When They Are Throwing Money At You

Companies get hot. And investors start throwing money at them. Entrepreneurs get calls and emails all day long from investors wanting to invest. After a while, the entrepreneurs start to think that they should take the money. Not because they need it, but because they figure if people are throwing money at them, it's probably a good idea to take some.

Given that we are in the "throwing money at entrepreneurs" period in web investing, I thought I'd say a few things about this.

1) Don't take money you will never ever need. No matter what price and terms the money is offered, it has a cost. Money is never free. If you have absolutely no need for the money then don't take it.

2) Money lying around tends to get spent. It is a very hard mental exercise to sock away a bunch of money and forget about it. If you think you'll just raise the money and put it away for a rainy day, just know that will be hard to do. And if you have team members who have ideas about how to spend/invest it, it will be even harder.

3) If you need the money, then raise it now. I have not seen a better time to raise money for web startups since the late 90s.

4) If you don't need the money, but have some ideas about how you could put it to good use, then do some hard work on those use cases. Flesh them out. Size them up. Build a plan. Then raise the money and execute the plan.

5) If your company doesn't need the money, but you sure could use some, then think about selling some secondary shares. But don't sell a lot. Maybe 10-20% of your position. I've come to believe that entrepreneurs putting away some money to protect the downside is largely a good thing. It allows them to take bigger risks and play for more upside.

6) Do not let the fact that your competitors are raising money impact your decisions around fundraising. I have not seen one company beat another because they raised more money. Most of the time it is the other way around. The overfunded company loses most of the time.

7) Don't let this environment make you crazy. I understand the problem. We get calls and emails too. It is tempting to get caught up in the nutty market we are in. Focus on your business, your product, your team. Put all this stuff in perspective and don't let it take you mind off what matters. You need money to build a business but the money is a tool, the business is the mission. Focus on the mission.

The financial markets will come and go. Sometimes investors are focused on the downside. Other times they are focused on the upside. Right now it is the latter. But someday it will move to the former. That's how financial markets behave. End markets, the place all businesses get paid day in and out, don't whipsaw you like financial markets. Build a product and sell it to the end market and get profitable and create lasting sustainable value and you'll get to the pay window on your terms and your time frame.

#VC & Technology

Comments (Archived):

  1. Rick Bullotta

    The current climate seems to be an interesting mix of not only ready availability of funding, but better early-stage valuations that are allowing startups to take on a bit more than they might have a couple years ago, but without giving away an unreasonable percentage ownership or controlIs it fair to say that if you’re confident in your execution plans, it is almost always unwise to take too much too early? It would seem that since money is “cheaper” (from the point of view of existing investors/stakeholders) in later rounds with increased valuations, it would seem generally not a good idea to raise more than you need with those “pricier” shares.Of course, this is always offset with the desire to focus on execution and not be distracted with fundraising later on when you’re really hitting your stride…

    1. Brett Topche

      The problem with this theory is that the good markets are by no means permanent. I have seen a lot of companies get stuck when they focused too much on early dilution and then the financing markets were much tighter when they went back out.Your last point is also key – fundraising can be a lengthy, time-consuming process. Within reason, I would generally rather take more dilution and have my CEO 100% focused on running the business instead of fundraising going forward.

  2. kagilandam

    Money is never free … but why these financial market people are throwing money like free ?

    1. fredwilson

      because they have a lot of it and they have to put it to work

      1. sigmaalgebra

        My meager understanding has been that in recent years VCs have raised relatively little money and, net, now have less money to invest than at any time in the last 5-9 years. Not so?Maybe the LPs are saying to ‘put the pedal to the metal’?Maybe investors see the low interest rates and inflation coming and are especially eager to get some high ROI?

        1. fredwilson

          there is so much money in the market right now that is not coming from VC funds

          1. yofrez

            It also seem like many of the well known VC funds are raising really big funds and can afford to overpay.

    2. Jrh

      Because the first people in usually make lots of money even when they know it’s a bubble.

  3. Dan Cornish

    Thank you for truth telling.

  4. kidmercury

    gotta solve the bubble problem. the only way is through monetary policy reform. ignorance is futile.we gotta find a way to bet on this bubble issue (maybe form a market that turns into a bubble about the bubble!). so many youngsters denying this is a bubble, getting mad if you tell them this is a bubble…..pfft. amateurs. let’s put some money and ego on the matter, i’m always up for some free victories.

    1. kidmercury

      btw you guys seen the latest video from porter stansberryhttp://www.stansberryresear…video quality sucks, mainly just a dude talking with text on the screen, violating powerpoint rules everywhere. but in the second part he talks about competing currencies and the loss of credibility in US dollars to settle transactions. same propaganda i’ve been sharing for years, but in one straightforward, poorly designed video.anyway, let’s use the bubble to solve this problem. plenty of companies out there in a good position to do so, all it takes is a willingness on the part of entrepreneurs and investors.

