Drink When Served
There’s been a lot of buzz the last few days about the piece in the WSJ on Monday featuring Bill Gurley warning that it’s starting to feel a lot like 1999 again, including a follow-up article yesterday in which other VCs echoed Bill’s sentiment to varying degrees. There’s certainly no denying that it’s been a pretty good ride since 2009. Bill’s one of the smartest guys I’ve ever met but I don’t know if this party’s just begun, halfway over or they’re about to turn the lights and music off – I’ve heard valid arguments supporting each scenario. I’ve old enough now to have been through a number of cycles in my career (starting with the crash of ’87, just month’s after I started my first job on Wall Street) and the only thing I’m sure of is that each downturn is different. They’re driven by different factors and it’s almost impossible to predict one based on historical data. If it were easy, timing the markets would be a piece of cake.
I’ve noticed one trend lately though which gives me pause; a growing hubris among entrepreneurs when it comes to the amount of capital they’ll need. I’ve had no less than five conversations with startup CEOs in the last couple of months where the CEO had an opportunity to raise more capital than they set out to and they were reaching out to me for advice on whether to take it or not. In each case they were leaning against it. To give some context, I’m not talking about setting out to raise $5 million and having $15 million in interest. All of these discussions were with seed or early-stage founders raising between $500K and $2 million and having investor interest that would allow them to raise an additional 25% – 50% more. All of them had strong conviction in their company’s ability to execute and hit the metrics needed to raise larger rounds of capital in 2015 and they were concerned about the dilution of taking more capital today.
I’ve been around long enough now to have seen what happens when macro events affect a company’s ability to raise capital and it’s not pretty. I also know that’s not the only reason to consider taking more capital than you think you need at the seed or early-stage. It’s an immutable truth that unexpected bad things happen inside all startups, even the great ones. Key customers and employees leave unexpectedly, competitors come out with new offerings that temporarily paralyze buying decisions, DOS attacks, negative press and a hundred other things derail startups. Having some extra cash in the bank to survive these episodes can be the difference between survival and shutdown. A great serial startup CEO once said to me “my job is to make sure we’re around tomorrow, a lot of days in a row.”
My advice to all of the CEOs I spoke with was the same. Don’t over-analyze the short-term dilution when you have the good fortune of increased capital availability. Think about the value you can create with the extra capital and how that might positively affect the valuation you might be able to command in your next round of financing and factor that in to the overall dilution analysis. A long time ago Jane Martin (one of my mentors and a long-time successful General Partner at USVP) taught me that startups should always “Drink When Served.” It was great advice then and it still stands true today.