When and When Not to Raise
Investors from the speedrun team share the advice they give friends who ask whether they should take venture money
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A few months ago, while reviewing applications for SR007, we asked investors on the speedrun team a question: if a close friend or family member told you they were thinking about raising VC, what would you tell them?
Troy Kirwin said that he’s already approached many of his “exceptional” friends about founding, but then sounded a note of caution:
“I have a great friend who’s running a growth marketing agency. He’s reading all these blogs and wondering if he should be raising. My answer to him is: you have a great, profitable business pumping a million in cash each year, and you’re working with great people. You have your own family and you get to spend time with them. Venture capital is not for everyone.”
– Troy Kirwin on “Advice for applying to a16z speedrun”, on YouTube
Troy Kirwin’s whole job is finding companies to fund, yet he sometimes tells the people he cares about most to reconsider. And he’s not the only one.
While we believe in the power of VC funding to massively accelerate growth for startups, the best investors try to be honest about the types of companies VC funding is and isn’t good for.
So how do you know whether VC is right for you?
First, what venture capital actually is
In January 2019, Josh Kopelman, co-founder of First Round Capital, the first seed investor in Uber, tweeted this extremely succinct description of the product he sells:
“Motorcycles are common (2018: Honda sold 18M motorcycles). Jet planes are rare (2018: 806 Boeing planes). VCs sell jet fuel, which doesn’t work in motorcycles. Bad stuff happens if VCs push jet fuel on a bike owner. Or if a bike owner thinks they can fly.”
He put it even more simply in the New York Times that same day: “I sell jet fuel, and some people don’t want to build a jet.”
The metaphor is obvious: A profitable company doing a million a year in cash is a fantastic motorcycle. But if you fill it with jet fuel, it will explode.
Eric Paley, managing partner at seed firm Founder Collective offered another hardware-based analogy:
“Founders need to think of venture capital as a power tool — a fairly dangerous one — but instead often mistake it for some magical, infinitely renewable resource. In the right hands, power tools can solve some real problems. Used incorrectly, they can chop off your hands.”
The thing you’re signing up for
Fareed Mosavat from the a16z speedrun team says that every founder should ask themselves two questions before they begin: “Should I start a company and should I raise capital for this company?” The second question is one that trips people up most often.
“You are signing up for a very specific kind of company the minute you raise any capital. Are you sure you want to be signed up for that?”
Signed up for what, exactly? Paul Graham spelled out the mechanics twenty years ago:
“Younger would-be founders are often surprised that investors expect them either to sell the company or go public. The reason is that investors need to get their capital back. They’ll only consider companies that have an exit strategy—meaning companies that could get bought or go public.”
The expectation of an eventual exit is one thing to keep in mind. Even tougher is the journey to get there. Venture-backed companies are expected to grow, and preferably quickly. Those on a slower trajectory or with a lower Total Addressable Market find it harder to raise followup funding rounds.
The ego tax
So why do founders sometimes go for VC funding, even why they don’t need it? Emily Bennett shared the following observation:
“There’s an ego element to VC, especially for young founders who think, ‘I need VC to show up credibly in a room.’ There are a lot of businesses that actually don’t need that form of acceleration. The expectation is you’re growing at a certain rate. The expectation is that you can meet this type of market demand, so it is a different kind of structural environment, which isn’t for every kind of business.”
One all-time counterexample to the need to fundraise for credibility is Mailchimp. Ben Chestnut bootstrapped it to roughly $700 million in annual revenue (“give or take,” as he told TechCrunch in 2019) before selling to Intuit for about $12 billion. His reasoning for never taking outside money:
“Today, I have two constituents to worry about: customers and employees… To have a third called investors? No, I can’t do that.”
You need less than you used to
The macro-economic environment is changing the math on this question, too. Per Fareed:
“Now more than ever… you can do more as a small team. You can do more without capital. If you were trying to start almost any company a decade ago, unless you had a bunch of money to self-fund, you probably needed cash just to put a server in the closet. That’s not the case now.”
The evidence to back this up keeps arriving. Midjourney has been turning away investors since 2021. The Information reported VCs “practically begging” David Holz to take their money, chasing warm intros and preemptively sending term sheets, while he built a nine-figure-revenue company with about 40 people and said no.
And Sam Altman, who has raised more money than almost anyone, told Alexis Ohanian:
“In my little group chat with my tech CEO friends there’s this betting pool for the first year that there is a one-person billion-dollar company. Which would have been unimaginable without AI and now will happen.”
If a billion-dollar company can be one person, then “do I need $5 million and a board to find out?” deserves a real answer before you send the deck.
So… should you raise?
If we’re being honest, on some level all this anti-selling is a filter. If one honest conversation with an investor talks you out of raising, the product was probably never for you.
But if you know what the fuel costs, and you’re certain you’re building a jet, we’ve got a link for you: Apply to a16z speedrun
That’s it for this week! For more weekly dives into the world of early stage startups, subscribe below.
I am that billion $ company <- JobLots 😉
Excellent metaphor.
My TAMS is 30-40 million. But I don’t want to blow up my Ducati just yet. lol