What are the less understood ramifications of taking too much or too little money from investors/VCs/etc? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world.
One thing I've seen lots of "hot" Series A or Series B companies make the mistake of doing is raising lots of money at high valuations from top-tier firms.
On the surface, seeing a large valuation and lots of cash on the balance sheet seems great. High valuation means less dilution, and the investors might be top-tier firms telling the startup to put more, rather than less, on the balance sheet so they can be aggressive and go to market as quickly as possible. They'll speak of winner-take-all markets, urgency to beat competitors, etc.
However, two years later, lots of these startups will be growing quickly, just not spectacularly... not home runs. They might've grown 2X, or maybe even 3X from when they raised their last round, but they're still not profitable. Then when they try to go fundraise from other firms, their previous valuations will turn away growth stage investors, leaving them no choice but to do insider rounds.
Why? The valuation of the previous round will imply that unless the Board of Directors or management team is willing to do a flat-round, or god forbid a down-round, they could find themselves trying to raise at a valuation that the startup might not have grown into.
What happens then? You're forced to do an insider round with your current investors. They'll start owning more and more of your company. They'll start calling all the shots, forcing your hand, and perhaps eventually finding a replacement CEO.
Roughly speaking, if you raise at a $40-50M valuation in your Series A, or close to a $100M valuation for a Series B, just know that you're signing up to swing for the fences. It might make sense to raise less cash on lower valuations (equal dilution), just to keep future options open and make future fundraising more realistic.
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