      1. sigmaalgebra

        As best I can tell from the readily available information, the main cause of the housing bubble and the subsequent Great Recession for the US and much of the world was Congress talking Fannie and Freddie (F&F) into guaranteeing mortgages made with low standards. Then, when some lenders saw the situation, they saw how to ‘game the system’: So, write some ‘adjustable rate’ mortgages deliberately to unqualified buyers. Sell the mortgages to someone else with everyone counting on F&F to guarantee payment. Do enough of this in some neighborhood to raise house prices.Then start raising the adjustable rates. When the buyers can’t pay at the adjusted rate, ‘refinance’ the house in a way that the mortgage company gets the value of the increase in the house price. Then do it over again.Monetary policy may have helped the bubble blowing, but key was Congress asking F&F to guarantee the bad paper.When the bubble was expanding, there was perceived ‘wealth’ in the houses. So, that ‘wealth’ was close to money in the sense of the ‘money supply’. Indeed, people would get home equity loans and spend the money on vacations, etc. As we know, in simple terms, too much money can cause inflation, and the housing bubble likely did. Then when the bubble burst, the ‘money’ in the houses was destroyed and we got deflation. Well, a credit economy has a tough time with deflation: Borrowing money, even at 0 interest, means paying back more ‘real money’ than was borrowed. For a business, during deflation, they can have a tough time getting the revenue to pay back the loan. So, no loans, and that’s a little like driving a car with no oil in the engine.So, to stop the deflation and get the economy going again, need to replace the ‘destroyed’ money, i.e., put oil back in the engine. Hopefully when the party gets going, Ben will take away the punchbowl.Just what a country should do about a ‘central bank’ seems quite unclear.The money supply is supposed to be a ‘control’ or ‘steering’ mechanism on the economy. Why ‘steer’? Even if we are driving down a smooth, straight road, we still steer at least a little. If we just lock the steering wheel in one position, then we can’t hope to stay on the road for long.History shows that it’s possible to have bubbles even without a central bank.It would help if the economists actually had some decent understanding of some real economy.

  5. LIAD

    I know its part of the Wilson enlightenment strategy to allow it, but, I feel such disdain for Business Insider when I see them publishing AVC posts verbatim, in near real-time after they’re published here, and then pumping them for ad revenue.The lack of innovation and bottom-feeding – makes me want to chunder.

    1. kirklove

      +1 for using chunder. Great word.

      1. fredwilson


      2. kenberger

        thought it belonged to Men at Work.

    2. fredwilson

      i want my ideas to get out there via as many channels as possiblei could care less who gets paid for them

      1. LIAD

        be that as it may. I still feel the same way.They ‘syndication’ of your posts is all well and good for amplifying your message, but I am sure you wouldn’t be pleased if they began to cannibalise AVC.com’s audience.It hasn’t happened, probably for reasons of audience loyalty and the syndicators being inept at creating an engaging experience, but if things changed and AVC traffic was tanking and going elsewhere to read your ideas – would you still not be bothered?

        1. fredwilson

          not as long as they all carried the comment thread. that’s the unifying part of the community

        2. Nik Cubrilovic

          They are his words and his message so they can’t cannibalize the audience.Fred doesn’t run a media company.

          1. LIAD

            you’re right.it’s more a religion ๐Ÿ˜‰

          2. Nik Cubrilovic

            next you will be finding AVC articles in hotel room drawers

          3. CJ

            Heh – I’m travelling next week, maybe I’ll leave a few!

          4. jonathanjaeger

            A Voracious Cult?

      2. RichardF

        and I don’t care now that Disqus comments are not ported over there ๐Ÿ˜‰

        1. fredwilson

          they are running this disqus thread at BI now

          1. RichardF

            Blodget must have just switched it on again to wind me up! It wasn’t there earlier!————————————Comment Posted via AVC

          2. CJ

            FWIW – I’m not a big fan of those guys either. Tabloid journalism at its finest IMHO.

          3. RichardF

            I don’t read it Malcolm, for that reason and it annoys me that if they are running one of Fred’s articles over there and the Disqus comments are also posted along with it then it makes it look like I read BI and take part in discussions over there.

          4. fredwilson

            that’s not how i look at ityou are reading the post at AVC and participating in a globalnetworked conversation

  6. kirklove

    “If you need the money, then raise it now. I have not seen a better time to raise money for web startups since the late 90s.”Sure starting to sound and feel like a bubble that’s inevitably going to pop. Your OREO tell at work again.

    1. fredwilson

      what movie do i need to watch to grok this “oreo tell” thingy?

        1. DonRyan

          Great movie.

        2. fredwilson

          just ordered on netflixcan’t do streaming unfortunately

          1. Dan Sweet

            can’t believe you’ve made it this far in life without Rounders! enjoy!

          2. fredwilson

            i will rectify that failure asap!!!!

      1. Evan

        At one point, Rounders was the highest grossing indie movie ever.

      2. Tereza

        +1 for using the word “thingy”.+2 if you use the word boo-boo.

  7. RichardF

    Really smart practical advice in the current market. Must be a great time to be a web entrepreneur in the US.I’d just add if you are going to take money from new investors, try hard not to give a board seat away as well. Might as well have your cake and eat it if the market is that strong!

    1. Harry DeMott

      I would go the other way on this.Take money from new investors – but only those that you would be happy to give a board seat to.If you are going to take on a financial partner – they might as well be a true partner in your business and not just someone you view as having no other value than their check. If that’s the partner you are bringing in – chances are it will not end well.

      1. RichardF

        I think as a principle you are absolutely right, you want investors who can add value particularly up to Series A. Beyond that unless you are talking about someone like Ben Horowitz coming on board, from an entrepreneurs perspective I’d say practically you want to keep those board seat numbers down.Congrats on Pandora getting to the finals of the Crunchies again by the way.

