I’m not even going to bother downloading Venture Economics data because I know it’s going to be garbage—most angel rounds aren’t tracked very well. That being said, is it me, or do more and more entrepreneurs seem to out there in the market essentially skipping the 500k-ish angel round? It’s a question I seem to be getting more and more often—why bother raising 500k if you can just grab a million or a million and a half?
(And yes, this post may seem self-serving, since I work at a seed-stage investment fund. Feel free to take this free content with a grain of salt. My self-servingness is wholly my own, and not necessarily that of my current employer.)
Part of the reason why it seems to be coming up is that a lot of people who used to write $25-50k checks now have funds that they can write bigger checks from. There also seem to be more angels joining the fray as well. Without necessarily going to anyone different than you would have two years ago, you can just as easily raise a seed round twice the size with the same group of people. So why not just raise it when you can get it? Isn’t it always a risk to go out and fundraise? Technically speaking, the number one reason why companies go out of business is because they don’t have any money, right? So what’s the downside, and why bother raising an actual angel round if you’re just going to have to turn around and start raising in 9 months again?
My own personal opinion is that if you could honestly tell me that you’re going to spend your million bucks at exactly the same pace as if you had $500k, except that you’ll now have twice as long to work on things, I’d say go for it. Knock yourself out in the fundraising and take the extra cash.
The problem is, that almost never happens.
Money at a startup is kind of like cash in your wallet—it gets spent. The temptation when you have it is to work on that one additional feature that gets you out in front of your competitor or wins you that next client? Got some dough? Why not spend it on a slick new interface or start working on version two ahead of time? The level of increased complexity in a startup that goes from let’s say two developers and a business or product person just focusing on one thing, to three or four developers and more than one product front to wage war on is significant. That’s what I see as the difference between an angel funded company at $500k versus a company that takes a million and a half. Unfortunately, when you have more money, you tend to do more stuff. Frankly, what a lot of startups should do is spend the money not on another developer to build more stuff, but on a kick ass product manager to eliminate features (especially the ones that get requested after you launch) and focus the offering.
What seems to be happening is that angel rounds get bloated—you go out looking for half a million just to get up on your feet, work on something fulltime, and fix all the stuff that broke at launch, and then you wind up with $1.2 million in the bank and way more expectations. All it takes is one or two smart investors to jump in, and then it becomes a pile-on. It’s tough to say no and not at least attempt to accommodate a top tier investor.
What I’m concerned about is that while your near term chances of survival go up, because you’re flush with cash, the net-net percentage chance of eventual “success” (defining success as a situation where most people, especially the entrepreneur, walk away happy) actually goes down. You try to do too much, overhire, overmarket, and you start to believe that your market is a landgrab. “We need to go faster!” So when’s the last time a landgrab produced one and only one winner in a space? How many losers were there who mis-executed along the way?
Not only does your business and product get more complex, but the expectations around it go up—particularly around the next round. When you go straight to a Series A round, you forget that your next round needs to be a Series B round. Historically, that was one where the business was clear and there was some initial revenue, even if slight. I’m sure you’ll start seeing some rounds that essentially should be B rounds according to what the current cap table looks like, except that there’s a Series A level of progress, and about a million bucks in product overspend that didn’t really lead to a business. That’s going to be very problematic for anyone expecting an up round—or even a flat valuation. So, what you really end up with was just a delay of the inevitable—that you had a business hypothesis that could have been proven, disproven, or de-risk on a lot smaller budget, but instead you’ve been in business for two years and have more employees than you need, with very little future to speak of.
On top of that, when you set out to raise a certain size round, and the round grows on you, you usually wind up taking a lot more dilution than you intended. Investors may let you bump up the pre a little to take more cash, but usually not enough to bring you back to where you were. At that point, it’s a tradeoff on ownership versus chance of survival, right? Well, not really. Are you telling me that if you didn’t raise “extra” you wouldn’t get left off in a fundable position? Are you so bearish on your ability to execute off of your originally intended seed round that you need 2x “just in case”? Are you willing to raise money at this pre, furthering your lack of clarity about the future?
On top of all this, isn’t there something to be said for the opportunity cost in your own career? What if you could either pass or fail at reaching a major milestone within 6-9 months and 500k? Beat it and you raise a big round, miss it and you pick up your marbles, empty bank account and go home. Doesn’t that sound like a better outcome than “Miss milestones, and now figure out what to do with the rest of the money for the next year.” You might come up with a Twitter among the ashes of your own personal Odeo, but it’s unlikely.
The solution? Pick out a small handful of investors that you feel can add the most value to your business. Keep it to that list—and keep it to people who regularly do seed and angel rounds as their main course of business. Chris Dixon said on a panel a month or so ago that when big venture firms write small checks, they’re not investing, they’re playing for the option value. That doesn’t seem like a good reason to change your financing and product strategy over.
Once you have that, keep your focus simple. Try to prove one thing. Drive one key metric. Is it users? Time per user? Posts? Photos? Time on site? Whatever it is, it seems that when you’re just starting out, a normally sized angel round should be more than enough to turn over the next card to identify what kind of hand you’ve been dealt and what you’ll need going forward.