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When less is more

“I was thinking, actually, what if you had asked for less?” Pied Piper’s Richard Hendricks asks a fictional founder in a bar scene in the season 2 premiere of HBO’s Silicon Valley.
The other founder, Javeed, of “Googlibib,” reflects. “It might have been easier to hit more benchmarks… we wouldn’t have faced that down round.” Growing increasingly despondent and loud, he continues, “We wouldn’t have had to settle for acquisition… We could have done a legit series B… I’d still be CEO… I’d probably still have my girlfriend… Why the f*** didn’t anyone tell me I could take less?
It plays pretty funny on the screen, but this fictional interchange illustrates a very real challenge entrepreneurs face: Money doesn’t necessarily mean freedom. Yet the ability to maneuver in response to business challenges is the one thing a startup founder needs most. Some of these decisions are minor: Should we give an early customer a big discount in order to close the deal?  Others are existential: Is it time to sell the company? 
As grueling as it can be to make a call on the hard decisions, it’s much worse to be unable to make a key decision at all — to be forced to take an action due to financial restrictions or other constraints.
When you’re building a company, you need to maximize your degrees of freedom — you need to have the widest set of options available to you for key strategic decisions.
Conventional (and even fictional!) startup wisdom says that the best way to maintain your degrees of freedom is to raise more money than you need so that you have a large war chest of capital on hand. I’m here to tell you that, based on my experience working with hundreds of startups, that one of the best ways to improve your optionality is to ignore that conventional wisdom and instead stay extremely efficient in both your operations and your fundraising strategy. You can actually increase your degrees of freedom not only by notspending money you have, but by not having too much to begin with. The best move for many startups is to raise just enough money to achieve key milestones.
We call this “just-enough” approach the capital-efficient path. Companies that follow this practice maintain tight, resourceful operations throughout their early stages and only add capital when there are proof points and processes to support it. The resourcefulness required of capital efficiency can dramatically improve your odds of building a successful startup.
More companies die of drowning in opportunities than of starvation.
In fact, capital-efficient founders can enable heroic success for themselves and their companies, while at the same time lowering the risk of startup failure.
Let’s explore why having just enough funding is actually better for your business.

Capital efficiency and optionality

The “less is more” approach seems counter-intuitive to many new entrepreneurs. But it is the path that many, many successful companies have taken, and, from the perspective of founders, it is arguably a less-risky path to success than the path of raising large amounts of venture capital.
Why? Because it lets you keep your options open. Here’s how:
You can choose how to grow your company
More companies die of drowning in opportunities than of starvation. Focusing your company on a very specific target market, finding a way to dominate that constrained market and then expanding from there is a well-documented approach to significantly reducing the risk of a startup’s failure.
But companies that raise a lot of money are often priced out of that model. They need to grow their top line at all costs, and one of the non-obvious costs can be losing the discipline of focus. When you choose to stay capital efficient, you can choose less-risky, more-focused paths, while still retaining the optionality to go much bigger once your product and sales repeatability are well-established.
Even Amazon — which has a market cap on the order of $400 billion — raised only $8 million of venture capital money as a private company before going public. It started with a very limited model of selling just books before it expanded to become the Everything Store.
You can weather storms
But, you say, what about market downturns? What if it becomes harder to raise money? Won’t a big cache of cash ensure survivability through hard times?
Not necessarily. The single largest determinant of whether you can survive a downturn in the funding market is your burn rate. You can weather storms better if you are capital efficient. If your cash burn is low — or even better, if you can get to cash-flow break-even — you can get through hard times.
Less burn, more options.
But if your burn rate is high, even a significant pile of cash won’t save you unless you are ready to make tough, morale-crushing decisions blindingly fast — such as laying off a large portion of your workforce or abandoning whole sectors of your business. And the unfortunate truth is that the bigger your cash reserves are, the higher your cash burn rate is likely to be.
Keep this mantra in mind: less burn, more options.
You can choose your exit strategy
Choosing an exit path is the greatest startup existential question of all. It’s also where raising too much capital limits your optionality the most. Venture capitalists don’t like to talk about this — shooting for the moon is expected.
But most exits are not billion-dollar IPOs or even $200 million acquisitions. Raising big money — even at a very high valuation, in fact especially at a very high valuation — forces you to a big exit.
If you don’t make that exit bogey, the portfolio effect might force you into an uncomfortable position: Venture capitalists aiming for a 10x return can torpedo smaller exits in pursuit of a “go-big-or-go-home” approach. Investors have a portfolio to manage, but you do not: You’re all-in on this hand. You can limit the risk of misaligned interests, and increase your flexibility, by raising only the money you need and managing the post-money valuation to better balance dilution against upside.
There’s a lot more room available to make everyone happy, founders and investors alike, if the last round’s post-money valuation is $25 million versus $250 million. In the latter case, your investors are likely to expect you to hit a billion dollars — or die trying.
There is such a thing as too much money.
Everyone wants a gigantic success and a big exit. But taking excess capital to achieve that outcome leads to a brittle, inflexible company. There is such a thing as too much money.
To keep your company open to multiple kinds of success, you need to decisively govern the amount and character of the money coming in. You might still end up growing a unicorn (like Atlassian did, with its $0 in venture funding on its cap table). But if a unicorn is not in the cards, the decision of where to drive your company is much more likely to remain in your hands, and the return you’ll get is more likely to be something with which you’ll be happy.
Capital efficiency can help create better optionality for your startup. Furthermore, the constraints of capital efficiency can actually help your company grow in a rapid, healthy, controllable way.

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