So, so much has changed since the peak crazy days of 2021.  For some, actually, like Palantir, Cloudflare and more — these are actually still the best of times.  Other are deeply struggling.

One thing though that everyone learned was wrong from the Go Go Days is that there’s no such thing as Free Capital.

What seems free, when times are good?

  • Raising a high-priced round, just to raise it
  • Raising a lot of extra money on SAFEs
  • Raising too much “non-dilutive” capital

Used right, these tools all can work well.  We’ll get to that next.  But what are the cons?

#1.  A High Priced Round Puts a Ton of Pressure On The Exit and Growth Rate

Raise $2m, $4m, $10m?  Selling for any price is OK.  And no one is going to be too concerned if growth slows.  But raise a round at $200m, $500m, or be one of the 1,000+ Unicorns we minted the past few years?  First, it’s going to be very stressful to sell for < $500m.  And you see almost none of those deals today.  Second, it can be almost impossible to raise more if you don’t execute to perfection.  Today, we’re seeing 100s of Unicorns that cannot raise more.  And third, you’ll likely end up spending it all.  Discipline tends to go out the window.

#2.  SAFEs Aren’t “Free” Money.  They Just Add to The Stack You Have to Make Big Returns For.

Adding another $5m, $10m, heck sometimes $50m into a startup via SAFEs to either punt on valuation issues or to extent runway can seem like a simple solution.  And if it helps you survive to win another day, do it.  But too many ignore the price, dilution and pressure from these SAFEs.  They are expecting 10x-100x returns, even if they haven’t officially converted to equity yet.  They aren’t free, usually.

#3.  Non-Dilutive Financing and Venture Debt Do Have Their Place, But They Have Their Risks, Too.  And They Aren’t Free, Either

I am definitely a fan of non-dilutive financing and venture debt when used conservatively.   For example, if you’re basically break-even and have millions or more in ARR, some debt can help you invest a smidge more.  That’s a great use of revenue financing and venture debt.  And sometimes, if you really are 100.000000% sure the next round is coming, because you’re totally on fire and can’t lose, then venture debt can be a great bridge to that round.  If you are 100% sure.

But it turns out, these products all have a lot of risk.  Mainly, because they have to be paid back now, albeit over time.  And they come first.  So we’re seeing way too many startups that borrowed money that now have to make large payments with scarce cash.  They would have been much better off not borrowing the money and just being 10% more frugal.

#4.  A High Burn Rate, Even a Modestly High Burn Rate, Is Really Tough to Bring Down

So many founders and also VCs think, “Hey, we’ll increase the burn for a while to try to grow faster, but we can always ratchet it down.”  Or think it makes sense to roll the dice on higher growth to increase the odds another funding round comes in.  I’ve basically never seen either approach work.  A high burn rate becomes an addiction for a startup.  It becomes hard for any department to function without it.  And burning it all in hopes of growing faster for the next round?  Once or twice I’ve seen this work.  But not very often.  Usually, that extra growth isn’t quite enough to justify burning up all the cash.  If it comes at all from the extra spend.

Net net, tons of founders are now regretting Easy Money in high-priced rounds, SAFEs, and debt.  It just makes sense.

Unicorns that wished they’d never raised that last round.  Folks with millions and millions in debt that wish they’d just gotten more disciplined, earlier.  SAFEs that end up leading to tons of headaches and dilution.

There’s no such thing as Easy Money, at least for 99% of us.  And we all know that.

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