September 24, 2015
When it comes to startup funding, Mark Suster knows a few things about venture capital. The general partner of Upfront Ventures joined the firm back in 2007 and has since been doing his best to ensure that every investment he or the firm makes is a smart investment. And this doesn’t just mean ensuring that the VC firm sees some returns in the long-run (though, of course, that certainly plays into it), but also that the company in which it invests is at the right stage and will put that capital to good use.
In a recently published blog post, Suster lays out the four biggest insights he’s learned about venture funding throughout the years. Admitting ignorance on his part, Suster admits that, while there are some definite things that he’s learned, he’s accepted that such definite lessons are never truly definitive – that he’s constantly learning and knowing new things that alter those lessons. He writes:
“I think I’m at the expert stage of venture capital…The longer I do this the more humbled I become. Not the kind of false, humblebrag, ‘I’m always ready to learn’ kind of humble but the ‘who the f*ck knows’ and ‘G-d I hope I’m right’ sort of humble…Here’s what I believe, but won’t claim to ‘know’ because every time I think I know something the market seems to do something entirely different.”
According to Suster, these are the four most important insights he’s learned about VC funding:
1. Too much money too early f*cks companies up.
According to Suster, every startup nowadays seem to be raising $10 million these days – way before they need to be raising that amount. He sees a lot of companies raising $10 million Series A rounds when they should really be raising between $3 and 5 million.
“I believe firmly in capital efficiency in the early days of a startup. It forces innovation. It forces the founder to spend time in front of customers. It forces teams not to expand too quickly. I know it’s easier said than done when capital is floating around and feels like it will ease up everything. I don’t blame you for taking more than you need. But if you take $10 [million]…G-d help you if you need to raise your next round and haven’t demonstrated amazing traction or you raise after the next correction. You are building a one-option startup. And I can tell you that almost certainly you will spend your money inefficiently.”
2. Too much money right after you hit your stride f*cks companies up.
Another problem Suster has seen is companies that end up with too much money after raising a $2-3 million seed round. They do their best to try to show that they are making huge traction – so, they end up hiring additional people in a short time period. But this ends up ruining the company’s culture and the company’s previous processes that worked for them when they were a smaller company. In the end, too much money could end up screwing over a company.
“I’ve seen one entrepreneur recently who did amazing things on no capital, raised a $10-ish million round and suddenly with a loose belt lost control of his business and nearly went bankrupt before cutting costs massively and is suddenly showing massive innovation and creativity again now that he realizes nobody would fund him with his losses.“
3. Money when you find product/market fit is an extreme differentiator.
Suster then notes that there are those limited cases where raising huge rounds once a company has started to scale can actually greatly contribute to even further scale. But these are exceptions more than the norm, and it’s all dependent on timing the raise at just the right moment.
“I’ve seen companies who raise the mega round after they’ve truly started to scale and put scale on steroids. I’ve seen the companies that had they not raised the big round would have evaporated. I’ve seen companies who avoided the big round and then struggled without enough resources to ship products on time and then missed market opportunities and sold in mediocre outcomes as others sailed by them.”
4. Overfunding after you’ve raised your growth round to achieve ‘winner take most’ prize puts you in serious jeopardy of f*cking things up.
This is best put in Suster’s own words:
“The mega round that follows true growth rounds will devastate many companies. Not all will be affected but certainly many will. How could that be? If the company raised it’s growth round and achieved product / market fit – wouldn’t a huge war chest be even better?[…]Companies that are raising greatly in excess of their economic worth in today’s financial metrics had better absolutely grow into their valuations over time or hope they’re acquired before the music stops and the band goes home. “
Earlier this year, Suster spoke at Premoney Miami via Meerkat to discuss the state of venture funding in America, touching upon the conditions today that are enabling more and more companies to grow at a much faster pace than ever. He’s also previously written on how startups can create a memorable narrative in their pitches. You can read his full insights on VC funding in his blog post, “What I’ve Learned About Venture Funding”.
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