What To Do If You've Raised Too Much Money
Over the past few weeks, I’ve met an unusually large number of founders who face a problem that is pervasive in VC-land — the curse of having raised too much money. This gets discussed far less than the usual chatter about raising capital in the first place.
These were all high quality founders; they were not delusional or difficult or unpleasant. They were without exception good, smart, hardworking folks.
This is not an absolute problem, it is a relative one. None of these companies have raised billions of dollars. They’ve just raised too much money, at too high a valuation, for their stage.
Most of the time, at some point, you have to pay the price. WeWork is paying the price; Uber may yet do so; many unicorns will. But in those examples, founders and early VC investors will make their way to massive paydays (I am not going to comment here on the justice of that).
But what if you’ve raised $10m (or $5m or $15m) across a seed and a seed extension and a Series A and a series A1 at great valuations, have built a great team, have built a great product, but now the market starts valuing you based on — shudder! — revenues? Or — horror! — the path to profitability?
What if you’ve raised no more than $1 or $2m in a seed round, but you couldn’t resist a funding feeding frenzy (accelerator demo days have this effect) and took money at a valuation cap that had no connection to intrinsic value? And now the market turns on you and that cap becomes a giant obstacle for potential investors in your next round — and it is easier for everyone to just say no?
Obviously the best answer is “price rationally, don’t over-raise and never have to deal with this problem”, but hindsight is always 20/20 and less-than-optimal things happen to good people.
There are a few solutions. None are going to be appealing but some of these give you “agency”, which is a fancy way of saying “take control of your own destiny”.
The Wishful Thinking Plans
WT Plan #1: meet scores of investors and hope that someone will top the last valuation and invest, giving you more runway. Because, you know, you see stuff like this in TechCrunch announcements every day.
WT Plan #2: this is a variation in which WT Plan #1 is actually successful (see: TechCrunch). The flaw in this outcome, in most scenarios, is that you have now greatly complicated your ability to pull off an RTBO plan at a later date (see below).
WT Plan #3: this is a variation in which you continually make cuts in order to extend your runway, and die very slowly. You are far better off going to RTBO Plan #1 (see below).
The Rip-The-Bandaid-Off Plans
RTBO Plan #1: have a plan for getting to breakeven — quickly — with no external capital. This may involve horrible maneuvers and some crushing of your dreams. But it may end up being the only solution, and it is better to survive and live to fight another day, then be roadkill.
RTBO Plan #2: I call this the mea culpa plan. I’ve never seen it done but I think it merits consideration. It requires a massive act of will, will be a ton of work, but just might be the right answer. You wake up one morning, say “I am going to take control here”, and do the following:
You figure out what a fair valuation is for the company, ignoring all prior rounds
You figure out the minimum capital you need to have a high quality business at breakeven
You sit with every one of your investors and propose a restructuring of the cap table that feels fair. If you have a friendly VC involved, get them to help
“Feels fair” almost inevitably means you and your other co-founders will take it in the shorts, but I am of the view that this is rarely the mental hurdle for high quality founders
Implement the restructuring - this may involve some preferred converting into common, may involve resetting prior valuations, may involve juicing your team back up with new option grants
Go to the market with a clean deal, where you are not asking a potential new investor to solve the problem themselves — that is your job. I believe this will dramatically increase the likelihood of getting funded.
Of course this is all easy to say. Take step #1 for example — that is a difficult rathole in and of itself. And step #3 is going to be no fun at all, especially if you have raised multiple rounds, have investors with paper markups, and so on. But knowing this is your plan will concentrate your mind and your efforts.
The venture capital world, as I often say, has inappropriately prioritized “founder friendly” over “founder responsible”, in part because of the fetishization of entrepreneurship. In my meetings with founders, I am being more direct about some of this than I have been in the past — because I feel I owe it to them to give them a window into what that polite VC might actually be thinking as they courteously decline to invest.
The market will dictate terms to you — it is just a question of when. Get ahead of it.