Sell Less, Minimize Dilution

One piece of advice that I’ve recommended to many entrepreneurs, with little success, is that they don’t have to sell the typical 20-30% of their business every financing round. Add the 10 – 15% additional dilution for each round from the new optional pool, and the overall dilution is often 40%+. Here’s the thing: institutional investors love to say that they have to buy at least 20% of the business for it to be worthwhile, but in reality, the percent ownership is a flexible amount.

Here are a few thoughts on selling less and minimizing dilution:

  • If it’s a winner take all or winner take most market, forget about dilution and focus on winning
  • Many markets have multiple winners (like email marketing), such that there’s room for several players including ones that don’t raise a ton (or any) outside capital, and still build great businesses (like Pardot and MailChimp)
  • Find a partner that can provide enough capital to get to the next milestone (e.g. raise $2.5 million instead of $5 million and model it out so that you still make meaningful progress over the next 18 – 24 months)
  • Pay close attention to growth rate and don’t let it get below 100% such that you raise enough capital to continue to grow fast (slow or no growth is the death of many venture-backed startups)
  • Know that there are many more sub $100 million exits than there are above that amount (see less than 2% of all venture-backed startups sell for more than $100 million)
  • Venture debt is an amazing deal and should be pursued (see credit lines for SaaS startups)

I know the glamorous thing to do is to raise a bunch of money but the reality is that most entrepreneurs can’t do that, and the ones that can should really consider raising less money and being more conscious of their dilution.

What else? What are some more thoughts on selling less and minimizing dilution?

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