America Outspent Europe During COVID, Fueling Prosperity

December 11, 2024

US growth is trouncing Europe and most of the developed world. While other countries are still struggling to recover economically from COVID, America is racing ahead.

Bold federal spending during COVID is a key reason why the US is outpacing the rest of the world. Mark this day — I finally said something nice about the government!

US GDP has been on a tear in recent years, growing 27% from 2019-23. Meanwhile, the Eurozone GDP grew just 15% (data from the World Bank).

The US has rebounded strongly. But it’s taken major government investment to do it.

US national debt as a percent of GDP went from 104% to 120% from 2019-23. Meanwhile, the Eurozone’s debt actually fell as a percentage of GDP.*

America’s debt is high, no question. But Europe’s policy during the crisis makes no sense to me.

COVID sweeps the world, the economy collapses, and their debt goes down? What are they thinking?

If ever there were a time to stimulate the economy, it’s when lockdowns are putting huge numbers of people out of work.

It’s no wonder that years after COVID, the Eurozone still hasn’t recovered to its historical trendline. Meanwhile, the US recovered by 2022.

Government spending is not the only factor in higher US growth.

American tech companies are crushing it, minting multibillion dollar profits. Meanwhile, Europe produces few new, major businesses of any sort.

The combination of bold spending in a crisis and a culture of innovation are keeping America on top. But now that we’ve recovered from COVID, it’s time to get that debt under control.

What do you think of American and European economic performance?

*Unfortunately, the Federal Reserve only has Eurozone debt data going through 2022. I wasn’t able to find another reliable source for this figure, so I’ll go with these numbers, even if they’re not as current as I’d like. If you see a better data source, let me know! 🙂

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Why I’ve Never Owned Bitcoin

December 10, 2024

Note: This is not investment advice.

“Have fun being poor!” I’m pretty sure someone is going to say that in the comments. But to invest in Bitcoin, I need a reason. Let me run through why the possible reasons to own Bitcoin don’t hold up.

A Store of Value — Gold

There will only ever be 21 million Bitcoin. This fixed supply leads many holders to treat it like digital gold.

But why not just buy actual gold?

Both are assets with a largely fixed supply. Gold, however, has been recognized as a store of value for over 6,000 years. Bitcoin has only existed for 16.

And if storing bullion is a little too much work, there are gold ETF’s that hold physical gold and regularly have auditors verify their stores.

Me Want Yield!

Gold is a better established store of value than Bitcoin. But neither one comes with an income stream.

If I wanted safety, Treasury bills would be a good alternative. They’re backed by the US government and pay interest.

Today, 1 month Treasury bills yield 4.4%. Even if you think the US government will go bust, I doubt it will happen in the next month.

DeFi platforms have offered some yield on cryptocurrencies. But they have a habit of turning out to be scams — see the recent conviction of the founder of Celsius.

An Inflation Hedge With a Yummy Income Stream

I like gold and Treasuries more than Bitcoin. But I actually have $0 in any of these three asset classes.

For a store of value and inflation hedge, I like real estate.

A house is a house, whether prices go up or down. It is likely to retain its value, since someone can live in it.

Real estate comes with a tasty income stream. In multifamily, that averages around 6%. In industrial or retail, it can go even higher.

The risk owning real estate is definitely higher than a Treasury bill. That suits my risk tolerance, but may not suit yours.

What’s Left — Speculation

If Bitcoin isn’t the best store of value and has no income stream, what is it for? Speculation, pure and simple.

People buy Bitcoin because they think it will go up. Most people’s rationale is no more complicated than that.

The problem is, it’s very hard to make money speculating. It comes down to a quote from Benjamin Graham:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

When we buy an asset because it’s popular, rather than because it has intrinsic value, we tend to lose big. Asset prices have a way of reverting to their real value over time.

Wrap-Up

I don’t see value in Bitcoin. And the correct allocation to an asset that lacks value isn’t 10%, 5%, or even 1% — it’s zero.

Seeing the price at nearly $100,000, who doesn’t wish they’d bought at a dollar, right? But chasing yesterday’s gains won’t make me money.

Maybe you own Bitcoin. And maybe I’m wrong and it goes to $10 million. Then you’ll make a fortune, and I won’t.

If so, I’ll be happy for you! It’s not taking anything away from me.

