VC Horror Stories Are Real. But They Mostly Happen When You Raise Too Much — And Spend It All.

Dear SaaStr:  How often do “VC Horror Stories” happen? 

Here’s the thing.

It doesn’t really happen as often anymore.  At least — not the classic stories we’ve heard in the past.  Not with larger, more successful funds at least.

Now, I don’t mean that literally. VC-founder misalignment still happens. Sometimes, VCs push to replace founder CEOs that don’t scale. Although founder CEOs aren’t really replaced that often in SaaS.  90% of SaaS companies that IPO … IPO with their founder CEO still the CEO.  More on that here:

What I mean is the horror stories you read about (which are real) typically have one thing in common: the horror story happens when the startup ends up being worth less than the amount it raises.  And especially, when it then starts to run out of money.

E.g., Knotel selling for $100m … after raising $600m in VC funding:

https://news.yahoo.com/ousted-knotel-founder-slams-owners-142321074.html

And running out of money?  Especially afte burning too much?  That is the CEO’s fault, not the VCs.  Even if the VCs are often the enablers:

• When you raise money from VCs, you’re committing to trying to make everyone money, at least trying to get to a value 3x-10x what everyone pays. VCs take high risks, and the high risks are tied to a hope for high returns.
• If you sell for less than you raise, no one does well. No one. Sometimes in this scenario, the VCs get their money back. Sometimes they don’t. But even if they do, it’s not a win for anyone.
• The more you raise, the higher the stakes. The VC Horror Stories are often around startups that have raised a lot. The WeWorks, etc. The stakes get high. If you don’t want to elevate the stakes — just raise less.
• Every founder needs to understand if you don’t sell for significantly more than you raise, no one is going to make any real money. That has to be part of the social contract when you raise outside capital.

The VC Horror stories are real. I’m not saying they aren’t. They just tend to happen when a startup raises too much and is worth too little, and spends too much, too quickly.

If you don’t want that pressure, raise less — and burn less. The drama usually ends up being much lower in that case.