VCs as Gas Stations
I was at an event the Gotham Gal had last night for her portfolio. I was asked a number of times “when is the best time to raise money?”. In general, I believe the best time to take money is when it is being offered. To some extent, VCs are gas stations and you should fill up when it is convenient.
I don’t drive that often, and when I do mostly drive electric cars, so gas stations are not a common place for me. But when I do drive a gas powered car, I tend to fill up my car when it gets below half a tank and I use stations I like and are convenient for me.
I think this analogy works to a point for VC fundraising. You should raise money when you still have a fair bit of cash in the bank. Driving around on fumes frantically trying to find a gas station is not a great idea. Raising a round when you have a month of cash left isn’t either.
I don’t shop around for and drive out of my way to the best priced gas station. I am happy to fill up at a fair price at a place that I like and is convenient to me. I would apply the same rule to raising money. Don’t shop for the very best deal, particularly if it means an elongated fundraising process and time away from the business. If a fair deal is being offered by a firm you like and trust, shake hands, close the deal, and get back to the business.
The place the gas station analogy breaks down is that for the most part the gas is same from gas station to gas station. That’s not true with VCs. You can buy really bad gas and you can buy really good gas from VCs. Some VCs can kill your company. Some VCs can propel your business forward. And some VCs will leave you alone.
So choose your gas wisely when shopping for the VC variety. And fill up when you’ve got a half tank and you are passing by one of your favorite stations.
And make sure the “credit” terms the gas station offers are fair as well (to you, your team, and your prior investors)
A well written post! I have run out of petrol, middle of the night, in a dodgy dark street in Nairobi. It’s no fun.
Oh, the fuel you’ve given me with this analogy.
If VCs are like gas stations, the quality of the VC is like the octane in the fuel.It varies from diesel to premium.
Hmm – I suspect some VC are -ve octane
Electric car = Lifestyle business?
The call back!
EV = no stinky gas stations.
Doing a mid sized raise with a client now. We are targeting someone, maybe two, who can help, the rest that won’t hurt.Naive?
Targeting seems to be the real key.
Yup…Raising capital is just really hard work. Different type of selling. Critical to success obvious but completely unrelated to the work of building a company.It’s easy to mouth that entrepreneurs should always be raising funds. It incorrect to not assume how straining it is to do both.My choice in my career to understand my markets from the bottoms up has served me well. Grittier but closer to the streets where reality lives.
AW, How do you understand your markets from the bottoms up?
Hands on, ground floor experience. Working my way up.Across most every job in sales and marketing and then building global teams across a variety of different industries.I like most of us can model anything from the top down. I simply don’t think that is the key.I think the kicker is to understand the market dynamics–not simply the customer behaviors and current distribution strangleholds, but the grit of how things work across the brand, supply and distribution chains.
It’s just how my career rolled out.All ground floor no educational background.A writer who had a knack for community and a flair for sales and marketing.
“Rest” don’t lead anyway.
True.But I find that the amount people put in is not proportionate to the amount of engagement they want. And the amount of engagement is certainly not proportional to the amount of value you get.
yes, i get the “won’t hurt” part and agree 100% that $ invested is not a leading indicator of expected engagement. speaks to the meddling comment elsewhere. was speaking more to the # of helpful investors you are targeting, and in my experience, once identified and committed, the rest will follow.
We are of like mind.Need to say that some recent and ongoing experience out of the tech and software space is a learning experience.Much less infrastructure in place. You need to be a great storyteller to sell valuations. And especially in the hospitality industry, you very much need to isolate key domain expertise people during the raise.Finding a tech lead is a bear. Finding the one unique person who can run a commissary in a specific industry segment is key to the story’s sellability.
Who at USV washes the windshields in this analogy?
Good answer. I know you hate gifts, but don’t be surprised when a squeegee arrives.
Yes, make sure it’s a full service station with a line on new parts and maintenance.
The money doesn’t always flow. That’s why.When someone offers you a check, you say yes.This assumes it meets your basic requirements and you’ve done basic due diligence. Don’t just take anyone’s check. But take the checks when 1) they’re interested and excited 2) something else hasn’t come up for them (life happens) 3) you haven’t disappointed anyone yet, which you will at some point, so you gotta make sure you’ve got enough float for the boat.Because the money doesn’t always flow, especially after you post real numbers. “They expect results.”
Honestly to make a startup into a business that changes the world–you need that self belief.During my stint in the movie biz, I sat in rooms with world movers like James Cameron, and realized that to really do the impossible, like spend hundreds of millions of dollars on an idea and pull it off, it’s damn well close to godliness.Every entrepreneur has struggles proportionally as huge.
it seems as if the key to this is believing that you are doing something larger than yourself that should be done (secular version of it being God’s will).Faith, in some form, matters.Oh, what career have you NOT had?
