Dear SaaStr: We Don’t Need It. Should We Go After Venture Capital, and When?
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. Whatever the dilution, cost, headaches — if you need VC to thrive, and you can raise it, then raise it. And don’t look back.
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.
- But … but … even if it’s “cheap”, it’s not free. Many of today’s unicorns likely wish they’d never raised, and spent, it all. These new investors will be looking to 3x-10x their money.
The real 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.
— Dave Kellogg (@Kellblog) September 26, 2023
(need it book image from here)