  8. Harry DeMott

    When the government pushes down interest rates to the point where debt instruments are pretty much an all risk no return situation – people turn to riskier ventures looking for equity like returns. Combine that with the lottery like returns for some big winners (Facebook, Groupon) that are not very old – and you have a great environment to raise money if you are a start-up.Markets are kind of like the banks. They lend you money when you don’t need it and know you can pay it back and they disappear when you actually do need it (see recent activity in small business loans – it’s non-existent) and might not pay it back.Well that’s where we are in funding for start-ups. There is enough professional money going around to fund most of the good ideas out there – but the market has weighed in and added fuel to the fire.I really do believe in taking more money when available – because you never know when you are going to need it – and when you need it most – that’s usually the point where the market is shut off. I agree with your points for sure – it is hard to let capital sit idle in the bank earning 0% – but it is better than trying to scrounge up a round when the market has turned – as it surely will.Take some $ off the table – pad the bank account – get a discipline CFO in there – and push forward.

    1. ShanaC

      Yes, but I am sitting here thinking that this is a market of no discipline.

    2. Donna Brewington White

      “get a discipline CFO in there”Yeah, because isn’t having too much credit about the same as having too much money — in effect…and wasn’t a lack of discipline a huge part of what got us into the recent crisis? And wasn’t that like…yesterday?

  9. Dan Ramsden

    Another one to add to the series of essentials: 1) VC math problem, 2) Suster’s 5-part series on angel investing, 3) this. There were some others along the way, but these stand out.

  10. sigmaalgebra

    When I was riding around in an airplane jump seat and talking to pilots about their work, I learned a little about how the history of flying on a wing and a prayer led to many smoking holes and, then, high discipline in aviation. Actually, anything less than high discipline quickly brought back high discipline.The analogies with starting a business have to be close enough to take seriously.So, there are some rules:Before taking off, do basic flight planning; here is a simplified description: Look at weather at the origin and all along the route. Also considering payload weight, pick altitude and speed for cruising. Consider that might have to fly around bad weather. Also consider what air traffic control might mandate. In case can’t land at the destination, pick a suitable alternate airport, far enough away from the destination to have relatively independent conditions. Calculate reserve fuel and its weight. Then calculate fuel burned to the destination considering all the weights involved.At the origin, check runway length, wind, air temperature, and any obstacles have to clear after takeoff and be sure can takeoff safely.Walk around the plane and look for any problems, knowing that airplane maintenance is already done with high discipline.For all important instruments, radios, etc., make sure have two good instances.Have very carefully developed checklists, go through them seriously, carefully, and deliberately item by item.I never saw a pilot use the reserve fuel and other safety efforts as an excuse to relax discipline, e.g., fly around sight seeing.”There are old pilots and there are bold pilots, but there are no old, bold pilots.”Otherwise, there is similar advice:(1) Measure twice, saw once.(2) In high winds, stay back from the edge of the cliff.(4) Squirrels put away nuts for the winter because the ones that didn’t didn’t have descendants.(5) It’s smart to “save for a rainy day”.(6) The first little pig built his house of straw, the second of wood, and the third of bricks. When the Big Bad Wolf came, all three pigs ended up in the brick house.(7) Since “When you are out of cash, you are out of business.”, it’s just crucial to do some very careful planning to be quite sure just never run out of cash, for a startup, at least as long still have hope for the business.Ship design and operation also developed considerable discipline for similar reasons.Most serious activities have norms of high discipline.So, with these analogies, for a startup without lots of assets to use as collateral for bank loans, a ‘cash cushion’ is just smart business.Wasting the money because it is in the bank would be a gross lack of discipline in strong conflict with other serious work and even ‘The Three Little Pigs’.If letting the fact that there is a lot of cash in the bank be widely known in the office would risk some office water cooler revolution demanding to spend the money, then just keep the true cash level a secret. Since, sure, the bookkeeper, accountant, and office manager will likely know the balance of the usual checking account, just set up a second account where only the CEO knows the balance?On how much cash cushion to have and on how to use it, here’s more: Of course, an organization of more than just a few people will have to have budgets by the quarter and the year, by departments, etc. and maybe some financial plans for several years.Okay, a common approach to such budgeting and planning is an electronic spreadsheet. Suppose we have one and have, say, one column for each month, with time increasing from left to right. Then have one row for each place to spend money, each place to get money, each decision about what to do, e.g., rent space, buy servers, hire people, etc., and for ‘exogenous’ things that might happen, e.g., interest rates.So, there’s a big spreadsheet.Now it is common to ‘tweak’ the decision and exogenous inputs to do some ‘what if’ analysis.Then, might fix the exogenous inputs and use the usual spreadsheet optimization feature (possibly based on L. Lasdon’s generalized reduced gradient software) to determine the decisions to maximize, say, the value of the business at the end of the plan.And, might fix those decisions and use a random number generator to generate values for the exogenous things, run ‘scenarios’ by ‘recalculating’ the spreadsheet, say, 2000 times, and get probability distributions of all the important quantities of interest.So, it sounds thorough. Maybe it is.But, in the end, we found some fixed decisions to apply over the whole planning period when we know that there will be unpredictable exogenous effects during the planning period. It sounds like in football on first and ten calling all four plays at once and continuing with those plays no matter what happens in the interim. No quarterback would do this and, instead, calls the second play only after seeing the results of the first, etc.Of course, our spreadsheet should do this also.So, how to do that?Yes, there is a way! Thank you R. Bellman! The way makes each decision using all the information available at the time the decision is made and, among such ways, achieves the best possible results. To do better, need a crystal ball that can actually see the future. Yes, it is possible to argue that all the standard Wall Street portfolio optimization calculations, e.g., Black-Scholes, are special cases, although for each such case there are more efficient special techniques.The bad news is that Bellman’s technique can consume some absurd amount of computer time. The good news is that enormous parallelism is available along with many techniques to make the calculations faster. E.g., R. Rockafellar at U. Washington is an expert. The USAF has thought highly of his work!Yes, recently an Intel engineer announced that processors with 1000 cores should be feasible and effective. Okay, if want to know what might do with several thousand such 1000 core processors, then it would be to apply Bellman’s work to such a business planning spreadsheet!So, for what we are going to do with 1000 core processors, we now have at least one item on the list!In particular, if we could find enough good data, then we could be fairly sure about how much money to keep in the bank during the period and, really, evaluate funding options and much more.Yes, in part the technique is a solution for problems where we do not yet have enough input data (or enough computing). Still, at times the technique can be powerful in practice now.How ’bout that!