Only way I could justify risking everything – (And it kept my wife fully on board) – So important.
Funny…Every once in awhile, I’ll hear from someone from my distant past from a very different me.Happened recently when someone who I partnered with to run bees in the North Okanagan pinged me to say hello.Crazy. Glad I never took the straight and narrow.
That’s an interesting distinction, at least for me that’s something that’s critical. Seeing how it matters to the people that use what you build, that gives me more drive than anything else. Money, reputation, etc…all that other stuff is just icing.
That’s an interesting point. I guess where I struggle is with founders that really think they are god. That’s not me or my co-founders, we believe we’re working on an earth shattering thing, we believe we are the right people to solve it, we believe it’s the right time and we’re tough as nails in our determination to get there. But a VC that thinks we’re god? I’d have a hard time trusting that person.
Just having fun… Anyway the point is check, when they offer you a check, say yes. don’t try to optimize from reasonable to exceptional.
Oh, got it. Yeah, I caught the sarcasm just wasn’t sure if there was something else. Understood on take the $, unless they are a train wreck / have a history of dangerous meddling.
meddling–is there any other kind? 😉
Ha! Touche. Though, as someone with a long project mgmt background, I can say that sometimes there is a difference.
The only positive meddling I’ve encountered with my limited experience has been with financials, M&A (and not all positive), and board governance. The negative meddling? A bunch. The problem for first-time founders is it’s hard to say now, because you don’t know at the time what a distraction a meddler can be, and they typically seem to have experience.
That makes sense, I recall Mark Suster writing about that a couple months ago. I guess it’s akin to the supreme court’s definition of pornography..
I’d like to get my gas at a station where the mechanics also know how to tune up cars.
I have to say Fred’s posts have gotten pretty zen lately. We’ve moved into the land of parables. Works though. Not likely to forget this.
Your car has gotten an alignment.
AVC is the bar you stop by on the way to the gas station. Don’t drink and drive.
VCs only offer money when you don’t need it, so this is advice for founders who don’t need it.
Can you explain that more?
Very rarely are VCs giving entrepreneurs a flyer. There are a few exceptions (I can think of one USV investment and several in Mark Suster’s portfolio). If a VC is handing you money, it’s most commonly because you’re not a startup but rather an operational business with EBITDA and other metrics of success.
That is not true as a blanket statementIts a valid critique of the sector for sureBut it is not true in all instances
I think that putting a couple of examples on the table would be worth doing.
I only raised money twice and I REALLY needed it both times – the VC’s knew I needed it bad, but they also knew I might have other sources. In both instances, I ended up with great VC’s.
Need is relative – Say SaaS with LTV / CAC > 10 – but no funds to invest in growth.They NEED to be efficient but not to survive on organic growth
The highways you have to cross to get to the fuel should be taken into account too. I personally like highways with a good vista , hugging a coastline (exciting to drive on but you need to be 100% focussed on the road so you don’t find yourself driving over a cliff ), green & leafy , well signposted and good euro style cafes where you can refuel yourself as you refuel your car . The road has to feel good as well as look good. Culture is everything on the road . You meet people who have similar tastes , outlooks on work and life , maybe even similar values as you . Heck, you may find yourself having coffee with them. Not all highways or fuel stops are like that .
In a poetic frame of mind today Marissa? I like it
The only difference is VCs might not offer fuel because your Car looks beat up and might not make the trip – so VCs are like, I wont take your money and give you fuel, you’ve got a leaky fuel tank – whatever I give you wont last upto the next gas tank ANY way.VCs judge your car condition, Gas stations dont. 🙂
This isn’t your best analogy – a VC gas station would only serve 1 out of every 1000 cars that pulled in.And they would have to know a driver of a car that knew you.And your car would have to be travelling to the Huge Addressable Market that the gas station has some experience with or you would have to drive according to their driving thesis.And your car would have to be of the model that the VC likes (some VC gas stations just don’t like to put gas in minivans).When, in fact, it turns out that customer experience is what matters most, according to this VC – https://medium.com/@todfran…
Yeah. Agreed. Not one of the better analogies. Pretty much 1 in 1000 fill up, and of those 2,000 who fill up each year five years later only 10-30 will really matter (making 95% of returns).. so I guess those are the lambos, Bugatti’s, Bentley’s and the rest rapidly become lemon Yugo’s??
And sometimes premium gas really is worth it even though it costs more
I’ve got a big grin on my face :)Ps . Shakespeare would say :”And you Brute, were you not the one who started the poetic verse, as you compare the wisdom of VCs with the utility of gas stations ?”
There’s one little caveat with the analogy: startups need to stop at many stations and convince each one that they are “gasable”. They need to convince that their trip will end up exploring much more gas than they actually took. So it takes awfully more energy than one usually anticipates, and it bears the risk of diverting your trip altogether. If you raised funds for 6-8 Q’s & you take Fred’s advise to refuel at half tank – you’ll end up traveling between gas stations most of your time.
