The Hard Raise
In the summer of 2003, Brad Burnham and I set out to raise a $100mm early stage venture capital fund. We had both been successful VCs in other firms and we had a thesis that the second wave of the Internet was upon us and that large networks were going to get built in this phase. The term “web 2.0” had not yet been coined and Facebook had not yet been started (LinkedIn was being built around this time).
It took us a year and a half to raise that fund. We traveled all around the country (and to the UK too which was a total waste of our time and money). We spent our own capital raising that fund. We believed in ourselves and our thesis, but it was very hard to get others to understand it. Sometime in the spring of 2004, someone got it. And then a few others did. And by the summer, we had a group together and we were able to build to a first close in November of 2004. We had our final close in February 2005, eighteen months after we started. That was a hard raise.
But that fund, USV 2004, has been one of the very best venture capital funds ever put together. The numbers are public because many (most) of our investors are public pension funds who have freedom of information act (FOIA) obligations to report the performance of the funds they invest in. At that time (early 2000s), the big VCs in the bay area were kicking out FOIA obligated limited partners out of their funds. That was a huge win for us and we got a bunch of those FOIA obligated LPs into our fund. Without FOIA, I am not sure we would have gotten USV 2004 done. But we did.
There is a correlation between hard raises and strong performing investments. It is not a perfect correlation by any means. Some great investments are obvious (Facebook in 2010, Airbnb in 2014) and get done easily by the company and perform very well. And many hard raises are hard because they aren’t good investments.
But there are some investments that are very hard to get done that turn into incredibly strong performers. We have had a few of these in our portfolio over the past year as the expansion capital stage (Series C and D) of the venture capital market has contracted. We have seen companies need as much as six to nine months to get a financing done and we have seen founders and CEOs get rejected by more than fifty investors during that process.
I like to tell them the story of USV 2004. I believe Brad and I got over 100 rejections during that process. Rejection hurts but it is part of the game, particularly when you have a hard raise.
One of the reasons hard raises can turn into great performers is that they often mean you are doing something others aren’t doing, you are early to an opportunity and others don’t see it. That certainly was the case with USV 2004. That’s the contrarian bet in action.
Another reason hard raises can turn into great performers is that you learn something from all of that rejection. Brad and I learned that we weren’t explaining the opportunity clearly and crisply enough. We went and read Carlota Perez on a friend’s suggestion and she helped us frame the “second wave” argument in a much cleaner and clearer way. And once we started investing the capital, we had a framework, influenced by Carlota’s work, that we could execute against. The fundraising process, and all of that rejection, helped harden our investment thesis to great effect.
It is this second reason that I am seeing in action in our portfolio. As these expansion stage companies struggle to raise capital, they are forced into a cathartic (and at times painful) process of self reflection. What is their sales process? Is it efficient? What is their unique value proposition? Is it really unique? What kind of company are they building? Will it be large enough to justify all of this investment?
And as a result, these companies are coming out of these hard raises with better businesses, better operating models (lower burn rates!!), and bigger visions to go execute against.
And I suspect that many of these rounds that have taken six to nine months to get done are going to turn into really strong performers for the investors who have ultimately decided to get behind them. We are using these opportunities to “lean into” these investments with our funds. We are always deeply reserved for our portfolio and believe in doubling down on investments when we have conviction. And, as an investor, you should always be open to having conviction around an investment that is having a hard time getting done. Because they can, at times, be among the strongest performing investments out there.
In summary, a hard struggle is only a prerequisite but being right is a necessity.
i love the Bill Gurley framework. You can make money being right about something that others know, but its hard. You can’t make money being wrong. So the best way to make money is to be right about something that others don’t know.
I’ve heard that from Peter Thiel. Someone has to be real the originator.
Think its a fairly commonly cited framework, don’t know who said it first.Basically, to be contrarian and right. Not just contrarian. Not only right.
Last Feb, Thiel signed a copy of his book for me with the words, “Never copy.”Some investor friends had told me, “You can copy some model that already exists in the US and change it a little for Europe.”I didn’t do that. I originated.https://uploads.disquscdn.c…
Basic essence of the word “innovate”.