    1. fredwilson

      this is a blog post. you really should post it somewhere

      1. sigmaalgebra

        Sorry, feel free and encouraged to delete it.

        1. Mark Essel

          I think Fred means it’s worth it’s own post, maybe a summary and link to it would be awesome too.I started losing it at contingent exogenous spreadsheets that simulate the future.

          1. sigmaalgebra

            Thanks for clearing that up! Praise is always welcome!But, gee, ‘business planning’ borrowing from standard FAA rules on reserve fuel and ‘The Three Little Pigs’ can’t be very good!Yes, I was outlining the canonical approach to ‘best decision making over time under uncertainty’. That there actually is a way to do that is curious. The topic is not really easy, but such financial planning spreadsheets are a surprisingly good way into it.If had enough data, computing, software, etc., then that topic should be a good way to address the questions in this thread, e.g., whether to take equity funding, how much ‘cash cushion’ to have, etc.Some products suddenly turn into worthless pumpkins at midnight: E.g., tough to sell an airline seat after the plane takes off or a hotel room the next day. So, as we move closer to midnight, minute by minute how much should we charge? Bellman’s topic is one way to address this. Then can also try to use the topic to make progress managing ‘supply chains’. As a grad student, I gave a few lectures on the topic, and later another student used the topic in his dissertation on how much water to release from a dam when considering uses for the water and the uncertainty of the rain!So, the topic is quite general and has many possible applications. Sometimes the computing is quite reasonable, and other times thousands of 1000 core processors won’t be enough.If want more on Bellman, he was Richard Bellman and was one of the most active researchers of the last century. As I recall, he had professorships in math, engineering, and medicine, all at the same time — busy guy.

        2. fredwilson

          you misunderstand my pointi’m fine with the commentbut it’s a full blown blog post and could benefit from being one

          1. sigmaalgebra

            Sorry to misunderstand.

    2. JLM

      You forgot to ascertain “winds aloft” — headwind or tailwind? LOL

      1. sigmaalgebra

        Right! As inhttp://www.youtube.com/watc…I “left out a bunch of stuff!”.

    3. David Noรซl

      That’s the first aviation analogy I see here on Fredland, loving it.

      1. JLM

        Aviate, navigate, communicate.

  11. PhilipSugar

    Points 1 and 2 are great. It is so hard to get people to not spend money when you’ve raised a ton. As an employee you can produce much more impressive results if you overspend. That really expensive marketing initiative that cost three times more than you really needed? You will be paying that back with interest.

  12. whitneymcn

    So many quotables in this, but I have to go with the simple, classic “money is never free.”

    1. Tereza

      that’s like….a little black dresscan’t go wrong with that one!

  13. Motoare Electrice

    Thanks a lot for these pointers, i love the “money is never free”part cause it’s so tempting sometimes to just take the money.

  14. DonRyan

    Enormous amount of “me too” investing going on which is where this money is coming from (as well as dismal fixed income returns). It will all end poorly.

  15. reece

    Sage advice.It’s hard to say no, but discipline wins.

  16. William Mougayar

    Words of wisdom truly spoken. I’ll table this as Fred Wilson Warning #4.Throwing money at the entrepreneur makes the entrepreneur drunk. People don’t make good decisions when they are drunk, but they still make decisions during these moments.Too much money can also lead to the fat startup syndrome.

    1. Tereza

      I must think this depends on the experience of the entrepreneur, no?Like our grandparents (great-grandparents?) who lived through the Depression. Because they knew what it was like to be hungry and remained miserly for their lives.Most seasoned people I know, having seen some darker days tend to set aside some reserves…

  17. dave_nyc

    Thank you for an enlightening post, as always. I especially agree that the temptation to take money because others are doing so is not best for entrepreneurs and businesses in the long term – however difficult it may be.

  18. Brett Topche

    To a limited extent, I have to disagree with #6, particularly when you’re talking about B2B companies. I have definitely seen cases where companies that raised more money were able to establish themselves as the market leaders on the strength of a much larger sales and marketing budget (allowing them to get into every “bake-off” in the market and thus become the leader even if their win % is just OK vs. competitors who had to pick their battles). Also, substantially larger budgets can lead to much larger engineering teams, making it harder for less funded companies to remain feature competitive.This isn’t always the case, and I don’t recommend taking money just to take it, but if you’re in a competitive space, you have to make sure you have sufficient resources not to be left behind by a fast moving market.

    1. jlemkin

      It’s a good point Fred’s post is terrific but may be slightly consumer biased.

