There used to a be time in Silicon Valley when a startup created a strategy, made a business plan to go execute it, and then raised the amount of money required to execute the business plan.
That seems pretty quaint these days. Because today, many companies have this upside-down. Instead of making a plan and raising funds to execute it, they raise a pile of money and then go figure out how to spend it.
This is happening largely because of the frothy, particularly mid- to late-stage financing environment that exists today. More and more money is going into later-stage VC and PE growth funds, funds get bigger, minimum check sizes get bigger, and all of sudden you have a bunch of investors who each need to write checks of $50M to $100m to make their funds work and those check sizes start dominating round sizes in Silicon Valley.
But it’s all upside down. Companies shouldn’t raise more money because investors want to write bigger checks. Companies should only raise more money if they need it to fund their plan.
A key part of building a startup is focus. Flooding companies with money works against focus. Remember the startup epitaph:
When startups “just do both” they fail to choose. And you flood a startup with money, it tends not just to do both, but perhaps all 4 or 5, of the ideas that were in discussion.
When a company gets caught in the VC inversion bad things happen. For details, see this post I wrote entitled Curse of the Megaround, but the short summary is that startups with too much cash make too many questionable investments that defocus the company and don’t provide returns, ultimately resulting in the termination of the CEO and usually a chunk of the executive team along with him/her. In short, turmoil.
Remember this tweet from Marc Andreessen:
So the next time you hear a company celebrating a $100M round ask yourself these questions:
- Can they actually put the money to productive use?
- What distractions will they start or continue to invest in?
- How much longer will the CEO and executive team last given the new, heavy pressure put on the valuation?
Startups used to be about entrepreneurs driving a vision for customers to benefit the founders and employees, with the VCs along for the ride. In this environment, they are more being run for late-stage investors with the customers, employees, and founders along for the ride.
And thanks to the preferences often found on these rounds, unless the ride ends well the late-stage investors may be the only ones getting any money on an exit.
(Cross-posted @ Kellblog)