I’m seeing a pattern among my most successful investments. They’re raising a lot less money.
How It Works
Here’s how it usually goes:
- Company raises a pre-seed or seed. I invest.
- Revenue grows very fast.
- Company raises $1-4 million once or twice on SAFEs at higher valuations over the next couple years.
- Revenue is at around $10 million ARR before Series A.
- Series A only raises a couple of million at a valuation of over $100 million.
The raises after pre-seed/seed are tiny, selling just a couple percent of the company each time. That’s a huge change from how it’s been done in the past, when each round would dilute prior shareholders by about 20%.
These subsequent raises are more about bringing on the right people than raising money. A venture firm that can bring in lots of customers gets the chance to invest $1-4 million, but no more.
‘What Do You Mean You’re Profitable?’
Startups are doing this because they don’t need the money. They are running very cash efficient businesses.
One company I’m an investor in actually has more cash in the bank than they ever raised! This means they’ve been net profitable since the founding — unheardof in startupland.
When Vanta got to $10 million ARR before raising a Series A, it shocked our little corner of the world. Now, Vantas are becoming more and more common.
DoNotPay even paid a dividend recently! They were making so much money they gave shareholders over a million dollars.
I’ve never once heard of a startup doing this before DoNotPay. But we may start to see dividends more and more often.
Do you think DoNotPay will be raising tens or hundreds of millions over and over, diluting 15-25% each time? I don’t think so.
They have no use for it.
What’s Driving Cash Efficiency
Startups may have started becoming more cash efficient because of the down market. But now, it’s taken on a life of its own.
AI has made every engineer 50% more productive. And if we’re all on Zoom, why not bring in engineers from Bangalore for $60k instead of $250k in SF?
Compared to the boom in 2021, we have engineers at 25% of the cost who are 50% more productive. That’s a roughly 6x boost in productivity per dollar in just 3 years*.
No wonder companies aren’t raising as much.
What This Means for Investors
Companies raising less spells trouble for the big, late-stage funds. If your business model depends on ripping $100 million or more into companies, and the companies no longer want your money, you’re finished.
Remember, every time founders take VC dollars, they own less of the company. So if they don’t need the cash, founders have a strong incentive to reject it.
My business model fares much better in this climate. My pre-seed and seed investments will suffer less dilution if companies raise less follow-on funding.
My follow-on investments, which usually happen at Series A, may get done at a higher price. But since my first bet isn’t getting diluted as much, this should even out.
If I see companies raising less becoming a durable trend, I may shift my business model. In a world like that, it may make sense to make a bigger first bet and not do any follow-on.
For now, I’m sticking to my existing strategy and watching the market closely.
Wrap-Up
The greatest thing about these cash efficient startups is that the public markets will eat them up.
Public market investors are sick of unprofitable tech. But profitable companies should get a great reception from the markets. They may even be able to go public at lower levels of revenue, perhaps $100-250 million ARR.
For early stage investors, companies raising less is great. We suffer less dilution and these cash efficient startups should have a smoother path to exit.
But for the late stage guys, the best days may be in the rearview.
Are you seeing startups raise less? Leave a comment and let us know!
Have a wonderful weekend, everyone!
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Talking Startups on the OpenVC Podcast
Meet My Latest Investment: Melengo
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*Note: Here’s how Claude and I calculated this. Shoutout to Claude for getting this right, when GPT-4o gave an incorrect answer.
Let’s say I have one engineer at $250,000 and another at $60,000. The engineer at $60,000 has 50% higher productivity than the pricier engineer. Both work 2000 hours a year. Is there a way to calculate the per-unit productivity of each person?
Edit
Yes, we can calculate the per-unit productivity of each engineer by considering their annual salary and relative productivity. Let’s solve this problem step by step.
Given:
• Engineer A earns $250,000 per year and works 2000 hours.
• Engineer B earns $60,000 per year, works 2000 hours, and has 50% higher productivity than Engineer A.
Step 1: Calculate the productivity ratio between Engineer B and Engineer A.
Engineer B’s productivity = 1.5 × Engineer A’s productivity
Step 2: Calculate the per-unit productivity for Engineer A.
Engineer A’s per-unit productivity = Engineer A’s productivity / Engineer A’s salary
Let’s assume Engineer A’s productivity is 1 unit per hour.
Engineer A’s per-unit productivity = 1 unit/hour ÷ $250,000/year
Engineer A’s per-unit productivity = 1 unit/hour ÷ $125/hour = 0.008 units per dollar
Step 3: Calculate the per-unit productivity for Engineer B.
Engineer B’s productivity = 1.5 × Engineer A’s productivity = 1.5 units/hour
Engineer B’s per-unit productivity = 1.5 units/hour ÷ $60,000/year
Engineer B’s per-unit productivity = 1.5 units/hour ÷ $30/hour = 0.05 units per dollar
Therefore, Engineer A’s per-unit productivity is 0.008 units per dollar, while Engineer B’s per-unit productivity is 0.05 units per dollar. Engineer B has a higher per-unit productivity, which means the company gets more output per dollar spent on Engineer B’s salary compared to Engineer A.
Copy
Retry
FS
what is the cost disparity then, per unit of productivity? please express it as a ratio.
Edit
To find the cost disparity per unit of productivity, we need to compare the cost per unit of productivity for each engineer. We can express this as a ratio of Engineer A’s cost per unit to Engineer B’s cost per unit.
From the previous calculation:
• Engineer A’s per-unit productivity = 0.008 units per dollar
• Engineer B’s per-unit productivity = 0.05 units per dollar
Step 1: Calculate the cost per unit of productivity for Engineer A.
Engineer A’s cost per unit = 1 ÷ Engineer A’s per-unit productivity
Engineer A’s cost per unit = 1 ÷ 0.008 = $125 per unit
Step 2: Calculate the cost per unit of productivity for Engineer B.
Engineer B’s cost per unit = 1 ÷ Engineer B’s per-unit productivity
Engineer B’s cost per unit = 1 ÷ 0.05 = $20 per unit
Step 3: Express the cost disparity as a ratio of Engineer A’s cost per unit to Engineer B’s cost per unit.
Cost disparity ratio = Engineer A’s cost per unit : Engineer B’s cost per unit
Cost disparity ratio = $125 : $20
Cost disparity ratio = 6.25 : 1
Therefore, the cost disparity per unit of productivity between Engineer A and Engineer B is 6.25 to 1. This means that the company spends 6.25 times more for each unit of productivity from Engineer A compared to Engineer B.
Tremendous 
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