    2. Kevin Burton

      If the company is overfunded, it’s going to count against them … however, if you’re UNDER funded, that’s also going to count against you.I think the point is , don’t rush into being overfunded just because your competitor is overfunded.The only variable you can control is your OWN execution. In my experience. My wins/losses were always under my control. My competitors didn’t enter into the equation that much.

  19. jpantuso

    “I have not seen one company beat another because they raised more money. Most of the time it is the other way around. The overfunded company loses most of the time.” is an interesting observation. Some examples those of us in the midst of fundraising could cite would be really helpful. Anyone have any good ones, besides Webvan and Pets.com I mean ๐Ÿ™‚

    1. fredwilson

      Gowalla raised $8mm at the same time Foursquare raised $1mm

  20. Matt Meeker

    Great advice. The best advice that is true in good times and bad is…”Focus on your business, your product, your team. You need money to build a business but the money is a tool, the business is the mission. Focus on the mission.”Perfectly said.

    1. adamwexler

      that was my favorite line as well. money often clouds the focus. if you’re trying to change the world, don’t let money be the driving force. it’s there to help…not harm.

      1. Pogoprice2010

        Hi, am a first timer here so please bare with me, i will just like to add If your trying to change the world for better, I believe money is a very important tool that helps you achieve that mission, but without it, your impact is very limited………

    2. fredwilson

      thanks, it sounded good when i wrote it. it felt good saying it too.

  21. Boris Fowler

    I wish people would throw money at me. But at the same time, money is dangerous and I agree with you, Fred, that taking money you dont need is not a smart move.

  22. Ken Hillyer

    Awesome post (!!)Surprised to see the comment thread devoid of Twitter corollaries though…

    1. fredwilson

      twitter ran for a year on $500k, Ev’s investmentthen ran for another year on ~$3mm, our investmentthey raised the money when they needed it all along the way

  23. Joe Gold

    Fred, When do you think we are right now in terms of timeline compared to dot-com? 1998? 1999?

    1. fredwilson

      march 2000 ๐Ÿ˜‰

      1. daryn

        that’s not funny.:)

      2. yofrez

        I understand why you feel some companies are being overvalued right now, but I don’t see strong evidence for a 2000 like bubble. Many of the tech leaders like Facebook, Groupon, Zynga, Linked, and Twitter all have growing or substantial revenue and rightfully should IPO at handsome valuations. Many of the new startups that are being overvalued, due to a large supply capital, have great teams who have executed in past ventures. Many of them will fail, but were aren’t seeing the 2011 version of pets.com are we?

  24. baba12

    Interesting post after the post about boot strapping and self funded ventures. Wonder how that plays into this equation.On another note Mr.Wilson do you plan on being at this evenings shindig at the Soho bar…

    1. fredwilson

      no, i have had a longstanding dinner engagement that i cannot get out of

  25. ShanaC

    Why in your opinion do overfunded companies usually lose?

    1. fredwilson

      because they think the things money can buy you are the important thingsand they aren’tstrategy, creativity, intuition, and execution don’t get better justbecause you have a ton of money in the bank

      1. ShanaC

        It can buy talent…I keep running into that issue finding a partner as I learn to code. I know already I’m not going to be that good, I don’t have the patience. And I know a number of very talented people – but stability is important to them.

        1. Donna Brewington White

          You are right, it can buy talent. And that’s uber-important.But even there I’ve seen people act more haphazardly in hiring when cash is flowing too freely.

      2. susequinn

        And time to play too much office ping pong. I’m underfunded, have no time for ping pong, and don’t even have a ping pong table. In fact it’s not in the 5-year plan.

    2. Scott Barnett

      it can cause you to get lazy, sloppy and not think important decisions through. I was just talking about this the other day – when I first got out of college and my radiator blew, I had to figure out where I was going to get $250 to pay the mechanic. It was an important and stressful decision that took several days. When I had to take my car in for service recently, I was really annoyed it was 500 bucks, but I simply handed him my credit card. It was a no brainer decision because I *have* the money and *want* the car fixed immediately. You should have just enough cash in a business that you are sweating the small stuff, ESPECIALLY when you are pre-revenue and searching for a repeatable sales model. It makes you think hard about all your decisions, and you only make the most important ones. If you’ve got lots of money in the bank, the attitude changes to what things you *want* and you want them now – so you spend vs. think.

      1. ShanaC

        So is there no way to provide checks and balances on this behavior?Edit: Basic grammar mistake because I didn’t think before typing…

        1. Scott Barnett

          Sure there is – but it’s hard to overcome the emotional aspects of money. Look at the saving rate in the US – it’s exceptionally low. When we (as a general rule) have extra cash, we tend to spend it vs. save. Multiply that by the number of people in a company that want to “invest” in something new. Very hard to say no, especially since many of the ideas will be good ones. Quoting from Fred’s post:1) “Money lying around tends to get spent” 2) “Build a product and sell it to the end market and get profitable and create lasting sustainable value”So, the checks and balances I would say is Do #2. If #2 requires money, spend it. If not, and you have money, see #1.

    3. David Noรซl

      I was part of an overfunded company that throwed money at problems. More money and people does not equal shipping a product faster, in my experience.

  26. $2814448

    Priceless advice. Understanding the difference between need and want is more difficult when you are dealing with VC money. Thanks Fred!

  27. Vlad Azimhodjaev

    Great post. Although I think that it becomes a common practice to raise more capital to add some liquidity and take away pressure from the founders. They perform better that way.I really think it is okay to raise money, so that founders can buy a car or something. Hell, Zuck keeps raising rounds after rounds and I doubt fb needs that cash to hire or to expand.