What do you think of Bitcoin?

Note: This is not investment advice.

More on tech:

Lessons From My 3 Most Challenged Investments

Learning From My Top 3 Investments

Why It’s Easier to Raise $3 Million Than $300,000

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers

December 9, 2024

“It was like 24,992 people making dough and 8 losing it.”

On September 15 2008, Lehman Brothers filed for bankruptcy. It was the largest bankruptcy in American history at the time.

Larry McDonald had a front row seat. In the book A Colossal Failure of Common Sense, the former Lehman trader gives us the inside story of how the 158 year old bank collapsed.

Number One at Any Cost

When McDonald joined Lehman in 2004, it was a dream come true.

He had grown up in a housing project. For years, McDonald dreamed about being a Wall Street trader.

Working on the Lehman trading floor was exciting, electric. But soon, McDonald began to see signs of trouble.

Chairman & CEO Dick Fuld desperately wanted Lehman to be the number one bank on Wall Street. But Lehman was smaller than rivals like Goldman and didn’t have the deposit base of a bank like JP Morgan.

Nonetheless, Fuld went on a buying spree.

Lehman bought trophy commercial properties all over the world. It also bought scads of securities backed by subprime mortgages.

Fuld did any business available, whether it was profitable or not.
Second tier banks often make this mistake. Credit Suisse collapsed last year under similar circumstances.

Disconnected Management

Fuld ruled the bank with an iron fist. But many Lehman employees had never even seen him.

He used a special elevator and seldom left the executive floor. Even many Managing Directors had never met Fuld.

Fuld didn’t have much time for his people. He was busy pursuing a lavish lifestyle.

Fuld owned mansions all over America. He left early for the weekend and spent much of his time away from New York.

The Lehman CEO reminds me a lot of Jimmy Cayne, former CEO of Bear Stearns. Cayne too was disconnected from the day-to-day, favoring long weekends at his various homes.

Compare Fuld to Elon Musk. Musk has 5 minute one-on-one meetings with every single employee at xAI.

The great CEO’s are deeply involved in the details. The rotten ones behave more like monarchs.

Falling Apart

Many of Lehman’s best traders and bankers tried to sound the alarm. Time and again, they warned Fuld and his executive team that the firm was taking on too much risk.

Fuld ignored them.

By the end of 2007, Lehman was leveraged 44:1. A 2.3% loss would wipe them out.

And sure enough, the losses started coming.

As subprime borrowers began to default, the value of mortgage backed securities fell hard. Lehman had tons of them on its books. Now, there was no buyer.

Lehman began to take one huge loss after another. Mortgage backed securities, commercial real estate, credit default swaps — the losses just kept coming.

Lehman began to look risky. Counterparties demanded more collateral, eager to protect themselves.

As summer turned to fall in 2008, JP Morgan began to demand billions in cash. Lehman didn’t have it.

Without that money, JP Morgan wouldn’t extend any further credit to Lehman. This meant Lehman could no longer operate.

The 158 year old bank filed for bankruptcy.

Wrap Up

Mismanagement is what killed Lehman Brothers. Reading this book, I couldn’t believe what I was hearing.

A 2.3% loss would wipe them out. How could you think you’d never take a 2.3% loss?

Fuld is the worst case of Manager Mode I’ve ever seen.

He had no idea what was going on in his company. He pushed for growth at all costs, and the cost was Lehman’s existence.

To add insult to injury, Fuld turned down repeated, firm offers from Korean Development Bank to acquire Lehman throughout 2008. The bank could’ve been saved, but Fuld blew it.

Reading this book makes me appreciate founders who are deeply involved in their companies. My job is to find the Elons and avoid the Fulds.

More on Fundrise in this post.

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Meet My Latest Investment: Recall

December 6, 2024

“Yes, that, give me that!” It’s funny how greedy I get when I see a startup I love. And when I saw Sanks pitch Recall at LAUNCH Accelerator Demo Day, that’s exactly how I felt.

Recall helps you store online content, see connections, and retain information better.

I listen to a zillion podcasts. How much do I retain?

Realistically, probably very little.

But with Recall, I can add the episodes to my knowledge base and get summaries saved for me to use later. Recall can also quiz me periodically on what I learned, helping me retain information better.

Recall works for YouTube videos, articles, blogs, PDF’s, Google Docs, and a lot more. It’s so helpful that it even won Product of the Month on Product Hunt in June!

