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Your ability to raise startup capital is inversely proportional to your need.


Stashed in: 106 Miles, Negotiation, Awesome, Techie

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The Law of Startup Physics:

When talking to potential investors as entrepreneurs, we tend to hear a lot of, “I’d like to keep in touch,” “Let us know when you’ve got your product launched,” and “We might be interested in investing once you have a strong customer base.”

Which sounds an awful lot like, “We might consider investing once you no longer need our money”!

It's not just happening to you. It happens to everyone.

It's true for any capital, not just startup capital.

Seems like you can only get a mortgage (or refinancing!) if you don't need it.

Before I worked in Silicon Valley I always thought that VCs were skilled at identifying likely candidates for The Next Big Thing, and were in a race to put money into the best deals before any of their colleagues/competitors.

I thought they looked at things like the skills & track record of the team, the business idea, market conditions, etc. (whatever things fancy analysts look at when deciding how much to spend and where) and then gave money to the most promising leads according to some kind of best practice, whether it was intuitive and experience-based or algorithmic.

It really seems like what they do is sit in a gigantic pile of someone else's money and wait for the next Facebook to reveal itself, and then try to invest a huge amount late in the game.

To be fair to them, sometimes they create ski slopes out of other peoples' money and invite children to come ski, too. They care a lot about the happiness of children.

scrooge+skiing.jpeg

I'm pretty sure an investor could randomly invest in any portfolio of the thousands of companies I've seen at 106 Miles and do fine return-wise.

Outsized returns are a myth, because there is no way to predict who is going to be huge.

I think there's a flaw in your model. It's not a linear graph. It's not even a polynomial graph. It's actually quantum. And there's only two states: need, but don't have; have, but don't need.

Greg, you just blew my mind.

But then it's not a graph.

It's a Venn diagram with non-overlapping circles...

This is true for lots of things you really want - like a date. Generally speaking, don't look needy.

If you signal to the other party that you really need something *NOW* (capital, insurance...), there's a good chance you're a riskier customer for all sorts of reasons. If you don't, just the opposite. So if the other party acquiesced to this, it might invite adverse/negative selection - needy/risky peeps would be first in line.

So the problem - if you do indeed need capital NOW - is how to make yourself not appear risky. Wear pants, stop sweating, clearly identify low-risk uses of said capital (i.e. not next month's payroll...)

Henry, that tickled me.

Jonathan, I agree that it's good to have a sense of urgency without being too eager.

That's true not just in any financing discussion, but in general in any negotiation.

But sometimes, you're just too awesome and they all want to be part of your parade :)

Everyone loves a parade, Kamal. :)

The beauty is that once you realize this fact, you can turn it to your advantage. Get to know investors socially. Meet with them regularly to see how you can help them. When they ask what you're up to, hem and haw. Force them to drag your startup out of you. Adamantly insist that you're not raising money.

Then sit back and watch the checks roll in.

Haha, Chris, I love this!

I call it "The Dance" and it's always amusing to see it in action. :)

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