  28. zackmansfield

    “Money lying around tends to get spent”Love this – it’s so true.I’ve heard a saying that the best entrepreneurs are like cockroaches – because they’re tough to kill and they will eat almost anything. Cockroaches can survive some of the worst conditions imaginable.Yet it’s hard to be a cockroach when you live in the splendor of post-funding bliss. With the frothiness going on in web investing today, it’s harder than ever for cockroaches not to turn into [whatever the opposite analogy would be]

  29. paramendra

    In short, build a real business.

    1. fredwilson


  30. Mrshafrir

    Money gets spent — love that. Was out recently with my class at MIT Sloan visiting a bunch of Silicon Valley startups. Was at one that had ~10 employees, great founding team, strong early PR, etc, but seemed to be struggling to find a product that got both traction and revenue.Team has raised low 8-figures but the CEO said he wished he could run the company as if they hadn’t raised a single dime…

  31. Kevin Burton

    I REALLY love #6 btw….”6) Do not let the fact that your competitors are raising money impact your decisions around fundraising. I have not seen one company beat another because they raised more money. Most of the time it is the other way around. The overfunded company loses most of the time.”I’ve been saying this for years. If you’re overfunded it’s CURSE not a blessing.When I see an overfunded company .. my first thought is that “it’s over” and 9/10 I’m right.

  32. Dave Pinsen

    “The overfunded company loses most of the time.”That would have seemed counter-intuitive to me years ago, but after seeing it happen a couple of times, it makes sense. At a start-up I worked for once, we saw two much better-funded (i.e., >4x as much funding) start-ups enter the same niche. Long story short, the two competitors are no more, and the company I worked for is still in business.

    1. Tereza

      I agree.There is an X factor that paranoia brings to the table that has a marked effect on our effectiveness and efficiency, if channeled correctly.

      1. Dave Pinsen

        There can be a downside, though, if potential partners aren’t sure how long you’re going to be in business, but being able to navigate uncertainty is part of the deal.

        1. Tereza

          LOL. True!

        2. Tereza

          BTW dave — i haven’t seen you post anything on Honestly Now yet. Surely you have a burning question?I’ve been tearing up much of the day, some of these are FUNNY.

          1. Dave Pinsen

            Oh, sorry, assumed it was a woman-only thing. A little swamped tonight and tomorrow, but will try to check it out Friday.

          2. Tereza

            there’s one catch, dave.if you don’t register with a profile pic, we put one in for you. it’s either a girl kitten, a boy kitten, or a very adorable trannie kitten.

    2. LIAD

      having too much cash can make you fat and lazy.to win you need to be hungry. Not on the breadline, living hand to mouth hungry – but still hungry.complacency is death – and it’s hard not to be complacent when you have a squillion bucks cushion in your back pocket.

      1. Robert Frunzke

        “complacency is death – and it’s hard not to be complacent when you have a squillion bucks cushion in your back pocket.”That should be engraved in stone (hope the grammar is correct, in german “Das sollte in Stein gemeiรŸelt werden”) ! ๐Ÿ˜‰

    3. David Noรซl

      +1 Dave, I was part of an overfunded company in 2006/7. It’s gone now.

    4. muratcannoyan

      I certainly believe that like Liad said that complacency is death but I can’t imagine that when you get over funded you turn stupid and start making irrational choices. After all, funding is a means to an end. I wonder what other factors contribute.

  33. Donna Brewington White

    I can’t believe we are here again. So soon?(BTW, thanks for this sober, sage advice. Belongs on the Vintage Fred list — or the book by the same title — just kidding. You rock.)

  34. Dave W Baldwin

    Reminds me of the stat from a few yrs. back where the truck owned overwhelmingly by the most millionaires was the Ford F-150…to persevere, you must learn to spend wisely.Somewhere in the equation, the interested buyer is going to notice the company doing more with less.I would look at considering the additional dollars if it made sense on the marketing side and work out the details before additional dilution.

  35. giffc

    “Given that we are in the “throwing money at entrepreneurs” period in web investing”It is funny, if you talk to investors or listen to the press (who talks to the investors), you would think money is just hanging on trees right now.But if you go out and talk to entrepreneurs in the trenches in NYC, they will tell you how damned hard it is to raise money right now. There are certainly “it” companies like GroupMe where investors are doing a pile-on, but those are exceptions not the rule.

    1. dorothy_mcgivney

      I agree with you. I’ve been looking to get just a bit of funding and I’m not saying it should be handed to me on a silver platter, but despite my efforts, I haven’t gotten any real interest from investors. I’m not complaining – I just think you’re right. This is the rule, not the exception. At least from where I’m sitting (in a co-working space in Brooklyn with a bunch of other startups).

  36. Jacob Thomason

    Excellent advice! Our company is in a unique situation where an influx of funds could really boost growth through market penetration and feature attraction. However, we know we can probably get there fine without it and don’t have to give out the equity as well. Thanks for this great article, things to keep in mind.