Recall does nothing less than change how humans learn and know things. That is a massive vision.

Sanks and her co-founders Paul and Igor must be working overtime, because Recall is growing really fast. And because they’re builders, they launch new features at a pace that leaves most startups in the dust.

I never invest on the European Continent. But I made an exception for Recall, which is based in Amsterdam.

We are in a business of outliers. I think Recall is one of those outliers.

So I tossed out the rules and made the bet. Check out Recall and learn something new!

Have a great weekend, everybody!

More on tech:

Meet My Latest Investment: LedgerUp

Why It’s Easier to Raise $3 Million Than $300,000

Lessons From My 3 Most Challenged Investments

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

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US Stocks Are Extremely Overvalued

December 5, 2024

Note: This is not investment advice.

Every day, my Vanguard account seems to hit a new all-time high. I’m loving it, but it also makes me worry — are we headed for a crash?

A Tour of Indicators

This morning, I looked at four valuation indicators for the US stock market as a whole. Every one of them says stocks are overvalued.

Let’s start with the Buffett Indicator.

This indicator measures the aggregate market cap of all stocks in the Wilshire 5000 divided by US GDP.

The Wilshire includes almost every publicly traded stock in America. Dividing their total value by GDP shows us how stocks are valued relative to the economy as a whole.

The Buffett Indicator is flashing red. It indicates stocks are extremely overvalued right now, by far the worst since at least the 1970’s.

Scary. But we shouldn’t go based on one indicator alone.

Let’s look at the S&P 500 PE ratio next.

This measures the total value of all stocks in the S&P divided by their total earnings. It’s a great way to see if major US companies are overvalued or undervalued.

This one is looking pretty bad as well. The current PE is roughly twice the historical average, although lower than during the dotcom bubble or the housing boom of the 2000’s.

Next, let’s check out the Shiller PE ratio.

This figure measures the current value of the S&P 500 divided by the average inflation-adjusted earnings for the last 10 years. The Shiller PE smooths out short-term deviations in earnings, which helps us see long term trends.

The Shiller PE is also flashing red.

It’s not saying that current prices are unprecedented, the way the Buffett Indicator is. But the Shiller PE still indicates that stocks are almost as overpriced as during the dot-com bubble.

Finally, let’s look at the Equity Risk Premium (ERP).

This number shows the earnings yield of the S&P 500 minus the real (or inflation-adjusted) yield on bonds.

The earnings yield is the inverse of the PE ratio. It tells us what percent of the money we put in stocks we get back in earnings every year.

If we’re going to own stocks, we need to be getting paid enough extra money to accept the risk. Keep in mind, we could always put our cash in risk-free government bonds instead.

The ERP also indicates a steeply overvalued stock market.

All four of our indicators are saying the same thing: US stocks are significantly overvalued right now. The indicators differ on how extreme that overvaluation is, but they all agree prices are way too high.

American Exceptionalism

These days, America is the prettiest girl at the dance.

We’re growing faster than any other developed market. Our companies are crushing it, churning out earnings in the tens of billions.

All over the world, people are wondering how we do it. And they’re piling into US stocks.

No wonder they’re pricey!

But if we look at markets around the world, we get a very different picture. The PE ratio of stocks in many major countries, like the UK and Germany, are far below the American level.

Granted, many of those countries aren’t growing much, if at all. But that’s bound to change eventually.

Today, America is up. But there will come a time when we’re down.

This is why when I need to sell off a little stock to fund an angel investment, I sell my US stocks. I’m holding on to my shares in overseas index funds — they’re priced right.

Wrap-Up

We never know whether stocks will go up or down. But we have enough data to say that US stocks look significantly overpriced.

So, am I dumping all my US stocks? Hardly.

Over the next 10, 20, or 30 years, American companies are going to keep innovating and growing. In the very long run, US stocks are likely to continue to rise.

So I’m going to sit tight. Sometimes, the most profitable thing you can do is nothing at all.

We’ll get back to startups tomorrow. I have an exciting new investment to announce!

What are your thoughts on the market today?

Note: This is not investment advice.

More on Fundrise in this post.

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Is the Consumer in Trouble?

December 4, 2024

I paid $6.79 for 18 eggs recently. No wonder the consumer is in trouble.

