Last week, I was talking to an entrepreneur who is building a new business. The company has some decent traction, and he’s deciding what to do next on the fundraising side. As part of the discussion, one important consideration that came up was how to think about a competitor recently raising a large round of funding.
Historically, in startups, funding is often used to achieve a new milestone. For example, going from $5 million of revenue to $10 million of revenue in a short period, fueled by outside capital. Once that milestone is hit, another round is raised, and the cycle continues as the business scales. But in the age of AI, scaling certain startups has become dramatically faster, and the perceived market opportunity is much larger. As a result, startups that previously would have raised amounts more in line with their run rate and growth rate are now raising many multiples of what used to be normal at valuations dramatically higher than in the past.
For entrepreneurs, especially in the context of competition, my recommendation is to always be market-aware and customer-focused. It’s easy to get distracted by competitor announcements, product launches, or flashy initiatives. But the most important thing is to listen closely to customers and build an opinionated vision of the future that you believe is right. That said, when you’re thinking about raising X dollars for the next round and you see a competitor raise 10X what you were considering, it naturally creates some consternation.
The Pros of Raising a Large Round
On the benefit side, the obvious one is having cash in the bank. A strong balance sheet enables more experiments, funds more initiatives, and gives the company breathing room. There’s a lot of advice out there about not needing to spend the money just because you raised it. But in practice, human nature pushes toward deploying that capital quickly, usually within 12 to 24 months, because it feels better to be aggressive and proactive rather than conservative and reactive.
Another major benefit of raising at a high valuation is the perceived value of equity for recruiting. For example, if you have an employee option pool of 10% and your last round valued the company at $50 million, that pool is worth $5 million on paper. If instead the last round valued the business at $200 million, even with identical metrics, that same pool is now worth $20 million. That makes it far easier to recruit top talent when you can offer an engineer $500,000 in paper equity value instead of $125,000, while giving up the same ownership percentage. The last round’s valuation acts as a powerful marker in the recruiting process.
The Cons of Raising a Large Round
On the downside, the higher the valuation, the higher the expectations. Growth investors typically want 3–5x their money, and elite VCs are often looking for 100x outcomes. Raising at an inflated valuation means the eventual exit or IPO must be correspondingly larger for everyone to be satisfied.
Another challenge is that the bar for the next round is dramatically higher. If you raise at an unusually high valuation and then need more money in 12–24 months, it can be demoralizing to face a down round. Down rounds often trigger negative side effects such as pay-to-play provisions or liquidation preferences, which can cause real pain inside the business.
Final Thoughts
When competitors raise large rounds, entrepreneurs should take the time to do some soul-searching about their own level of ambition. Do you want to “go big or go home,” or are you comfortable being the number two or three player in the market? Many markets are not true winner-take-all environments. More often, they resemble oligopolies or are divided into valuable niches where multiple players can thrive.
Just because a competitor raises a massive round doesn’t mean you need to. But it is prudent to carefully weigh the pros and cons instead of reacting impulsively. There are many paths to building a successful business, and not all of them require raising huge sums of money.
David Cummings on Startups 