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Sometimes you raise all you can, sometimes you don’t

A flurry of recent posts on raising money in the blogosphere. Marc Andreesen says to raise all you can. Jeremy Liew says to be careful not to create down rounds. Josh says moderate how much money you take or you risk an unintentional moonshot. I wanted to make sure people realize that these comments are all situational and put some context (and some CogText! god, kill me now) around it.

Posts like Jeremy Liew’s latest, on risk in capital raising, are the posts I love. I am shocked that no one has made the “Price is Right” analogy yet. You want to go as high as you can without going over. Of course, Josh takes his analysis to the next level by looking at it from the investor side and why Jeremy could not do that deal. The reason that Jeremy can’t do that deal is that even if he decided that the last valuation was fair (i.e. a probably unacceptable flat round to the entrepreneur) he might put $10m in to take 25% of that company ($30m pre-money) and then they would have to find an exit around $400m. I feel like, right now, in this market, early stage investors (and entrepreneurs!) want to be able to exit at potentially lower values.

The IPO window is opening, but it’s still pretty small. The M&A market is boiling, but most of the deals are technology acquisitions (Right Media, DoubleClick, Postini). This usually means that the exits are happening earlier in a companies lifecycle, so the valuations are probably a bit lower.

I sent Josh a note this morning about his blog post because it reminded me a ton of when I met with him about Cogmap. Is Cogmap a $200 million exit opportunity? If not, that kind of dictates how you take money. If you raise too much money and your exit comes in too low, that creates bad outcomes.

I think investors right now are also wary that these early exit opportunities are tempting to entrepreneurs and that makes them cautious as they look to do small early deals. People like Fred Wilson have blogged before about opportunities like where a VC might have preferred to take a shot at a big win but the entrepreneur chose to settle for significant insta-wealth.

All of these comments from entrepreneurs on Jeremy’s blog that imply that if they have the chance to fleece investors, they have a fiduciary duty to do so are short-sighted. It made me think about Ning’s recent round. If they exit for $100m, no one in any of the earlier rounds is going to see much money because the investors probably made their investment on a participating preferred basis. When you raise that kind of money, the only way the entrepreneur gets rich is hitting an absolute home run. That is why quibbling over 5% or 3% doesn’t make that much of a difference. When you are talking about raising $44m or $40m, sure, go ahead raise all you can. The price for the next round or exit will be so high that $4m will look like a rounding error, and if it isn’t, then the dilution will be brutal and the entrepreneur will get nothing anyway.

3 Responses to “Sometimes you raise all you can, sometimes you don’t”

  1. Cogblog » Blog Archive » Using Trackbacks to tag Jeremy’s post Says:

    […] Jeremy come post again on raising capital is something I have to talk about.  The one thing that I have discussed in my earlier posts is that you also have to consider what the exit might look […]

  2. Cogblog » Blog Archive » I see Zombies! Says:

    […] be exits that investors and employees can feel good about? I am not so sure. I have blogged about valuation challenges a […]

  3. Cogblog » Blog Archive » Revenue Science Proves the Challenge with Lots of Capital Says:

    […] reports that ValueClick is considering buying Revenue Science.  I have blogged extensively about the challenges in raising a lot of capital and exiting appropriately.  This […]