For fortunate people like me, inflation is just an annoyance. But for people of modest means, it’s a crisis.

“How long can people keep going like this?” I wondered. So this morning, I dug into some data…

Falling Behind

Americans are falling behind on credit cards and auto loans. Balances 90+ days delinquent have jumped significantly since 2023.

Some of the wildest stories are coming out of the auto market. People bought cars for above sticker price during COVID and now owe more on the cars than they’re worth. This creates a debt spiral.

The Struggling Working Class

Americans as a whole have reported worsening finances since 2021. But the biggest drops in financial health are among people with a high school diploma or some college but no more.

In other words, the working class.

Before inflation, many working class people were getting by and perhaps able to save a modest sum. Now, with prices through the roof, they’re being pushed into the lower class.

A Two-Track Society

Why are things going well for people like me, but not for blue collar Americans? It all comes down to the money supply.

The government has increased the money supply by 38% since the beginning of COVID. This money has chased two things: assets and goods.

The price of both are through the roof. But the higher asset prices primarily benefit the well-off, while the rising prices for goods crush the working class.

Inflation is beginning to fall, which should make things a little easier for the working class. But prices are still over 20% higher than before COVID, and that’s not likely to change.

Regardless of what you think of the man, is it any wonder Trump won given these stats?

What This Means for Businesses

For those of us who run and invest in businesses, financial stress among consumers is a serious problem. If you sell your product to the working class, sales are probably getting harder.

Take Buy Now Pay Later (BNPL) providers like Affirm or Klarna, for example.

Consumers who use BNPL are poorer than average. I expect BNPL delinquencies to rise just as credit card delinquencies have.

Wrap-Up

It’s a hard time for working class Americans. While fortunate people like me benefit from an asset bubble, blue collar folks struggle to pay their bills.

Declining inflation will help the average man. But it’s going to take a long time to make up what they’ve lost.

Are you seeing more people struggle financially?

More on Fundrise in this post.

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Misfits Market

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I wrote a detailed review of Misfits here.

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Lessons From My 3 Most Challenged Investments

December 3, 2024

Two companies about to shut down. Another getting acquired at a loss. This is the reality of angel investing — a lot of them don’t make it.

Every founder I’ve ever invested in worked really hard. But nonetheless, most companies die.

Today, I looked at my 3 most challenged investments. Let’s see what we can learn from these companies…

Startup X

I was sure this company was going to be huge. And boy was it growing fast — almost 20% month over month.

But one day, the growth stopped. Revenue started trending down, way down.

They had built a cool product, but it didn’t address the needs of customers well enough. Customers churned and new accounts became harder to find.

This founder is incredibly smart and worked very hard. But the company is likely to go out of business soon.

I invested in this company between rounds. This means the company wasn’t getting the usual multimillion dollar cash infusion when I invested.

They were profitable and had some cash in the bank, so I figured the investment could work.

But a company that’s profitable one day can start burning the next. Without a big cash cushion, the picture quickly becomes dire.

Startup Y

This one was a pure founder bet. I had strong conviction that this founder was incredibly determined.

I was right about that. But the company is still about to go out of business.

Despite his best efforts, a difficult market and a lack of cash made it hard for the startup to survive. Even the scrappiest founders can run up against insoluble problems.

The company had strong growth, but less traction than I’d normally look for. It was making a small profit but didn’t have a lot of cash on hand.

Like Startup X, I did this investment between rounds. And like Startup X, over time customers churned and a profit became a loss.

That’s when the minimal cash cushion began to bite.

Startup Z

“There are no sure things in startups, but this is as close as it gets.” Well, that’s what I thought then.

Now, this company is being acquired for a small sum and we’ll likely take a partial loss on the investment.

These guys had it all. Amazing product, incredible growth, a round led by one of the best early stage VC’s in the world.

But shortly after the round closed, the two co-founders started arguing.

One of them wound up leaving. The company has trended downward ever since.

Long sales cycles led to missed targets. Meanwhile, burn continued.

A lot of companies didn’t cut burn soon enough in the down market. Startup Z was one of them, and it helped sink the company.

Overall, this loss was the hardest to predict.

What I Learned

Out of 32 names in my portfolio, I’ve done 3 investments between rounds. One is growing, but the other two are about to go out of business.