There’s a difference between invention and innovation.Invention’s a much harder, more painful process — yet also more character-building. It often involves starting from Base 0 (also known as first principles invention) and challenging pretty much every aspect of an existing system.The inventor also challenges themselves.An example is Einstein arguing that everything’s relative rather than probabilistic (his “God doesn’t play dice” quote).* http://uk.businessinsider.c…* https://uploads.disquscdn.c…https://uploads.disquscdn.c…
There sure is.
Yup. But in that case, better be able to self-fund and then grow organically.
This post speaks to me in more ways than one, as I might exceed your time record in raising my own fund focused the 3rd coming of the Internet. But I’m more determined than ever.
Have you read Steve Case’s book ? If so does it resonate?(My auto correct offered Jobs when I typed “Steve”)
Love this idea about the 3rd coming.Don’t believe in it. Don’t see it articulated but I like i.
“One of the reasons hard raises can turn into great performers is that they often mean you are doing something others aren’t doing, you are early to an opportunity and others don’t see it.” The irony of this is that it explains why hard raises are hard raises.
i guess i could have chosen my words more carefully
It’s fine. I didn’t mean to convey the sense that you are wrong or offensive here and apologize if I did. Just amusement that this sort of thing pops up in almost any situation where you are working with other people and they can opt-out. Job hunting, finding apartment roommates, etc. it can be very easy to find the wrong people or fail before you figure out what you are doing and find what works.
Naw, I thought it was deliberate, topical, etc.!
Somewhere along the “somewhat contrarian “–> “Must be Barking Mad”spectrum lies EVERY new idea, every new Business Model, every new MarketplaceWe wear our “bootstrapped for eight years, surviving and still possibly onto something crazy difficult but valuable” badge with real prideSo many idiots have told us we can’t do it – yet here we are “as ever pre-overnight success”, “sometimes down” – but never “out” .Breaking constraints is often a possibility, always a joy, and can become a norm.So when I hear a new VC notion that is not tested by the BS filter of good robust debate I wince – it invariably means someone will be dropping their trousers in public soon.However, when I hear a good argument against the status quo (blockchain was the most obvious recent one on trust) my ears prick up because, amazing as it may seem:the ONLY prerequisite for building a business is the ability to “bring about change in a profitable manner”.Once you can “bring about change in a profitable manner” you have a business and if you can cover cash-flow needs to break-even you can get there regardless of any and all detractors.And that is a beautiful thing !
Great GEMS here …”One of the reasons hard raises can turn into great performers is that they often mean you are doing something others aren’t doing, you are early to an opportunity and others don’t see it.””Another reason hard raises can turn into great performers is that you learn something from all of that rejection.” ( And as a result, these companies are coming out of these hard raises with better businesses, better operating models (lower burn rates!!), and bigger visions to go execute against.)Bill Gurley framework – You can make money being right about something that others know, but its hard. You can’t make money being wrong. So the best way to make money is to be right about something that others don’t know.
Unless someone is born into the lucky sperm club, it sure takes grit to get anything done in this world. I was expecting some sort of sports or political commentary on a Sunday morning; instead we got one of those profoundly more enlightening posts.
This: As these expansion stage companies struggle to raise capital, they are forced into a cathartic (and at times painful) process of self reflection.Too much time looking at who’s going to acquire or at your competitors and not enough time looking in the mirror.
The thing that jumps out for me is just how critical it is to reach a clarity of thinking and argument. Be it your initial investment thesis or, more recently, the strategies of your portfolio companies, the possession of that clarity leads to persuasiveness – not due to slick presentation but because the logic is convincing and you’ve done the work to ensure it’s not just you who gets it. Great post.
Was there a particular event that triggered the dumping of FOIA limited partners?
A lot of people don’t like that sort of transparency. Personally, I don’t have an issue with it at all.
It’s brutally tough to raise a fund. How big was your prior fund with Jerry Colonna? Having a prior fund makes it slightly easier to raise.
Winning formula:Be a anti-fragile tenacious contrarian who is right.
Not an easy thing to be.
Only a chosen few. And then the few within that group who can monetize this gift.
