The Hidden Costs of High Valuations
Encouraging founders to raise less VC feels like telling people to eat spinach when everyone in the startup world is munching on Shake Shack, but it has benefits:
🥇 Better partners
💰 Smaller preference stack
🛣️ More Options
😬 Less stress
💸 Self-control
⏱️ Time to grow
VCs telling founders to consider smaller funding rounds is counterintuitive.
“Don’t VCs want the highest markup?”
“Don’t VCs want their portfolio companies to have more money in the bank?”
“Doesn’t it validate his/her investment?”
It’s more complicated …
🥇 Better partners
Optimizing for price makes sense in the moment, but don’t prioritize short-term transactions over long-term relationships.
Find a VC aligned with *your* vision who will pay a fair price and don’t overthink things.
💰 Smaller preference stack
The more you raise, the more you have to return. Are you *sure* you want to eliminate your ability to sell the company for $100M and take home $25M-$40M (assuming a co-founder, VC, and option pool) after 3–5 year’s work?
🛣️ More Options
There are a small number of firms that can do big rounds. A dozen “No’s” might make it harder to raise the next round. Focusing on stage-appropriate capital increases the number of firms that might invest. Preserve that optionality — you might need it!
😬 Less Stress
Raising at a maxed-out valuation can create tremendous amounts of stress. Putting undue pressure on yourself to act like a $200M business when you have $5M in revenue can create unforced errors — like spending uncontrollably on marketing.
💸 Self-imposed self-control
Smaller funding rounds are a good way to limit wasteful spending, which often leads to unnecessary dilution. Portion control is a key to weight loss and it has benefits in startups as well!
⏱️ Time to grow
Most startups converge around industry multiples, and by raising at a high price now, you’re in effect borrowing from your future value. It can be like buying a big house with a lot of debt — fine until you lose a job or your interest rate adjusts.
🕳️ Avoidance of potential down rounds
Trying to live up to a prematurely high valuation is a self-imposed hurdle. Down rounds don’t just hurt shareholders; it hurts employees with options that are “out of the money” and can be demoralizing all around. Avoid them!
A few closing thoughts:
Before raising, always ask if you are raising for ego/validation purposes, sending a message, or genuinely need the capital. There’s no one right answer, but be honest with yourself!
If you can raise a big round today, you can likely raise at an even higher, less dilutive valuation tomorrow! Don’t make capital your first choice — @ScottBelsky said it best, “Resources are carbs, resourcefulness is muscle.”
There’s no such thing as free money. Sure the $50M on $200M deal is mathematically “better” than $25 on $125M, but it can eliminate a huge swath of exit opportunities in the highest-probability range of outcomes. That is the actual cost of the extra $25M.
Getting a slightly higher valuation feels right at the moment. Still, you may pay for that premium in the form of a decade-long personality conflict with your investor or the inability to sell your company for what would be a life-changing sum. Is it really worth it?
Always remember:
Venture capital can be deadly!
We’ve written about how and why extensively:
