Should we go after Venture Capital, and when?

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JASON LEMKIN

There are only two reasons to raise Venture Capital:

  • You need it. If the only way you can get to the next level is to raise capital, then do it. I needed to for both my start-ups, up to a point, for different reasons.

or

  • It’s “cheap”. Venture capital is very expensive in the early days, in terms of dilution. But later, it gets pretty cheap. It can either be cheap in that the ROI is high — e.g., you make $5 back for every $1 you invest. That usually is incredibly accretive for your founders’ stock. This is the ideal reason to raise a Series “B” or “C” round. And in later stages, if you can raise money at huge valuations, the rounds literally can be very cheap in terms of dilution % for $ raised. Airbnb will never even notice the dilution from its last rounds, to take an extreme example. In either or both cases, venture capital can be a great deal.

The trap is raising in other scenarios. Founders often raise venture capital because they can … but they don’t need to, and it’s not cheap / very high ROI.

If you do that and it’s just one round, no big deal. If you do that over multiple rounds, before the capital is “cheap” … you’ll end up diluted far more than you realize. And possibly losing more control than was really necessary.

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Published on March 8, 2017
  • Jason, would you raise even if you’re cash flow positive but think that another round will help accelerate growth?
    For example: instead of increasing the headcount by 4 in the next 6 months, you could raise and increase by 20 to accelerate your roadmap execution

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