Startup Funding and Optionality

One of the challenges entrepreneurs face after achieving a repeatable customer acquisition process with great metrics in a big market is just how much money to raise. Initial thinking might be to raise as much as possible at the highest valuation possible. Only, investors have an expectation to make at least three times their money at the later stages and many more times that at the earlier stages. Couple this with the fact that only 2 out of every 100 venture-backed startups ever sell for $100 million or more, and raising substantial amounts of money greatly reduces the potential chance of a “successful” outcome.

Here are a few thoughts on startup funding and optionality:

  • Discuss this topic with potential investors before raising money to understand expectations and see if there is a fit
  • Ensure the founders, management, and board are aligned around desired outcomes
  • Recognize that not all outcomes are to sell the entire business as high growth tech companies are staying private longer and have more access to secondary liquidity
  • Sometimes raising money at a valuation lower than what’s possible makes sense to get the startup to the next milestone and keep more options open

The next time an entrepreneur wants to raise more money at all costs, explain how startup funding affects optionality. Raising too much money has made many acquisition offers not feasible due to the underlying motivations.

What else? What are some more thoughts on startup funding and optionality?

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