Couldnt resist…Switzerland – not a bloody Gas Station in sight !I hear there are more “in the Valley”
Hmm out there you have to fly the “gas station” in and overwhelm with the natural beauty and elegance of your “car.” heh
Couldn’t resist as well: In Brazil, we do have a couple of gas stations… But would you dare park your car in one of these???
Australia is covered with signs like these (good luck charging your EV):
You’re also selling part of your car every time you fill up 😉
So in other words, buy an electric car and skip the VC…it’s better for the environment anyway 😉
Just build your own power generation (revenues), and you’re good to go!
But the remainder you own is worth more than the total you had before
true, but you’re still the one driving it.
This post sir is golden.
of course, gas stations make money by selling coke, milk and cigarettes. VCs make money by distributing gas 🙂
I’m just starting to look into VC for a project of mine and am ultra nervous. I really liked this analogy and am hoping to apply it for once I find the right gas station for me. Thanks!
We haven’t taken on VC money yet at Localeur so either that means we’re still a bike and our angel investors are more like a tire pump or we’re a car with very high gas efficiency. Nonetheless, we’ve managed to continue growing (going) without running out and a gas station – the kind you speak of – is at one of the next few exits.
True or false: most VC is a commodity?
If most VC is a commodity – VC is not a commodity – there is differentiation.However is dumb-money a commodity ? -Base rate + perceived undiversifiable risk – so determined by creditworthiness and nonetheless subjective
I’d say false for a lot of reasons.
Driving around on fumes frantically trying to find a gas station is not a great idea. Raising a round when you have a month of cash left isn’t either.People can sense fear and it’s a big turnoff.
If a fair deal is being offered by a firm you like and trust, shake hands, close the deal, and get back to the business.Really the same as satisficing in so many ways.  In short, don’t spin your wheels and don’t reinvent the wheel. http://en.wikipedia.org/wik…
So choose your gas wisely when shopping for the VC variety. And fill up when you’ve got a half tank and you are passing by one of your favorite stations.Otoh (taking the other side of this) having to much of a cushion might take the necessary edge off things and make you spend that money like a drunken sailor (things you have discussed in one way or another in the past..)
If a fair deal is being offered by a firm you like and trust, shake hands, close the deal, and get back to the business.I apply this principle in so many ways in both business and in personal purchases. I will pay more  to deal with someone that I have dealt with before (and who does a good job and that I can depend on) rather than on someone new or spending the time myself. Because it’s a time saver and is one less thing that I have to worry about.Recently I had to get some papers filed with the state. I have a neighbor that is a title company (that I have used) that I thought could do the work for me. So when I asked them they started to tell me how easy it was and that I could do it myself (which I already knew). I said “I want you to do this and I’ll pay you to do it I don’t want to have to get involved at all”. If it was something that I did regularly I might take the time to “re-invent the wheel”. But this particular thing didn’t fall into that category. I just wanted a turnkey service (which is what I got and it was a big help no need to fork on web searches or make phone calls or guess on anything very helpful..) Depending on the purchase size and the risk involved the arbitrary number could be from (arbitrarily) 5 to 50% more.
One of the great things about the VC industry is that the gas stations are more like that of the full service free advice stations of the 1950s than the self serve stations of today, but for how much longer?
The best time to fill up the tank is when you find out your car is generating gas at a faster pace than it’s consuming. And you figure you can press the pedal further and go faster if you get the tank filled. The faster you want to go, the more gas per milage your car will spend, but soon enough it will be generating more gas than it is consuming again, and you will be in a good position one more time (and with a faster car).I’ve been in a position before when my gas meter was going down and I couldn’t find an open gas station to fill up. Even the ones with the worse quality of gas, the type that ruins your engine after you use it, would close their doors once they saw my car drive nearby.Never want to be there again. Now my car generates more gas than it consumes, while it keeps running faster and faster every year. Now gas stations guys are opening when they see my car, some even wave at me and ask me to come in. I will fill my tank once I find a gas station with top notch gas quality, that will fill my tank nicely and also give me some free nitro on the side. All that, obviously, at a fair price.
It’s a nice analogy, but the gas is the same every where, it’s cash. What’s different, to your point, it’s the service you get at the station, which can boost the performance of your car.
Fred – if it was as simple as driving to the gas station 🙂 also in your second half you mean the specific “partner” as much/more than just “VC” as firm as I assume?