This was very true for First Advantage (87 nos to raise $16 MM) and the early FirstMark Funds also. Thanks for sharing
USV 2004 fund: Total Value Multiple 14x and IRR of 67%! Well done!
Ben Horowitz said that the hard thing about hard things is that they are hard. Hard things lead to great results/solutions… when they work! The thing is when we are in the middle of the race we don’t know if the things are really going to work! With lots of rejection along the way, only those with a strong believe and purpose in their work have the conditions to, eventually, win. At the end of the day, I think is the ability to see the future before everyone else and work hard to make it happen.
Yeah, and you only hear about the winners. Most of the people doing hard things go down the tubes and you never hear from them again.
I love how posts like this with a bit of thought/translation can be applied to other situations. This one is quite the gem. Thanks for sharing from your experience so that the rest of us can learn from it.
One of the world’s more famous mathematicians was Max Zorn of Zorn’s lemma, a convenient and equivalent statement of the axiom of choice.As soon as I met Zorn I asked him: “What did Paul Cohen prove” — about the continuum hypothesis. Zorn gave me his copy of Cohen’s paper, and I still have it.One of Zorn’s favorite statements was, “Be wise, generalize.” You just did that. Nice.
I find my lessons where I can. Thanks Siggy.BTW I don’t always agree with you but you do expand my thinking.
I feel like many must read this and say “how can being forced to think about your business be that important? Why aren’t founders just thinking about their business this way anyway?”I don’t have the answers to those questions. I don’t know why it works this way, where deep reflection happens only when it’s forced for the most part. But it’s definitely true.
Surprising. Discouraging.What the heck? The LPs don’t want to read and think? One of the best raises in all of IT VC is right in front of them, and they don’t see it? I shouldn’t say what the heck. Instead, it’s WTF.It is beyond me to see how 99 44/100% of a major pillar of our economy can be so uniformly and consistently wrong.Yup, once again, yet again, over again, one more time, in some ways at least, the flip side has to be one heck of a good opportunity.
This post is the ‘why’ I come here. There haven’t been so many of them in recent times, but this one is a black pearl.
And things come in cycles, and it seems to me that now is the beginning of a new cycle. It’s about working out the particulars that will apply now, the direction of travel (not difficult), the points of aggregation (difficult), and their defensibility (hard).
Haha! Also as you know the best teachers are also the best students. But I love the confidence — well-deserved. Speaking of your book, started reading the e-book. Surprisingly easy to read and enjoyable. The delay was not for lack of interest — a lot left untended these days thanks to increase in work (yay!) due to a new client with urgent hiring needs and on boarding new team members — but the impetus came in the form of a potential block chain client with whom I’m in discussion. Fascinating stuff.
I have been thinking a lot about this very subject for about a month. It’s absolutely true that you better your thesis and the explanation of it. Marketplaces that don’t currently exist are very hard for some investors to see and it took me sometime to crystallize the total solution. I have thought about and worked on the solution for almost two years. I read alot and the best reading that helped are from MIT Media Lab multidisciplinary writings. The glee when you bit-by-bit solidify your vision is worth all the subs from fundraising.
How do you get past the reliance on software programmers as experts in areas outside of their own? And this might be a faulty understanding on my part, but a lot of what I’ve seen in the blockchain/decentralization focuses on coders to create code that does a thing that is currently being done by a person who gets paid specifically to do that thing. (Lawyers and contracts for example)How do you get past trusting a coder to create contracts without exploits (code or legal)? I’m thinking of the Ethereum fork specifically but also the issues that spawn from anything similar.
You still need to do diligence. There are risks of course, and if things don’t look good then I ignore.
This one resonated with me (on a smaller scale) as I am halfway through deploying my 3rd fund, and while each fund has grown in size (and some have started returning into the carry), it has been a grind to raise the money. I now just expect it to be all the time. I just enjoyed my first “quarter off” from thinking about it. That helped. One of the dangers for an investor like me (and for a founder) is that you can start to think about the raise so much, you tune your skills toward that, and over time, you underweight the other stuff.
Timing is key. Definitely some truth that (if) you are doing something others aren’t doing, you are early to an opportunity and others don’t see it. However, one can be too early. In which case, persistence matters even more.
