And pretty soon they need to raise more money, but they haven't achieved the revenue scale that they needed to in order to justify an increase in valuation. And now they're in a tight spot. And once you hit that, like, if you have a flat round or you have a down round, even worse, it drastically slows down your momentum. And once you have momentum slow down, it just becomes that much more exponentially difficult to raise your next round. You'd be far better off raising a smaller amount of money at the right valuation and then being able to easily hit your targets and raise at a larger valuation, you know, more money with the right partner and hit those targets again and again and again. And that's where you get like this ongoing escape velocity from a momentum perspective. So anyways, I don't know, what do you think? Like, what, why do founders do that way? And am I wrong? Like, do you disagree? Like, should founders be focused on more on valuation and overall ownership?

As you've been talking, I've had different thoughts. So one, I feel like there's a case of confirmation bias. That was my knee jerk reaction. Of course. Peter wants founders to give him better terms for his fund.

Sure.

I do see examples in this last market where many people are raised and it just made it because we work with, at Codebase, we work with a lot of venture backed founders and they got boxed in a scenario between the market and their terms that I think it's just they had to completely restructure the company. Several of them did major layoffs, 50% or more. And my belief is that their last valuation, the round, it's always the, they're, they're, they're chasing what looks better on paper to them as the founder.

Yeah.

Not what's, what's best for the employees. Things like ratchets and other things get snuck in.

Yep.

And it literally cooks the deal. Which kind of reminds me of what we talked about the last podcast where we're talking about our BC Anonymous. Thing is there's things like that where until you've been bitten or you're close to someone who has been bitten, it's hard not to go for, hey, someone's willing to give me a 20 million, you know, post money valuation versus a 10. Why not just take the 10? I mean the 20.

The 20, yeah, for sure. I've heard valuation, like I end up owning more of the company and all those things. And I look at it and I'm not saying that you should always take the lower deal. Right. You should take the right deal. Like the math should be how much money do I need to get to the next like valuation hurdle? Right. So if I'm A Traditional Enterprise SaaS Business Series A, I need to be doing somewhere between 1 and 3 million of ARR. To get to series B, I need to be somewhere in the 5 to 10 million ARR range. Right? Well, I need to raise enough money to get from where I'm at 1 to 3 to 5 to 10. And then I probably need to raise a little bit more to have some buffer. Right. Because things never go 100% to plan. So having some buffer is helpful. But then I probably shouldn't raise any more than that. Right. And then I should look for partners that are going to be good partners. So, you know, is it better to have a junior partner that nobody knows with very little experience from an Andreessen Horowitz, or is it better to have, you know, the managing partner of a smaller, more regional fund? Right. Think like, you know, maybe apelion like great funds where maybe you have somebody that's got a lot more experience that comes through and invests in your company. Which one's better? Well, like it kind of depends on your business and all of those things. But really thinking about like, what's the right partner for this business and who's going to be supportive along the way, I think is super important.

Yeah, but I mean, I think if we look at the core of should you, should you raise VC or not?

Yeah. So I mean the other like piece of this is just that question when it comes to advice around fundraising is like, should you even, should you even raise money from VCs? And I was talking to a founder who's also done a bunch of investing over the years this week and we were talking about how raising venture capital is. It's like a drug, right? You get on the VC drug, but I mean it's kind of like like taking steroids. And if you have a company that is got the potential, that operates in a huge market or potential market, has the ability to scale and scale very quickly with high gross margins, which should equate to high profit margins over a relatively time, short time frame. Then like maybe you have a company, right, that is venture backable. And if you don't check all of those boxes, right, then you probably don't have a company that's venture back. You know, so like, so like this week I met with a company that makes like this consumer hair product and the founder was like, yeah, I want to raise money. And I'm like thinking to myself, like, this is not like arguably really big market, but hyper crowded, not very scalable, low margin, right. On a comparative basis, she should probably not raise money from VCs. Right. And then there's this whole other question. Around, like, okay, let's say you have all those things. Are you, as a founder, like, ready to sign up for that? Right? Are you ready to be on that drug? Which means you have to, you have, you have to like, just kind of constantly be running, right? You have to push as hard as you can every single day, and then you got to raise more money to do more of it, right?

If you trip once, the board yanks you.

Yeah. And if you trip once, the board yanks you, like, if you don't have the stomach for that, you probably also shouldn't raise venture capital, right? And it was interesting talking to this founder because he had done some bootstrapping and then he has raised money from VCs, and he was like, look, I learned a lot from the bootstrapping days and I'm glad I did it. But the flip side is, raising money allows me to grow just so much faster. He's like, boom, I had all this money and I could go hire the very best people day one right into my team, and we could start, like, chasing revenue really fast. And I think, you know, founders that have kind of been through both better appreciate, like, the reason you raise VC is just the same reason why you might take steroids, which is, like, you want to get really big, really fast, and you put at least a high amount of value on time and not necessarily a high amount of value on control. Because when you take VC money, you're giving up control, right? And so, you know, you have to be comfortable with that trade off. And so, you know, I think a lot of companies, like, really need to sit back and evaluate, like, do I have the right company, the right horse, right, to be venture backed? And then the next question is, like, am I the right jockey? Do, like, do I want to do this? Can I do this? Like, some people just, like, they're not built for it, right? And like, that's not a knock against them, right? Not every, not every, like, amazing horse is designed to, like, race. That doesn't mean it's bad horse. So, you know, and same thing with individuals and jockeys and all of those, you know, comparisons. So anyways, those are kind of my thoughts, like, things that you should evaluate if you're thinking about fundraising and how to evaluate whether or not it's the right fit for you, and then if it is, how to go about it in such a way that you really, like, optimize the chances for success. And. And I guess the last thing I'd add is a lot of people listening to this. I'M sure are thinking, yeah, but look at Uber. Look at like some of these other companies that just raise monster rounds round after round and ended up building like a very large successful business. And my response to them is like having invested in a lot of like very fast growing tech companies, you know, like Spotify, like Airbnb, like Lyft, like a bunch of these. I will tell you like they are more the exceptions than the rule.

