I asked a 4-times tech-founder for his view on funding. And his answer is worth sharing.
“Funding is really not a good model for an innovator. You may have an idea, and you know that to complete that idea, you’re going to need $10 million. But if you decide to raise that $10 million because you’re in the valley, and that’s what they want you to do, you’re putting the math in their court. The deal is on their terms, not yours.
Here’s the thing:
Sure, it’s tempting to negotiate some high valuation, but when you’re early stage, you’ll put a noose around your neck that will only pay off if you know how to spend money effectively. If they’re confident you will create the +10x valuation you agreed upon, great. But if you can’t create that growth, you’re in trouble. It’s one thing to raise money, it’s another thing to create the value that the investors who are putting that money in are expecting.
And that’s exactly where things go wrong – and with that, no one wins. The problem is, VCs calculate that 99 out of their 100 investments fail. A better ratio is a bonus. That’s not the motivation of any entrepreneur.
How to go about it?
- Understand your position. Are you coming from a position of strength to set the terms or are they?
- Deeply understand the deal that you’re making for the money you’re going to raise.
- Think ahead. Once you’re in the funding loop – it’s hard to get out. You’re expected to raise again – and again. The bar will only get higher – and dilution will only get worse
If you’re smart as an entrepreneur, the best relationship you’ll have with VCs has got to be a love-hate relationship.
Question for you to reflect upon:
Imagine you’re starting a funding round in Q1 2023 – what can you still change to put the math in your court?