Everybody in startup land should do a Kickstarter for something to feel this pain.
The worst 30 days of my business.
67% – as AI would say that return is fire! #harvard
I worry that blockchain/ decentralization / cryptocurrency (3rd coming) is too complicated and confusing for mass adoption when compared to something like Facebook/Linkedin/etc (2nd coming). I think the technology is interesting, but have a hard time figuring out where it’s headed in the general consumer space.
True. It’s early days. A bit like the Internet/Web in 94-95 when the apps weren’t clear yet, nor polished.
A perfect post for this Monday. Thanks, Fred. We have been told a couple of times “your pricing model and approach is totally unique, but it doesn’t fit with our existing investment model.” VC investment in IT security is on fire – but we are still grinding. When you are not another “me-too” it does get challenging to fit into the right bucket. But when our customers are saying “wow – I love that” we remain encouraged.One of the reasons hard raises can turn intogreat performers is that they often mean you are doing something others aren’tdoing, you are early to an opportunity and others don’t see it.Let the grinding continue.
I’m fortunate enough to be able to attend the USV annual meetings. After one of the early annual meetings for the 2004 fund, some of us shared a taxi to the airport and we asked each other if any of us understood what their companies were doing. None of us did. So one LP says to the other, “this is either going to a massive success or a complete failure, I just don’t know which yet.”
Great post Fred! We had a similar experience with our first fund at Founders Circle Capital. Our fund was also different. It was a hard capital raise also over 18 months, but we got smarter about how we framed the business. Many thanks to your post, http://avc.com/2014/10/foun… we have had the priviledge to work with many of the highest performing growth companies over the last four years. All of these companies are going through some of the growing pains you mention including how to provide aligned liquidity to the team. Founder peer learning has been the most fun thing we get to facilitate. Growing @ scale & @ speed is very hard, and learning from fellow founders on the same trail is powerful. We just raised Founders Circle Capital II and it was a little easier with 6 great exits out of 24 investments for our LPs. More importantly, we just crossed 946 families we have invested in growing the best @ scale companies. Thanks for believing in us early!!!
I thought I heard Brad mention once that you two shared hotel rooms while on the road, pitching. If I heard correctly, what a lesson about keeping costs down.
This has REALLY encouraged me just now.I’m in he middle of the hardest raise of my life, totally dejected and seriously thinking of just quitting. Idea is good madman proven, cofounder is good but due to my lack of on paper experience I’m getting totally shut down. Encouraged by this.
Seems like there’s a fine line between a hard raise and a stupid raise.
Thanks Brad, I’m not raising capital anymore but just reading your point of view is valuable on many fronts.
While many of the comments are written by VC’s, as an entrepreneur amidst a hard raise, I found Fred’s thoughts interesting (as always), and somewhat provocative. There’s an existential dichotomy that any thoughtful start-up businessperson must ponder: on the one hand, the hubris involved with even believing your venture has any shot, when so few succeed, requires a near slavish devotion to long-odds betting; kind of like buying way out-of-the-money options with little time value left. A foolish long-shot, but oh, the returns only if!At the same time, lean pundits opine on the wisdom of early pivots, plan B’s, and failing fast. So what do we do? Hit the bid quick, or go deep for the glory? The only answers I get are retrospective analyses that remind me of Robert Osborne’s pre-screening lecture on the hard choices Orson Welles made in casting “Citizen Kane.” Interesting, for sure, but instructive? Not so much.I’ve come to believe you can’t have it both ways: the hard raise reflects either a dog of an idea or too-early genius. Quit on an 18-month raise? What if all you needed was that 19th month? My truth, advanced years have taught me, means swinging for the seats, knowing I’m going to strike out quite a bit. But I figure that I’ve had, maybe, three or four really good ideas in my life, tops, and I’ll hang my hat on them. Or go down with the ship.Jedediah Leland: You still eating?Charles Foster Kane: I’m still hungry.