I have enough information to say that investing between rounds is not a successful approach. In the future, I will only be investing when a startup is closing a full round.

Running a startup is hard enough. Doing it without a cash cushion is almost impossible.

Despite these losses, my follow-on strategy worked. I didn’t invest any follow-on in any of these companies, which will keep my losses small.

Lastly, Startup Z showed me how important the co-founder relationship is.

Today, I ask how the co-founders know each other. If they have a longstanding relationship, that’s a huge plus.

Wrap-Up

Ultimately, I will never avoid all losses. Nor should I.

We are playing a high risk game. Most companies will go out of business.

But if we’re lucky, 1 out of 30 or 50 becomes a huge success.

My hat is off to all these founders. They worked really hard.

In this business, failure is inevitable. All that matters is to keep trying.

What have you learned from failure?

More on tech:

Learning From My Top 3 Investments

Why It’s Easier to Raise $3 Million Than $300,000

Why Entry Price Matters

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order.

Learning From My Top 3 Investments

December 2, 2024

$17 million, $12 million, $8 million — those are the annual run rates of my 3 most successful investments so far. This morning, I sat down to figure out what these incredible companies have in common.

Startup A

Startup A is doing so well I can barely believe it.

Revenue was around $500k ARR when I invested. Less than 2 years later, they cracked $17 million and raised a Series A from a top firm.

I’d love to tell you I knew it all along — but I didn’t.

What I could see was some awesome revenue growth and a tenacious founder. When I dug into his background, I found out that he once appealed a rejection from an entrepreneurship program and got in.

That’s a man who doesn’t give up.

I had no idea the company would do this well. But if I keep investing in great founders with growing businesses, I have a chance to hit a phenom like this once in a while.

Startup B

Like Startup A, these founders showed an incredible ability to stick it out during tough times. COVID nearly killed their business in its infancy, but they pivoted and made it through.

These guys also had strong growth and a ton of revenue for a seed stage company.

ARR was around $2.4 million, rare for a company raising at such a good price. Startups outside SF are often overlooked.

With a huge market, serious revenue and strong growth, this company had the kind of metrics I dream about. Add in founders who clearly refuse to give up, and no wonder it’s a winner.

Startup C

I actually passed on this company at first. But my decision was based on misunderstanding their business model. The founder asked to meet a 2nd time and showed me where I was getting confused.

He was right. I wrote the check.

To this day, I thank him for correcting me!

Clearly, this is a fella who doesn’t give up easily. And the performance of his company reflected that.

The growth at this startup was incredible — 60% month over month in the prior 4 months. They had passed a $1.5 million a year run rate and were raising a late-seed stage round.

Today, they’re at an $8 million a year run rate. I still can’t believe I almost passed on it.

Wrap-Up

What do these 3 startups have in common?

In every case, the founder showed incredible tenacity. They did that in different ways, but it was clear each time.

These startups also had far more revenue and growth than what’s typical for a seed stage company. The best startups have a way of jumping out early.

Today, I’m looking for investments like these: gritty founders with incredible growth.

Tomorrow, we’ll look at the 3 most challenged startups in my portfolio. What can we learn from these struggling companies?

More on tech:

Why Entry Price Matters

Why It’s Easier to Raise $3 Million Than $300,000

Small Investors Lead to Big Investors

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order.

Why Entry Price Matters

November 29, 2024

Former Google and Stripe executives just raised $56 million at a $500 million valuation for their new startup, /dev/agents. I never do deals like this. Here’s why…

Returning the Fund

In most venture funds, one investment accounts for the bulk of the returns. The same will probably be true for my angel portfolio, which I think of as a tiny venture fund.

A typical early stage fund might contain 35 names, or separate companies. Since one company will probably provide most of the returns, I want every investment to be able to return the fund.

Think of it like shooting a target. If a bet can’t return the fund, I just wasted a precious bullet.

For an investment to return the fund, it needs to increase by about 70x.

Companies raise more money along the way, diluting the early investors. Investors at pre-seed and seed, the point at which I invest, are usually diluted by around 50% come IPO.

So, to give me 35x and return the fund, I need a 70x increase on that initial investment.

Underwriting /dev/agents

I didn’t have an opportunity to invest in /dev/agents, but I’ve had a shot at many deals like it recently. With the excitement around AI, many startups are raising giant early rounds at eyewatering prices.

