Venture Capital

Top Hack: Keeping a “Stub” Source of Capital in Your Back Pocket'

Jason Lemkin

One of the wonderful things that has changed in the years since I was running my own SaaS company is the rise of “stub” sources of capital.  Investors that, for a variety of reasons, are OK buying fewer shares than the average investor, and just as importantly, outside of the timing of traditional venture rounds.

One visceral example is how the top startups out of YCombinator Demo Day raise money.  For the top YC companies, there is always far more investor interest than room to invest from individuals and microfunds alone, and the startups are often fairly capital efficient.  This combo means they can leverage Demo Days to fine tune the exact amount of capital they want to raise.  They can raise a late seed, a pre-seed, a half-seed, whatever they want, $632,000, $1,623,932, whatever (if they are hot).

I wish I had had that luxury.  I didn’t have trouble raising traditional venture rounds.  But the gap in between rounds was far tougher for me.

When EchoSign was at about $6m in ARR and growing nicely, and cash flow positive, everything was going fairly well.  But we only had $1.6m or so in cash on the balance sheet.  It wasn’t enough.  Not to really invest properly.  I’ve learned over time that Josh Stein of DFJ’s Rule of 50%, i.e.,  “Keep 50% of your ARR on Your Balance Sheet” is a good one.  If you have less cash in the bank that 50% of your ARR, you can still grow.  But you are going to underinvest.  Everything is going to feel too expensive.

So I figured that out at $6m in ARR, that I needed a smidge more capital.  We were doing well, everyone was able to hire anyone great they could find, but I was still worried a large “hit” would put us at risk with a small balance sheet.

And I went out to raise $2m-$3m, and I couldn’t get it.  I could raise $10m or $20m.  But not a fifth or tenth of that 😉  No traditional new-to-the-company VC (back in the day) would give me just a few million, as strange as that sounds.  Because it wasn’t enough ownership.  And only one of my existing investors wanted to invest more outside of a traditional round.

So fast forward to today, and there are 100x more sources of “stub capital”.  There are tons more corporate VC programs.  There are opportunistic funds that take less ownership.  There are hedge funds that want to invest earlier.  There are international investors with different investing goals.  There are hyper specialized funds for every niche.  There are billionaire ex-founders 🙂

My simple point is this:  meet with “stub” sources of financing, as you scale.  They will act and sound different than traditional South Park venture firms.  But, still take the meeting.  You may find an extra $100k, an extra $500k, an extra $3m (based on stage), is that extra bit you need.

Years ago, that was hard.

Today, it’s still hard, but much more common.

So take those meetings.  And keep them updated, and in the loop.  Your job as CEO: try to keep 1-2 sources of “stub” capital close to you.

So if you need a little financial boost — you can get it.  Ideally, with just an email or two.

Published on August 4, 2017
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