Dear SaaStr: What Happens When a VC Fund Invests in a Startup?

Dear SaaStr: What Happens When a VC Fund Invests in a Startup?

Answer: The clock starts ticking.

As soon as a VC invests, the follow calculation begins:

• Can the company grow fast enough,
• and accomplish enough,
• before running out of money,
• to raise the Next Round at >=2x the price just paid.

And if not — will the VC need to put more money in if they do start to run out?  And should they?

Almost always the startup isn’t profitable, or chooses not to be after raisong a round.  So there is a certain amount of runway, a period of time that money lasts, and a “Zero Cash Date.”  Know it cold.  More on that here: https://www.saastr.com/knowing-a…

Immediately, there’s a timeline now. Can you get 2x or more the price of this round in the next round — before the company runs out of cash.

If it’s a non-issue, if an “upround” will clearly happen (and thus, the company clearly will not run out of money) … stress will melt away quickly with your investors

If it’s super early, right after the investment, the stress will be there, but it’s still early. It’s the Honeymoon period.

But as soon as it looks like those criteria might not be met … Stress.  And the more you raise, the more the stress.

Venture capital can be great.  The vast majority of SaaS companies that IPO and/or have big exits raise VC capital.  But it’s very expensive capital.

More expensive than we realize, especially in the early days.