[gimme_treefiddy]

> They raised a ton of money on a high valuation, spent 25mil to make 1 mil last year and are now scrambling to raise a new crowd sourced round because they don't want to get wiped out in a down round.

Sorry to get off-topic, but is there a read/book to understand funding, VCs, etc., from a holistic POV. I totally didn't expect that consequence of having to raise a crowd sourced round due to initial high valuation.

[hackitup7]

- Their valuation is high because they raised during the recent bubble

- If you raise more money at a lower valuation than your last fundraise, it's highly dilutive. Investors paid $10 for 10% of a $100 valued company last round during the bubble. Vs. given current market conditions, new investors would only pay $10 for 20% of a $50 valued company this round. This second round would dilute existing investors, except...

- If you crowd source the funding, now you can raise at a $100 valuation again (less dilution), because these crowdsourcing investors don't know what they're doing

[mikpanko]

“Venture Deals: Be Smarter Than Your Lawyer And VC” is pretty good. Used it when raising a round of funding.

“The Power Law: Venture Capital And The Making Of The New Future” is also good. It tells the story of the evolution of VC over the last 70 years. It is interesting that funding terms seem to be becoming more and more founder-friendly over decades.

[alephnerd]

"Secrets of Sand Hill Road" by Scott Kupor (Managing Partner @ A16Z).

Was recommended to read this by VC friends to prep for Investment Associate interviews a couple years ago

[q7xvh97o2pDhNrh]

Having been in/around the game for a good few years, I can assure you it's not nearly as complicated as they try to make it sound.

The game works like this: the VCs want 100% of your company, and you want to give away 0% of your company. (Of course, 90%+ of companies will fail, so it doesn't really matter. But let's pretend we're all in that special 10%.)

If you do end up choosing to play that particular game, then you'll find some common numerical rules of thumb. They usually go like this: Each round should raise 12-18 months of runway, and each round's investors usually get about 20-30% of your company.

On one side of the game, you have the VCs, who basically play this negotiation full-time — and whose comp structure depends on extracting as much equity from you as possible. This is why we get the constant stream of "thought leadership" from VC bloggers, because they're trying to distinguish themselves as offering something more than capital. (And, having distinguished themselves, they can extract more % from you for less $.)

After decades of practice, VCs have plenty of hustles they can run. Some of the classics are the old "participating preferred" play, as well as the usual sound bite about how "it doesn't matter what the exact numbers are."

On the other side of the game, you have the founders, who basically want the maximum amount of money in exchange for the least amount of equity — but also for the least amount of time. Fundraising is a massive distraction, and VCs know it — which is why time always gets used against the founder, with long and drawn-out "fundraising processes" that (by total coincidence, of course) also happen to exhaust the founder and push them towards signing.

The twist is that this game isn't only for 1 round. Once you take your company into this game, you're stuck in it — you'll have to keep fundraising to keep fueling the growth that you've kickstarted using external capital. With the average IPO timeline being 7-10 years, combined with fundraising every 12-18 months, you can expect to play this game 5+ times on the way to IPO.

Sometimes, for a variety of reasons, the founder raises too much $ for too little %. You'd think this is a good move — but, since this is an iterated game, it's not all upside. Decisions in this round set the stage for the next round. If you can't live up to the growth expectations implied by the high valuation, then you're in for a "down round."

VCs have a standard "down round" playbook, too. They'll have their way with the cap table, of course — and it's also not uncommon to see some/all of the founding team shown the door. The press piles on as soon as they hear of it, which drags on employee morale as well as the talent pipeline, both of which then destroy product velocity and market positioning... it's very easy to have a single "down round" be the kiss of death for a company.

So that brings us all the way back around to your question. For this particular company — as well as for many others that raised during the "cheap money" era of the pandemic and pre-pandemic years — it sounds like they're facing this conundrum. Crowdsourcing the next round is a somewhat new way to tackle this situation — new regulations came out a few years ago, and founders sometimes go this route instead of risking the "down round" game with VCs.

You usually only see B2C companies making the crowd-funding play in the first place, since you need the name recognition and customer base to even try to raise money in this way. Because founders can essentially "divide and conquer" their investor base in a scenario where everyone's investing only four or five figures, the common scenario here is that the founder sets the terms to avoid the down round — and then they begin the fundraising. Since they're fundraising from hundreds/thousands of people instead of 5-10 people, it ends up being more of a marketing campaign rather than high-touch sales, which can also play to some founders' strengths.

Anyway, I could keep riffing for a while (and I'm sure others here could do even better). I'll let the other commenters chime in with book recommendations — I'm sure someone's written about these market dynamics in much more detail.

[mikpanko]

In my experience the reality is much more nuanced:

- VCs don’t want founders to own 0% of their company because founders need to be motivated to work hard to make it a success

- % of dilution usually goes down very significantly over funding rounds

- there is significant competition between VCs to fund good startups these days, which can translate to founder leverage

- there are early-stage VCs these days, which don’t pressure founders for quick growth

- founders talk to each other and a large portion of founders are serial entrepreneurs. Reputation among founders matters to VCs

- looking over the longer term of decades, typical funding terms are getting much more founder-friendly

[q7xvh97o2pDhNrh]

> there are early-stage VCs these days, which don’t pressure founders for quick growth

That's really interesting. Do you know how they make that work, exactly?

I feel like that's naturally opposed to the standard incentive structures that VCs have with their LPs. They need to show results in O(years) so they can raise their next fund and keep the overall VC firm going over O(decades). That maps down straightforwardly to the day-to-day pressure VCs put on all their portfolio companies to grow as fast as possible.

Unless early-stage VCs are doing something new with the terms they give their LPs, how could they prioritize anything other than growth?

[alephnerd]

Down the grapevine at least, a couple Micro VCs ik provide a pipeline for CorpDev teams at larger companies and early stage VCs (Series A-C check signers like Unusual Ventures) to choose pre-vetted companies. Mind you this seems to be more Enterprise/B2B Micro VC oriented.

If the startup is showing good growth metrics, they'd point them to friends at later stage funds. If they aren't, they'd give intros and help get the startup aquihired.

[reducesuffering]

> The twist is that this game isn't only for 1 round. Once you take your company into this game, you're stuck in it — you'll have to keep fundraising to keep fueling the growth that you've kickstarted using external capital.

Why? What stops you from raising a $15m series A and only burning it conservatively until you hit neutral profitability. Investors only have 15-25% of your cap table and can't strong-arm you.

[quickthrower2]

You would have had to mislead them right? Why would they give $15m to use slowly when they can give $15m to a company that will use it quick, assuming both companies are using it in a +EV way?

[drusepth]

I don't have a resource for you (and will probably read whatever you get linked), but one intuitive way to think about it is that VCs/investors (and most of the startup ecosystem) are generally focused on "growth", not "performance".

You can be a stable, profitable, money-making machine with 90+% margins and amazing reviews, but unless you're doubling something (users, engagement, profits, etc) every single year, you go to the back of the potential-investment line.

A high initial valuation might be great for performance relative to other companies (or whatever reasonable metric you want to insert here), but it also makes it way more difficult to show "growth" YOY compared to a lower initial valuation.

[brewdad]

Why would a company like that want VC money? They can go to a bank if their numbers are that good and keep their equity for themselves.

[ymolodtsov]

Venture Deals by Bred Feld is the best book on the matter