There's only a few big winners like even in that market. One of the things that Paul Allen taught me, he's the founder of Ancestry.com Yep. His point was, is one of the reasons why you take VC funding is if you're in a winner take all scenario and if you're not the winners take all, then you'll lose. But that's even hard because even look at your, because you're an investor in Lyft, you're probably hyper aware of what's happening. Most of the people in that space probably just lost money. Founders went under.

Oh yeah.

A lot of them got acquired. More, probably more acquired.

Yep.

And in that scenario, I think it's tricky. I think another thing we were looking at raising funding is Josh Coates one of your other investments? He was, he did, he took Mosey and sold Mosey. He took instructor public when I was, I think in my college days. He did a private kind of a VIP coaching session. And one of the things he, he, he taught me is when he said or at least his perspective is as you're trying to decide where to go and spend your career, you could go build a service company or in his mind you can go build the next venture backed, you know, bazillion dollar company and both are going to take the same amount of time.

Yeah.

But in his mind one has significantly better upside down.

Yeah.

And as I've navigated my career, should I fundraise? Not fundraise, self fund, you know, do I, do I try to try to pitch? I've, I've constantly looked at that and said where am I on this continuum? Because I could take the risk and go after the really risky market. Like I saw a bunch of my friends go after the crypto space. Yep. But I'm like they're all probably going to lose and where am I on that risk scale where I can be in a less risky business? I'm not going to get venture funding, but I know I'll be set for life.

Yeah.

Or I can play winner take all. And there are several founders in Utah that were in that crypto space. And I just looked at all them. I'm like, I don't have the stomach for it.

Yeah.

Like, they're all. Most likely are going to lose.

Yeah.

And they did.

Yeah, yeah. Stuff. I mean, you got to have, you got to have like a stomach, a will of steel. Right. To get through it.

I'm also a big fan of one of the podcasts I was listening to this week. They talked about founders that actually have a job are far more successful than founders that go all in because most founders run out of cash and you never even get cash to raise capital. And so one of the things I've always looked at is if you've got true skills, it's probably easier to build a small consulting gig or have a partner that can support you and get it off to the ground. And then you've got options whether you go bigger or not. But again, those are the places I, I play it. But then again, I'm also not venture backed. I've helped others become venture backed. I've raised, you know, we raised a fund. But just, you have to decide, you know, the Cheshire Cat scenario, are you willing to take that risk? And if you're doing the VC route, you're still probably going to lose.

Yeah, the high likelihood of losing. Right. Yeah, it's tough. It's tough. I mean, it's risky, but, you know, it's the power law and it's. But I also do firmly believe that if you approach it kind of the right way and you raise kind of the right amount of money from the right partners at the right valuation, you at least hopefully eliminate that as a point of potential failure of, like, you just got a little over your skis. Right.

And knowing who you are.

And knowing who you are. Yeah, yeah, yeah. You know, look, one of the things I was thinking about is, like, if you're a founder and you haven't been able to raise money from like, like the amount of money that you need, whatever it is, within probably like three months, it's probably not going to happen. And if it does happen, you're going to end up with deal or partners or terms or amount that is not going to be enough to allow you to make it. And so life is short. Go find a new idea or a new path in your life.

Here's another way I've always looked at it. When I've decided, do I try to raise at the moment or not? It's. And I, and I put it in the context of code base. If I spend the same amount of Time trying to raise versus getting one more client for my business. Which ones will have better returns? Yeah, and it's literally always just go grab one more client.

Yeah, yeah, no, and I 100% agree with that. I mean, client revenue is far better than, you know, highly dilutive. Give up lots of control VC money.

I will smile the day when Peter gives me a term sheet and I reject it. Just kidding.

Well, that probably won't happen because I don't write a lot of term sheets as a co investment fund.

But just seven a year.

Well, we do seven deals a year.

Just have to be one of the seven.

There you go. I look forward to that day of being rejected by you.

John, I would never reject you. I guess it depend on the terms. If it's not $100 million post money based on 1 million in revenue.

100X seems reasonable.

I had a VC ask me if I was raising this week and he says, what are your terms? He's like, just tell me what your number is. And I was like, I told him for 3% I would take half a million dollars. And he laughed at me. And I laughed because I knew he knew I was kidding.

Yeah, yeah.

And then he was like pulling out his calculator. John, do you know what the post money valuation of this is? Yeah, I know. Exactly. It's ridiculous. Leave me alone.

Leave me alone. I don't want your money.

But I also think that's a good flex.

Yeah. Also, Codebase is not really a venture backable business.

This wasn't for Code Base.

It's not a bad business, but this was.

No, they were specifically asking about appointment.

Ah, okay, fair enough. Cool. Well, what do you all think? Do you think we're like totally offroad rockers? What advice would you give to founders as they're going through the fundraising process? Am I just super biased looking for cheaper deals to do like John thinks? Or is there you know, maybe some. Some merit to the madness? Anyways, let us know down in the comments. Thanks for joining us. We'll catch you next time on the next one.

All right, thanks, guys.