If you're an entrepreneur, how much money do you want to take when you raise money?
Most people's idea should be: not like Han Xin Dianbing, the more the merrier. In this way, there is not only more abundant grain and grass in the hand, but also optimistic about the capital market, killing two birds with one stone.
One company, however, did the opposite. Low-code application company Retool has reduced its valuation in its recent Series C funding round. Its founder, David Hsu, said: "Raise as little money as possible to achieve our goals.
This road is wild enough that ordinary people can't afford to play.
I. Retool's "routine"
In 2017, Retool was born at Y Combinator. It is designed to provide a tool development platform for enterprises to build custom business tools using a limited number of programming languages.
With just four employees, Retool generated millions of dollars in revenue that year and then opened a series of financings:
In 2019, Retool raised its first funding. Then in early 2020, a $25 million Series A funding round led by Sequoia was made. In October of that year, another $50 million Series B funding round was rapidly raised.
Hsu said Retool barely touched the money. The author believes that Hsu is in "Versailles" - he has enough income and does not need the money he raised.
Currently, it's headquartered in San Francisco, with 130 employees, tens of millions of dollars in revenue, positive cash flow, and customers including Coinbase, NBC, Peloton, Volvo, and more.
David Hsu
According to the normal trend, as the company grows and the valuation increases, the scale of financing should be larger and larger. However, in the recent Series C financing, Retool went against this customary capital model.
It first turned to one of the earliest individual investors — Color Genomics co-founder Elad Gil, Stripe co-founders Collison and John, and former GitHub CEO Nat Friedman.
Retool's new valuation is set at $190 million. Although it is twice as much as before, it is still lower than market expectations. The fundraising was only $20 million, less than both Series A and Series B.
Many people don't quite understand this style of play, who doesn't like money?
In Hsu's view, maximizing valuations and raising capital looks good, and the media also likes to attract attention with large financings with high valuations, but it also hurts the team:
Reaching peak valuations too early can lead to a significant decline in employee earnings.
Hsu cares about the loss of employees due to high valuations and huge financing.
For example, he found that in the weeks after the valuation reached $5 billion or $10 billion, employees who joined a tech company faced far less financial gains than those who joined in previous weeks.
More specifically, they are spending more money on stocks that could have been acquired at a lower price a few weeks ago.
There are plenty of examples to illustrate this point. Uber and Coinbase, for example, have similar IPOs with similar market capitalizations, but the financial outcomes of their employees are completely different.
Hsu said that when hiring for some employees, they worried that the company's valuation had been overvalued and that they were missing out on opportunities to maximize their earnings. Hsu believes that the team is an important driving force for Retool to go all the way down, and it is his responsibility to let the team get a good stock purchase price.
Hsu has developed its own unique financing model, one that uses a small-scale, step-by-step financing model every 6 to 9 months. Calculated this way, the typical engineer could save $1 million when exercising stock options, and executives could save up to $10 million.
Overall, Hsu has three perspectives on financing startups:
Raising capital at the right valuation, not the highest valuation; raising as little money as possible to achieve the goal; and the team is as important as the investor.
Hsu said it would be happy to use its company as an experimental ground for this financing model. He would also like to see more startups emulate themselves. While he knows that it will take a while to convince others to do so, he will do his best.
Second, the benefits of financing
Many Of Retool's investors are supportive of Hsu's financing model. Former GitHub CEO Nat Friedman said: "I think it's in the company's interest to acquire the best talent and compensate them." ”
Other investors say the new funding model can help companies stay self-disciplined in spending and gain the upper hand in the battle for talent.
However, there are also many people who oppose it.
Stewart Butterfield, the founder of Slack, believes it's best to raise as much money as possible when it's cheap.
Other venture capitalists point out that if the current abundance of capital markets changes, microfinance and the hope of quick follow-up can be risky.
Bryan Schreier, a partner at Sequoia Capital, also said: "Not every company can adopt this strategy. ”
The author also believes that Retool's financing model is not emulated by every startup. In fact, there is no fixed routine in financing activities, and it is all up to entrepreneurs to judge the situation and select the best.
First of all, startups must think clearly about one problem at the beginning of financing:
Why finance?
