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Why Raising the Most Dollars and the Highest Valuation is Not Always in Your Best Interest

By: Garret Flynn, Principal

Many startup founders are laser-focused on raising the most money at the highest valuation possible. While this may seem like the best strategy for success, it’s important for founders to carefully think about the balance between the number of dollars raised, the market valuation, the phase of the company, and the short and long-term goals. It is not always in a founder’s best interest to raise the most money at the highest valuation.

First and foremost, it’s important to understand the raise valuation is essentially the minimum bar the founder sets for generating a return from the investor’s point of view. The higher that bar is, the harder it is for the company to reach “escape velocity” to generate cash returns to investors (versus paper returns). This means the pressure will be on the startup to scale quickly and generate significant revenue to justify that high valuation. This can often lead to unrealistic growth expectations and pressure on the startup to prioritize growth over profitability.

In many cases, startups that raise a lot of money at a high valuation become focus on short-term goals and strategies, rather than taking a longer-term view of the business. This can lead to a lack of focus on building a sustainable and profitable business model, which can be problematic if the startup hits a bump in the road or if the market shifts in an unexpected way.

A high valuation can be exciting but also lead to a sense of entitlement and complacency among the startup team. When a startup is valued at a high level, it can be easy for the team to feel like they have already achieved success and become less motivated to work hard and innovate. This can be particularly dangerous in the early stages of a startup, where hard work and innovation are still critical to success.

So, what’s the right balance when it comes to raising money and at what valuation? It really depends on the individual startup and its goals. For some startups, raising a lot of money at a high valuation may be the right move if the goal is to rapidly grow and capture a large market share. However, for many startups, a more measured approach to fundraising may be more appropriate.

Focus on building a sustainable and profitable business model:
Balanced with growth and traction, sustainability or at least a path to sustainability should be the top priority for any startup. If the business model is not sustainable or profitable, it’s increasingly unlikely that the startup will be successful in the long run, regardless of how much money is raised.

Consider the long-term implications:
Startup founders should think about the long-term implications of any fundraising decisions. Will raising a lot of money at a high valuation put too much pressure on the team to grow quickly? Will it lead to a sense of entitlement or complacency? Will it dilute the founder’s equity too much?

Build a strong relationship with the right investors:
Finally, it’s important for startup founders to build a strong relationship with their investors. This includes being transparent about the company’s progress and challenges, seeking out advice and mentorship from investors, and working collaboratively with them to achieve common goals. When founders and investors have a good working relationship, it can help to mitigate some of the downsides of raising too much money at a high valuation.

While it is tempting for startup founders to focus on raising the most money at the highest valuation, it’s important to think about the balance between the amount of dollars raised and at what valuation. Raising too much money at a high valuation can lead to unrealistic growth expectations, a sense of entitlement and complacency, and a lack of focus on building a sustainable and profitable business model. By being strategic about fundraising, considering the long-term implications, and building a strong relationship with investors, startup founders can ensure that they are making the best decisions for their business and their long-term success.