  37. Noam

    If you can raise money at an absurdly high valuation with little effort, take it, sit on it, and invest it when opportunities arise in due course. They always do. If folks lack the discipline to do that, how would they have discipline to manage a company effectively? Effective company builders have discipline to say no to the wrong customers, wrong investors, wrong spending. If you have discipline, accepting super-cheap money from passive investors in bubbly times: no-brainer. The idea that you’ll always be able to raise capital at a valuation in the ballpark of reasonable: bunk. Capital raising can be super-costly not just in interest/dilution but in time. Ability to close a round from inquiring investors at very little dilution and at very little time incurred is a double win. Of course it doesn’t benefit VCs ๐Ÿ™‚ The VC model of financing only 12-18 months per round may result in highly dilutive rounds from time to time unless the investing community is optimistic and cash-rich every year or two. Granted having little cash can focus a team well on near-term milestones and profitable activities. But if you have fire in the belly anyway and can accept 5 years worth of operating cash for a few points of common: to decline would be insane.Surplus cash can dull team motivation due to cushy pay/perks or stock options at excessive valuations. No problem: (1) make C-level cash pay and perks modest and transparent; (2) base bonuses/incentives on operating goals beyond equity price.If you cash up now, you might buy out your most attractive profitable competitor when times get tough. They will.

  38. jack

    It’s like this thing I’ve heard before: “there are two types of people out there; the good kind, and the bad kind.”

  39. calabs

    I’m a 35yo independant software developer with broad experience – both strong javascript/css/html and also good knowledge of nosql and cluster computing (via hadoop, couchdb, and both gae/java). Before going independent I worked for HP, Blizzard, Citysearch (alas) and one early startup, all as senior programmer or tech lead roles (well, at the startup I was also 50% product).I have a portfolio of 16 ideas, two strong front-runners, ranging from electronic devices to internet software. I have good contacts in the LA/OC java enterprise space, although my interest are mostly consumer oriented. My degree is in physics from UCI if that matters. I have money to last for a year, including decent hosting.My general philosophy is that I want people to be really, really happy when they find out one of my products is available – this kind of delight is rare, but its what I’m going for. This is what drives meaning for me: making others happy. I do this now with custom software for small business (which is great because I get to work so closely with the customer) but I’d like to do it on a larger scale both through open source contributions and a startup.I recognize that this is a great time to begin. (Actually this is more of a second chance for me, as I turned down a private investor at age 20 while still getting my degree – this was in 1997 when I was doing web work for the Office of Academic Computing at UCI (yes, the same OAC Roy Fielding worked for). In some ways I’m glad I didn’t leave school then, because I’ve grown a lot in these 15 years.)So it’s fair to say that I have two important ingredients: great ideas, and great technical ability. I also have some money – enough for about a year, maybe two if I go Ramen. Hosting is dirt cheap these days – especially with Google App Engine, which I’ve been heavily using for a year, so it’s not like I’d have to spend a lot on that.The thing is, I feel like I’m missing something, but I’m not exactly sure what. I really enjoy this blog – not just Fred but all the participants, so I figured I’d just take a chance, be humble, and ask you guys. I’m hungry to begin, and I need guidance. Thanks.

    1. fredwilson

      i’m not sure you are missing anything except, perhaps, some companyfor the ride aheadPaul Graham prefers two or three person founding teams to one person teamsi don’t recall his logic, but i know that he doeswe’ve seen a one person team work. that’s how Joshua Schachter builtdelicious, for examplebut we’ve also seen two or three person teams work more oftenso i’d encourage you to think about who you might be able to get tojoin you on your startup journey and whether that person would make itmore fun and ideally more successful as well

      1. RJ Johnston

        Do you have a post on here that talks about founder equity split ratios, paid advisor option levels and early employee, or work for free until we’re funded employee, option recommendations?Ty

        1. fredwilson

          yupi’ve covered a lot of that territory on mba mondayshttp://www.avc.com/a_vc/mba…

      2. calabs

        Thanks Fred. I will think about possible fellow adventurers – on both the axis of “fun” and “success”. ๐Ÿ™‚

    2. JamesHRH

      Impressive that you are mature enough to request guidance. Really.I have worked with 15 startup entrepreneurs/teams, helping them add missing pieces to their big ideas (market positioning, funding, recruitment, etc.) and move them forward. Almost always, in my experience, the startups in my working life that were stuck or dysfunctional had a founder or founding team that lacked maturity, trust in others or confidence in themselves.I would suggest that you review your personal stance, attitudes and capability regarding teams: do you want to even participate in a team dynamic (some people prefer being a sole contributor), do you want to build and lead a founding team yourself (if so – what tools / experience do you have), If you don’t, can you identify team building / leading attributes, skills and experience in a potential partner?In the end, most businesses are about people working together. Happy is good, but making the wrong type of people happy will not lead to the impact that you desire for your ideas.

      1. calabs

        Sounds like you have a great deal of experience as a consultant. I like the list of important qualities you mention back at you with my definitions: -Maturity. Honest, accurate self-assessment, self-control, a sense of perspective and humor! Real-world experience building things and the ability to accurately assess effort and risk. -Trust in others. Trust is confidence that others will be true to their word, and will do their best. -Confidence in themselves. A firm, justified belief that the product is good and that we can make it.Does that sound right?Well, I think there’s a lot to this list. I think trust is my weak point. I tend not to trust people because I’ve been burned so many times. I feel like the world is awash in people who don’t really understand their own capabilities, and so cannot be trusted to execute. I’m not really sure how to address this lack. Perhaps you have some advice?

