Raising money from the best investors is more important than getting the highest valuation

In the summer of 2008, Posterous was a part of Y Combinator Demo Day in Boston and Mountain View. After one of our demos, an investor pulled me aside:

“I love what you are doing. How much do you want? $3M? $5M?”

This was the Silicon Valley dream. An investor was throwing money at us.

But he wasn’t one of the top VCs, and this was my first company. I wanted strong advisors. So I politely declined, and instead raised an angel round from some of the best investors in the valley.

Vinod Khosla said it well:

Khosla explained that the key role of early investors is not funding, but personal attention and guidance. But generating buzz too early can inflate a startup’s market cap and make them a less lucrative investment of time and money for the top-tier advisors they need. That leads to critical missteps like poor hiring decisions that can doom a startup.

via techcrunch.com

Raising from the VC would have put more money in our bank account, and our valuation would have been astronomical. But it would have been worse for the company.

My advice: go into fundraising with a clear idea of how much money you want to raise. What is the next major milestone for the company and how much money do you need to hit that? Don’t over raise.

Then, optimize for the best investors in the valley. Find investors with a track record of success, check references, pick the one that’s the most passionate about what you’re doing.

The past couple years, I’ve seen many companies raise huge rounds at huge valuations. They got the money, but couldn’t scale their team or product effectively. Ultimately it became hard or impossible for them to raise another round, or find an exit.

Raising money isn’t success in and of itself. You have to be able to use that money to build real value within the company. Great investors and advisors will help you get there.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s