Great post. One caveat to this is that I’ve seen a lot of entrepreneurs (including myself) end up with “hard raises” because they’re not bringing market-clearing deals to market, or because they’re signaling unrealistic pricing expectations. Seeking a seed round when you lack key team/traction elements and should be looking for friends-and-family investors, for example.You can hold out for your beliefs, and it certainly makes sense to do this if you have conviction and an all-or-nothing deal model such as a $100M fund thesis, but sometimes reorienting to the right market segment, repricing, or coming back with more traction would be more productive than simply applying more effort. And many entrepreneurs don’t realize there are negative effects to chasing unrealistic deals for a prolonged period of time.(lightly edited, wording)
Thought provoking…I think we will put…”One of the reasons hard raises can turn into great performers is that they often mean you are doing something others aren’t doing, you are early to an opportunity and others don’t see it.”…on the first slide of our pitch discussion doc….
Nice. Didn’t know about Carlota Perez’ book.
that is where a supportive investor can help. we are not in it every day for 12 hours a day. but we see what is going on. we are one step removed. every entrepreneur should have one or two of those.
You know Charlie this is a great point, and one that we should share with Entrepreneurs.We are in complete agreement, you have to have a Plan B. It needs to be articulated, it needs to be written.But you are right it has to stay inside the company. I know that is not “transparent” but there are some things that have to stay “inside the locker room” (and I hate saying that after yesterday)Investors don’t want to see anything other than we are going 100% and you are, it’s just you have to have a Plan B. They want to know there is nothing but 100% confidence and harmony with top management, but there is not.
I want to echo Charlie – I love these posts that tell the story of the earlier days. I feel a little ashamed about my own accomplishment when I realize you Fred were younger than I am now when you pulled all of this off, but it also inspires me to work harder and seek to accomplish more. And as someone who knows you primarily in the context of our shared passion for computer science education, it’s instructive to understand how you approach obstacles and overcome. The challenge of telling one’s story in a clear, compelling, simple way (e.g., avoiding 3 adjectives when 1 will do) are common in both raising a VC round as they are in raising money for computer science/STEM so that’s particularly interesting.The “What is their sales process?” question caught my eye as in the startup advisory work I do that’s nearly always an open issue, in some capacity or another, especially for B2B companies, but also B2C as well. Young companies build these wonderful products, and may even prove out legitimate product-market fit, but they haven’t figured out how to sell their products at scale both effectively and efficiently. In particular I see too many companies insisting on going it alone in selling rather than look hard at new channels, partners, and routes-to-market. That seems a hangover of the early days of founders going heads down to focus on building something great – the go it along mentality often required to eliminate distractions. It seems like as founders become CEOs of series-A companies, it’s important to move to that magic ratio of “50% heads down, 50% heads up”.
Man I love this comment.(And this post.)
Charlie, have you seen Jessica Abel’s podcast series Out on the Wire? (There’s a book too, which I haven’t read yet — but had a few plane, train and automobile trips and binge-listened to the series.)It is about framing and reframing a story, ostensibly/mostly in the context of radio production. I loved it, and am recommending it to everyone doing something that’s hard for others to “get.”http://jessicaabel.com/podc…
Pick a business can self-fund and then grow organically.Anyone with anything very good will have a heck of a time finding someone that good to report to, as a CEO or BoD member.For anyone who really has the keys to a billion, adding people to the team very likely dilutes the quality of the team.
I have watched Lancaster fondly and celebrated each small victory you post. I often tell people about your company as an example of something which feels right. Bravo. But I f you thought bread was hard, you should follow me for a while. Science and STEM education in the US is such a clusterfuck.Our Plan B was inverting our funding model around the same content but different partnership structures. Far more elegant, way less people managing. It’s not sealed up yet, but on its way hopefully. It should remove people from meddling with the content by virtue of having put money in, which is paramount. Not taking outside money has been nailbitingly stressful. But that drive to do it how it should be done means our content is top notch – not only is this the way it should be, but I am deeply happy to have it now be so valued, so in demand.
You are a thesis-driven firm. Are (your) LPs also thesis-driven ?
13 years later, the state of U.K. startup financing:https://uploads.disquscdn.c…Having sensible conviction and adaptability during hard & good times matters on both sides of the table.Some founders build me-too propositions that can’t and don’t withstand the down cycles. Other founders refuse to do me-too because they know that exposes them to market saturation and increased competition, so they try and do something most others aren’t/ can’t do.Then they have USP.Ditto for investors. They have to find the spot that makes them stand out from other investors.