This is the most primitive and simplest problem, but also the most complex and critical problem. We often say that money is not a panacea, but without money it is impossible.
For a start-up, the benefits of financing are not just the money itself, it can bring at least four advantages:
The first is development. If a start-up's model is clear and the direction is correct, financing obtains a large amount of capital to help the company quickly occupy the market, surpass its opponents, and run to the front of the track in a short period of time to achieve leapfrog development.
The second is recognition. A company that is able to obtain large-scale financing shows that the capital market recognizes its business, team and potential. Invisibly, the reputation and reputation of the enterprise have been promoted, which is conducive to continuously raising funds, attracting talents, and improving the visibility of the industry.
The third is resources. After successful financing, investment institutions will not only bring money, but also bring more abundant resources: such as orders, customers, government relations, etc., which can help enterprises to gain a firm foothold in the market and lay a good foundation for future development.
The fourth is management. After the financing is completed, some experienced venture capital institutions can bring a more formal and efficient management system to the start-ups. It will transform startups from individual decisions to group decisions, which will not only improve the ability of enterprises to cope with market instability, but also reduce the risk of decision-making.
From this point of view, it is naturally a good thing to get more money at a high valuation in financing and to have a closer cooperative relationship with investment institutions.
Third, the disadvantages of too much money
Of course, there are two sides to everything. Some people think it's good to take more money, and some people think it's a bad thing for startups to have more money.
Retool wants to take less money in the financing because he does not want the interests of employees to be damaged, thus affecting the combat effectiveness of the entire team.
In the eyes of others, more money is a constraint on the business: execution and flexibility.
Fred Wilson, co-founder of New York-based Venture Capital, stressed in his blog that it would be foolish to integrate too much money too early.
In his view, the amount of financing raised by startups in the early stages is often inversely proportional to their own success. The more money you take, the more likely it is for the company to fail.
Wilson believes that startups are prone to make the mistake of desperately trying to save more money in order to live longer before they run out of money.
This seemed to Wilson to be a very short-sighted idea. In the long run, startups should focus on how quickly they can achieve their goals, rather than living for the sake of living. When the goal is achieved, the funds will always follow.
Others believe that too much financing can lead to inflexible businesses.
John Mullins, associate professor of management practice at the London Business School (LBS), believes that the business model that startups think of up front is sometimes not the best option.
If you put too much money into it, it may be able to support you to put this model to the ground. But because of the focus on its landing, it may be overlooked or difficult to implement other better options.
Domestic JD.com, in fact, has been loaded on this heel. Liu Qiangdong once admitted that the most regrettable thing is that he did not do mobile payment. Because he had raised too much money in logistics at that time and burned too much money, he did not dare to invest heavily in mobile payment.
In fact, he had seen the opportunity, but it was difficult to turn around.
Of course, there is also a positive case.
Skimlinks, a marketing website founded in 2006, initially used a B2C model. In order to break through the world, the company raised a lot of funds. But when the money was about to burn out, it had not yet found a sustainable profit model. The leak occurred during the overnight rain and the financial crisis broke out, making it difficult for the company to raise funds.
In a critical moment, co-founder Alicia Navarro came up with the idea of selling back-end technology to other companies, replacing the B2C model that did not work with a B2B model that could work, so that the company would be in a desperate situation.
Without Alicia Navarro to turn the tide, I am afraid that Skimlinks will continue to go down the same pattern until it falls.
Fourth, don't follow suit
In my opinion, whether a startup can emulate Retool and reduce its valuation for less money depends on whether it can control capital.
According to Hsu, the most appropriate ones who can now imitate him are capital-efficient companies.
What is a capital-efficient enterprise? To put it bluntly, their earning power is strong, and their external capital relationship network is strong.
Like Retool, born out of Y Combinator, it is close to the sequoia and rich in resources. At the same time, profitability is strong, and the money raised hardly needs to be used. Then you can "waywardly" reduce the valuation in the financing.
Otherwise, it is still honest and follows the traditional financing model.
Resources:
1. Why Retool's CEO took a "risky" fundraising approach on the road to a valuation of $1.9 billion
2. [Micro Angel Crowdfunding Network] Financing tips for start-ups: not the more money the better