So, could I make money investing in /dev/agents? Let’s run the numbers…

At an entry price of $500 million post-money, I need /dev/agents to hit a $35 billion valuation to give me my 70x. Although the founders involved are exceptional, getting to a $35 billion valuation is extremely unlikely.

By my count, there are only 49 US tech companies worth $35 billion or more on the public markets. Just 49 ever, in all of history.

This outcome is so rare that I cannot underwrite to it.

Controlling My Entry Price

So far this year, my average entry price has been $11.6 million post-money. A 70x on that is much easier to underwrite to.

I don’t even need an investment to be a unicorn. $800 million will do me just fine.

Don’t get me wrong, getting to a $800 million valuation is extremely difficult. But it’s a whole lot easier than hitting $35 billion.

And if that little seed stage startup hits a $2.4 billion valuation, I have a nice 3x fund returner. Add in follow-on investments in the most successful companies, and I might get that to a 6x or more.

Wrap-Up

/dev/agents may become a fantastic company, but it’s unlikely to be a good investment.

This is no reflection on the founders, and I wish them all the best. Moreover, /dev/agents is hardly alone in raising its first round at a sky high price.

So, why do VC’s make investments like this?

They may just want a shiny logo for their website. Saying they’re in X hot deal makes them look smart, like they’re insiders.

Me, I don’t play that game. If an investment can’t make money, I’m out.

What do you think of the /dev/agents raise?

Have a great weekend, everyone!

More on tech:

Why It’s Easier to Raise $3 Million Than $300,000

Benchmarks for Valuation and Traction at Y Combinator

Small Investors Lead to Big Investors

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order.

Why It’s Easier to Raise $3 Million Than $300,000

November 27, 2024

“I know this sounds crazy, but it’s actually easier to raise $3 million than it is to raise $300,000.” Yesterday, I was helping a wonderful founder plan his fundraise. Like many founders, he thought a small raise would be easier — but it’s not.

One of the weird things about venture capital is that raising a large sum is easier than raising a small one.

Signaling Risk

When I see a company raising a very small sum, I think to myself, “Why aren’t they raising more? Other companies are raising millions. Are they unable to raise?”

And if they’re unable to raise, is there something wrong with the company?

We don’t have much data to go on for an early stage startup. So investors pay a lot of attention to those signals, even if they can be misleading.

“What Happens in 3 Months?”

Let’s say a company is burning $100,000 a month and raising $300,000. What happens in 3 months?

If I’m putting a check into a company, I don’t want them running out of cash right afterward. So I look for 12 months runway after a fundraise closes. I’d prefer to see 18-24 or more.

Investors don’t want to see you limping along from small check to small check. They want you to raise significant cash and get the company to the next level.

Big Ambitions

Raising a larger round shows you have big ambitions. VC’s love ambitious founders.

Only a huge outcome will make the VC’s money. Their business model is to lose money on 30 investments and have a single company put them into the black.

Raising $2-4 million at seed shows that you plan on building this into a major company. Raising a couple hundred thousand may mean you just want to make a solid, small business.

That small business may be great for you. But it won’t get the VC’s paid.

Bringing in the Institutions

Most institutional lead investors need to write a check of $1 million or more at seed. If your whole round is $200,000, they can’t do that.

Now, you’re left with no lead.

Every other investor you meet will wonder why you don’t have a lead. Did they pass on the deal? Did you fail due diligence?

With questions like that in their minds, VC’s will just move on to the next deal.

Insiders vs. Outsiders

When you show up asking for $3 million for a seed stage startup, you’re showing that you know how the game is played.

You know what your company is worth and what it can raise. And you have the network to get it done.

When you show up looking for a $250,000 “seed round,” you look like an outsider. You look like you don’t know how venture capital works.

Fairly or unfairly, investors want to back insiders, not outsiders.

Wrap-Up

If you’re going to bother raising money, you may as well take down some serious cash. Aim for a seed round of $2-4 million.

You’re ambitious on signing customers, right? Bring the same ambition to your fundraise.

There will be no blog tomorrow for Thanksgiving.🦃 I’ll see you on Friday. Happy Thanksgiving, everybody!

More on tech:

Benchmarks for Valuation and Traction at Y Combinator

How Much Runway Do I Need?

Small Investors Lead to Big Investors

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