As the number of Cloud and SaaS IPOs increase, each one becomes a little case study. We’ve looked at many of them in our 5 Interesting Learnings series.
And one thing we can see is that many big successes were far from overnight success stories:
- It took UiPath 10 years to get to $1m ARR! More here.
- It took Procore 10 years to hit its stride! More here.
- It took Squarespace 5 years to get to material revenue. More here.
These long-time-to-success stories are more common than you might think, and worthy of their own post.
But here, we’re going to use them just to illustrate a point.
Your VCs can run out of money — for later checks. Just understand that if you ask for money years later. And especially if it just takes longer to get to that next round that you were planning.
And it’s an even bigger deal now, when more and more folks are struggling a bit and asking their VCs for a bridge financing, or a smidge more money. VCs run out. Even if they’ve just raised a brand new fund.
How does this work? Well, VC funds typically last 10-15 years, but do all or most of their brand new investments the first 2-4 years. They might deploy 40% of the total fund into these first checks. 20% is used for fees and expenses. The rest is then used for later, follow-on rounds into these existing investments. But eventually, the fund starts to run low on “reserve” cash for later rounds and bridges. That 40% of the fund earmarked for later rounds gets used up bit-by-bit, check by check.
Now for the mega winners, VCs can always find more money. They can use other vehicles like Opportunity Funds and SPVs for their very top winners. Or at least, they could in the best of times. But that’s opportunistic and doesn’t really help you as a founder. That money comes from other places, just for the very top performers.
Just be aware of this: 7-8 years into the life of a specific VC fund, it starts to run out of money. After that, there’s often very little left. And that gets accelerated in tougher times again, as more of the portfolio needs extra money.
How do you know? Just ask. It’s OK to ask. Ask how much of the fund is left. Ask if your VCs have more cash for the next round. Ask more specifically, “What percent are you deployed in the fund?” Folks will generally tell you. If the answer is much more than 80%, money will get tight.
Around Years 8-9 of a fund, it’s often close to 100%. There’s usually almost nothing left.
And then the specific VC fund you are in really will be close to out of money.
And what about that new, $1B fund they just raised? 95% of the time, VCs can’t “cross over” and invest in older companies out of a newer fund. Again, there can be limited exceptions for the hottest of startups. But that probably won’t help you. That new fund generally can’t invest in supporting or bridging existing companies. That capital has to come out of the same fund that invested in you, e.g. Fund II or Fund IV or whichever exact fund did that investment.