It seems to me that many founders approach fundraising as they would a math problem. They think that there’s a single
correct answer. This usually leads to over-optimization, which is a mistake. Optimization presumes that incremental
changes improve fundraising and/or company outcomes. It does not.
Because fundraising is never the deciding factor in the success of a company, founders should instead look to use a
regret minimization function when fundraising. Essentially, they should get what they need, avoid doing stupid things,
and move on. Part of the challenge in learning to not over-optimize is understanding what qualifies as a “stupid thing”
and what qualifies as a big deal.
There are nearly as many ways to over-optimize a fundraise as there are founders. Here are some of the more common
- Over-optimizing for price - Founders optimize for price largely because of ego. If you’ve raised at a higher
price than someone else, the thinking goes, your company and therefore you are better. This is absurd. Raising at
high prices has almost nothing to do with the quality of the company. It doesn’t necessarily even reflect how good
the founder is at fundraising. Price mostly reflects where the market is at any given time.
- Over-optimizing for investor - The funny thing about this one is that people start doing it before they even
have offers. You only get to pick your investor if you have a choice. In the end, while some investors are better
than others, none of them translate directly to success.
- Over-optimizing for dilution - This is another take on price. Founders who quibble over selling 18% or 20% of
their company in a round have lost sight of what actually matters - building the company for massive success.
- Over-optimizing for the amount raised - When founders begin to obsess about the amount they are raising,
independent of what they need, they lose sight of why they are raising money. Money is a means to an end, not a goal
in and of itself. Raising more money doesn’t yield success, but it usually results in more dilution.
- Over-optimizing for speed - Founders who try to close rounds in days seem to believe that humans make better
decisions under extreme pressure. This is almost never true.
Here’s the tricky part: each of these decisions, price, investor, dilution, and speed are important. The right way to
deal with each of these is to step back and approach them from the perspective of a goal that needs to be achieved.
- Price - This needs to be high enough to allow the company to raise enough money to achieve its goals without so
significantly diluting the founders and employees that they are not incentivized to work hard.
- Investors - Most investors are fine. They provide capital and some help when asked. Some investors are great.
They provide capital, are hugely helpful when asked, and get out of the way when asked. There is, however, such a
thing as a destructive investor. These investors can hurt companies in a number of ways. They should be
- Dilution - Founders need to retain enough ownership in the company to be committed to its success over and above
any other business venture that they might pursue. If this flips, there’s a risk to the founder drifting off or
doing a mediocre job. Ownership is also often linked to control. At some point, most founders lose control of their
companies, but it’s generally good for this to happen as late in the life of the company as possible.
- Amount - Founders raise money in order to hit specific milestones. Founders need to raise enough money to
actually hit those milestones, with some buffer to account for mistakes or delays. While the press loves to talk
about gigantic fundraises, smart founders raise enough to succeed, and not more.
- Speed - Fundraises that stop moving quickly generally die. This is because it is always easier to not fund
something than fund it. Founders need to be careful to keep a round moving fast enough to close, but it doesn’t have
to be much faster than that.
When fundraising, founders need to stay on top of many conversations with many people without losing sight of their
businesses or employees or lives in general. With all of this in play, it is easy to lose sight of what matters and to
start focusing on the wrong things. What matters most is getting enough money to achieve a set of goals. Paying
attention to price, investors, dilution, and speed is important, over-optimizing them is not.