David Cummings on Startups

Tag: venture-capital

  • The Preemptive Funding Offer

    Last week, I caught up with an entrepreneur, and we discussed a preemptive funding offer. The startup is thriving, growing rapidly in a large market with limited competition. Currently, the entrepreneur doesn’t need to raise capital, especially as key business metrics continue to improve. As the company grows, potential investors frequently reach out to build relationships before funding becomes necessary. The entrepreneur has started taking these meetings to connect with the venture community. After a particularly promising meeting, one investor offered a substantial investment at a valuation significantly higher than the last round. So, what should the entrepreneur do?

    We weighed the pros and cons. On the pro side, accepting the offer provides time to assess the investor’s compatibility, ensuring the right chemistry and personality fit for a long-term partnership. The additional capital would support a more aggressive hiring plan, considering it takes three to six months to onboard and scale a team. This could accelerate growth and position the company for greater opportunities. Moreover, the extra funds could act as a financial cushion, offering flexibility to seize new opportunities without immediate spending pressure.

    On the con side, raising money now at a higher valuation, when it’s not needed, reduces optionality. It sets a higher exit bar, which could complicate a future sale. Additional capital also brings increased pressure to grow and expand, which can be beneficial but may sometimes hinder the business. Finally, if growth continues and funds aren’t immediately necessary, the entrepreneur could raise capital later at an even higher valuation, minimizing dilution.

    There’s no right or wrong answer—only an opportunity to reflect on priorities and goals. Entrepreneurs should build relationships with a select group of investors before their next funding round. Occasionally, these connections lead to preemptive offers, as in this case. When this happens, it’s an ideal time to evaluate the next round by listing the pros and cons of acting now versus sticking to the existing financing timeline.

  • Entrepreneurs Selling Equity in a Financing Round

    Last week, I caught up with an entrepreneur who shared his plans to raise a round of capital. Toward the end of our conversation, he asked my thoughts on selling some of his shares during the round to take chips off the table (sell his own equity). “Absolutely,” I said. “I’m a big proponent of entrepreneurs diversifying a bit, especially when it helps them sleep better at night knowing they have some savings.”

    Of course, the challenge is balancing this with the belief that the best person to bet on is yourself, especially when you’ve built a business to the point where investors are willing to buy your personal sharing. After discussing fundraising and personal diversification with numerous entrepreneurs, I’ve seen that selling some personal shares often brings a sigh of relief and a sense of satisfaction. Yes, you might leave some money on the table, and as an entrepreneur, you may feel compelled to go all in. But you never know what lies ahead, and having a financial cushion can be valuable in any scenario.

    From an investor’s perspective, I also support selling some secondary shares. Investing in startups is inherently illiquid with an unpredictable timeline. When the opportunity arises to sell shares—especially if you can recover your initial investment while letting the remaining position ride—it should be taken seriously.

    This point hit home recently when I reflected on a group discussion about investing in an anonymous social network over a decade ago. The business grew rapidly to millions of daily active users, and a prominent venture firm led the next funding round. To achieve their target ownership, they asked existing investors if they’d be interested in selling. I said yes, locking in a return on my angel investment. Ultimately, the business didn’t succeed, but I’m glad I secured a small win while letting most of my investment stay in the startup.

    For entrepreneurs raising a funding round or achieving enough scale to consider a secondary sale, my recommendation is to take some cash off the table and diversify. The future is bright, and a little savings can go a long way.