I agree that Plan B can actually help out Plan A. Plan B never includes everybody in Plan A and does not have the same outcome, but it is important to think about it.
(achilles heel for me…inability to read social cues)Is this really true (for you?). If so how do you modify your approach and see what works and what doesn’t work? This is natural for me. I can read micro expressions  and do it on the fly. If you are pitching then the solution I see is to bring someone else along whose entire job is to monitor reactions. This is often helpful even if you aren’t face blind. If I am understanding your point, I may not be.There is an upside in certain types of selling to not being able to read micro expressions. The rejection factor is less of a problem when you aren’t as sensitive to multiple forms of rejection. http://www.paulekman.com/mi…
Thanks for that.
He is The Sage Breadman of Lancaster.
.Not disagreeing with you but there is something very real about “burning the boats” about “going all in.”I’ve raised more than a billion dollars and have never, ever had an “easy” raise until I either didn’t or couldn’t use the money.Still, there is something to be said for torching the alternatives and saddling up and saying, “I will see y’all on the high ground. Follow me.”At the Infantry School in Ft Benning, there is a statue of a Lt with a 45 in his hand. He is waving to his men and saying, “Follow me.”It is the motto of the Infantry officer. It says, “I will lead from the front and I will take you to the objective and together we will kill everyone who gets in our way.”Millions of shavetails have seen it.I remember looking at the statue a green 2nd Lt and not really understanding it and then half a decade later and just then beginning to understand it.There is a reverence about it, like the smell of incense in a cathedral.Leadership is a funny thing. When you exert it, it becomes second nature and it is easy to do it again and again. Not in a foolhardy way but in a calculated manner in which you harness the realization that people want to be led, at certain times.JLMwww.themusingsofthebigredca…
I would even go further saying that plan B should be always alive and kicking, even interacting in creative ways with plan A. For me, plan B is the less risky, more manageable, self funded and local version of plan A.
I don’t disagree. As a leader you are all in. But you have to have a backup plan? Yes?
See my Dunkirk comment below.
I think its dangerous to advice entrepreneurs to have a Plan B without qualifying what you mean with a Plan B. I’ve seen too many young entrepreneurs thinking about a Plan B as an escape route which in turn makes them less committed to make Plan A work. I’ve seen founding teams collapse because some individuals had a Plan B and at the first sign of trouble in executing Plan A decided too easily that Plan A was not going to work.
Have worked for more than a couple leaders whose lifeboat was only big enough for themselves. Not the most enjoyable way to learn to swim.
Don’t know how long you’ve done this but I have for four successful startups over thirty years. Plan B does not mean bail. It means adjust and adapt depending on market conditions. You’ve seen Fred, Brad,Mark,Sequoia, and many others advocate this.
I understand what you mean by a Plan B, but many young entrepreneurs do not. And I’ve seen too many entrepreneurs take the advice of having a Plan B as having an escape route, as the option to bail when things go wrong. And things will go wrong. I don’t disagree with the notion of finding an alternative way to reach an outcome if your original plan fails. I do however believe its dangerous for experienced and successful entrepreneurs or VC’s to talk about having a Plan B without qualifying what that Plan B is and what it isn’t.
We could stand to see more discussion on “Plan B” — is this different than “pivot”?
My advice is worth what you paid for it on this board.
It needs to be like Dunkirk.Man it is shitty.But living to fight another day is better than getting slaughtered.
Yes, yes, yes.See my Dunkirk comment.
Hmmm. Maybe? I love stuff like this, so plowed through the whole thing. If I didn’t want to do that, I probably would have gotten the book. (Which I still may do.)Episodes 2 and 4 cover a lot on story structure. The “.5” episodes are sort of case-study elaboration on the core episodes, it might hang together without those.(And that said, episode 7.5 was interesting because they took someone’s impossible mess of a story and workshopped it, giving it several possible more straightforward narratives…)
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Good for you, A.A fan, albeit from a distance.
Plan B is not a pivot.