        1. JamesHRH

          Just for the AVC public record, I am not a consultant, at this moment or in the past.I told every entrepreneur that my goal was to help them get out of the ditch, onto the road and, then, in some capacity, come along for the ride. Usually, when they were out of the ditch, they wanted to drive by themselves again. Some stayed on the road, others……I learned not to help people out of the ditch.I would say that your definitions are incomplete or not specific enough……in particular the definition of confidence. Confidence comes from preparation.Would be happy to help / have a chat. I am on twitter @jameshrh. We could connect that way to begin.

  40. Charlie Crystle

    Happy to take a reasonable round at a reasonable valuation from reasonable people.

  41. SF

    If one believes there is a bubble, then does not it make sense to take “money you do not need” now? In “Interviews with Founders” a few of the founders remarked on the fact that they were able to outlast their competitors because they took more money than they needed. If there is a bubble, and the bubble will burst then would not the one with most cash be better off?If there is no bubble, then taking extra cash is just diluting your position for no good reason.

  42. MStevens

    Funny…looking at your portfolio…Zynga – #1 Funded companyTwitter – #1 Funded companyEtsy – #1 Funded companyFoursquare – #1 Funded companyDo you have any data that shows the #1 funded company doesn’t win? I just don’t believe that.

    1. fredwilson

      each of them invented the categoryzynga raised less than SGN in the beginning and killed themfoursquare raised less than gowalla and killed themyou are looking at effect, not cause

  43. sull

    Take the money, bubble or not, if you and your team are mature, experienced and smart about how to use money for the benefit of the company and product(s) and if at least some are technologists who know how to spend wisely on infrastructure and/or can directly handle technology requirements. An example of leveraging money wisely is investing in top talent that will likely help the company succeed. This is not easily done when you cannot put the right offer on the table because you are tight on cash.Take the money. Buy time and talent. Don’t be stupid with the money. Figure out how to MAKE money.

  44. David Miller

    I love the post and agree with your main points. Having said that, my experience as as Entrepreneur has always been to take money when you can because it may not be available when you really need it. Yes, it’s clearly hard not to spend (invest) it, and yes, we’ve survived when companies with 10x our funding have failed. Cash is oxygen and you’ll die without it, so it’s always your first priority. It’s a tough call to make.Given that I just left the company I founded (in April 2000) and am launching a new start-up, your comments about how good a time it is to raise money is comforting and resonate with the reaction I’m getting from my investor network. If you could only explain that to my wife.

  45. Peng Zhao

    Good advice.The hardest thing is to get the customers. Focus on the customers, the money will follow.

  46. Farhan Rehman

    Poignantly summarised, why it’s so important to stay focussed on your product, and the value it produces to the end consumer, whilst thinking of money as just another tool, that forms part of your arsenal.Thanks for sharing this Fred!

  47. Maig1984

    I would rather get money thrown at than none.BUT I think being from the later position (no money at all), the problem of ‘too much money’ wouldn’t arise because you damn well know where and how to put the money to good use and not just simply spend it.but ‘Focus on the mission’ guys…. FOCUS!…

  48. allubarbosa

    Some of the founders noticed that they were able to survive the competition, because it makes more money than you need. If there is a bubble and the bubble burst, then it would have more money which will be better.Motorcycle Parts

  49. Susan Rubinsky

    Pure sanity!

  50. RJ Johnston

    Bucket in hand, where is it raining? ๐Ÿ™‚ As always, good advice. Thanks Fred,

  51. SamT

    #6 resontates greatly. I was in a startup TV network where we raised $6M but should’ve only raised $1-1.5M. We ended up hiring a lot of expensive execs, launching a lot of ancillary v1.0 media businesses, and did less than a stellar job packaging the primary TV business to pitch to NewsCorp, Comcast, etc. We never did get a distribution deal, burned through our cash, and returned something like 15c on the dollar to our investors less than 2 years later. Raising too much was one of several mistakes we made.

  52. Jeremy Campbell

    So Groupon recently raises money at a $4.7 billion valuation now they want an IPO at $15 billion, someone is making money here and it sure isn’t me!

  53. Vinay Singh

    Thanks for motivation Fred but even with a product which is generating some sales, it is difficult to raise money. I got rejected from techstars because I was alone , there was not a team.I have team who work with me but they cannot quit their day job unless I give them a bare minimum salary. I know team is important but why is having a co founder that important.

  54. Jay Batson

    “5) If your company doesn’t need the money, but you sure could use some, then think about selling some secondary shares. But don’t sell a lot. Maybe 10-20% of your position.”Maybe I’m not as good at knowing how this works as others, but I can’t see how this works. As a founder, I own common stock. Until my company gets fairly mature, the my common is worth a pretty small fraction of the preferred price, which makes it hard to make 10% of my position worth an amount that will allow me to “.. take bigger risks and play for more upside.”I’m sure you can do the numbers, but let’s take this kind of an example. The time when it’s useful to be taking good risks is during the first few years of the company; so let’s assume my company is 2-3 years old, and is having good success (maybe not Twitter-level, but good). Assume a recent valuation arising from a Series (x) of $50M post. Assume that after a couple rounds of financing I own 15% of the company, fully-diluted. Assume common is currently priced around 10% of the preferred. The resulting math: $50M * 10% (common value) = $5M * 15% (my ownership fraction) = $750k * 10% (of my position sold) = $75k. That’s nice money, but not “I’m going to take more interesting risks” money.Am I missing something? Or does this point really only apply when the company is doing staggeringly well and has $xxxM valuations (with a smaller gap between common and preferred)?

    1. fredwilson

      the common starts to become worth the same as the preferred once thetotal value of the business is larger than the amount of capitalraised