I can’t speak from experience because I’ve never raised money; haven’t attempted yet. But, I imagine the first round (finding that first gas station) is going to feel like Clark W. Griswald driving through the desert with his family… Aunt Edna died along the way; you forgot to untie the dog from the bumper and there isn’t a gas station in sight….The car is going to breakdown and I’m going to have to share a beer with Rusty and set off on a trek through the desert on foot to find that first station and it’ll probably be run by an attendant who knows I’m in dire need of gas so some price gouging is in order.. it’s all a rite of passage necesarry to find that next station that will fill you up, at a market price for a gallon, on your way to a fun-filled, successful trip to Wally World
I can’t speak to the accuracy of the gas station analogy because it implies a birds-eye view of the startup landscape, which I don’t have. But it feels true, and it’s consistent with what we’ve been doing as a company. To extend it, as the ones driving the car, yes we are concerned about the price of gas. But that price is one variable in a function we are optimizing. Conversely, the station owner is optimizing a function in which our car and everyone in it is one variable. If our goal was purely to optimize gas prices, we wouldn’t be on a road trip. We’d open a gas station.
Filling up gas doesn’t take going to 100 gas stations and getting to know the shop keepers and spending months to fill up the gas. I know the analogy is more to do with timing of raising, but it doesn’t quite work for many other aspects. Thanks anyways for the analogies. They are always fun.
An old friend’s dad smuggled watered-down (and polluted) Mexican gasoline across the border and sold it at his own station…
Sounds like some VC’s I knew ’98 to ’02!
@fredwilson:disqus VC’s as Gas Stations. Be a bicycle vs car, grow slower and not rely VC capital. Eventually you will get to the same place.
I actually think that the analogy doesn’t break down. The gas is the money and it’s actually the same in every place (green), from every VC. The convinience and the extra services (windshield, oil, air, even maybe a snack) are the value that VC bring to the table to differentiate themselves. If you think about gas stations and their locations it’s also applies to relationships and networking. Probably the VC that is closer to you and knows you the best is the most convinient (this is based in my thesis that we invest in relationship and people). Sometimes you don’t choose the closet but the one you like the most, as the same with VC. Where the analogy actually fails is in the point where interaction between owner of the car and the gas station is actually inverted. VC gives money to founders, but I put myself the gas. The direction of the action is opposite of what it should be.
If this is the kind of advice an entrepreneur is looking for from a VC, then that person shouldn’t be in business, or probably won’t be for very much longer. Money isn’t the only thing I’d want from my investors; I’d be asking the age old question- what can you do for me in helping my company scale to reach its vision? If all I get from you is a fistful of cash (or a tankful of gas), and your butt taking a seat on my (running) board, then I’d say its time to give up driving and start walking. A recent article in WSJ cites the fact that 60% of Inc. 500’s fastest growing companies were bootstrapped vs 7% which were venture-backed. Gas from the closest station can end up killing your engine, if you’re not careful!
There’s purpose and then there’s practice; I believe a good VC understands the value in advocating both.In practice, there are lots of start-ups with great ideas but only a few survive a running on empty cash crisis. I like the analogy a lot and perhaps would suggest that the gas meter represents another scarce resource, time.
did you read the post? check the second to last paragraph.
No analogy is perfect, not even mine.But I’ll continue Fred’s analogy with the comment that if you commute daily, you know your route pretty well, and you learn which gas stations are likely to have better prices than others. So when your drive takes you a certain way, you fill up at the best station in route.I agree with Fred, don’t hunt for the best deal–but, get to know the VC community and recognize who is the best fit for you, and seek them your start-up is running on fumes….
USV is on Broadway near 21st Street. Just pull up in front and one of the guys will take care of you. Tell ’em Big Jim sent ya.
Polly’s Service Center, 3200 Belmont Blvd, Nashville. Still has a full service lane! Sorry to be literal 😉
Yup…it’s crazy at times.
You’ve hit a hot button of mine.I totally reject this notion that they need to be actively thinking about a woman as a partner. That’s a business decision. Ntim, gotham gal is all about women, Fred supports her (he is part of the investment there) as well as her various other activities. Not that I would give a different answer if that wasn’t the case.Why women? Why not people of color, Amish, or American Indians by the way?
Ok explain why then. You think that is going to give them more and better deal flow? That will allow them to make more money?Business is about triaging all the things that you could possibly do, and focusing on the things that you think, in your humble opinion, matter the most. Not what the current zeitgeist says is the thing you should be considering.
Having a balance of women makes good business sense – this is different than ethnicity. McKinsey published a report on organizational impact for companies where women occupy top level management positions, Woman Matter: Gender Diversity a Corporate Performance Driver (published in 2007). The report concludes that of the 231 international public and private companies evaluated; the top performing companies are those companies with a strong representation of women in top level management and board positions. There was a clear correlation between gender diversity and better economic performance. The report underscores that performance increases significantly when the level of women in top management reaches a critical mass. Gotta love numbers – that’s what VC’s live for 🙂