Some thoughts on your ABBA round

I’ve noticed an ongoing trend over the past year or so that’s worth highlighting and commenting on. As valuations have risen (become “frothy” in VC speak, which is our nice way of saying “too high”) companies have started raising much larger Series A rounds. This is anecdotal – I’ll try to validate it when the numbers are released – but where companies used to raise $3-$5M for their Series A, one response to higher valuations has been a much larger number of companies raising larger and larger Series A rounds (say $6M-$10M). I think this is driven both by entrepreneurs who want to take risk out of their business with more cash on the balance sheet, as well as by investors who, despite higher frothy valuations, are looking to hit certain ownership thresholds. The obvious result of this is much higher post money valuations of Series A companies which puts more pressure on the exit dynamic (ownership thresholds may still be achieved, but the threshold for the proverbial 10x has gone way up).

But that’s not what I want to talk about. I want to talk about your cash burn.

You already know that I believe that you’re burning too much money. This is an especially slippery slope when you have $7M or $10M on your balance sheet. Traditionally companies raised enough money in their Series A to last 12-18 months. And there’s a temptation with that much cash on your balance sheet to up your cash spend. Maybe significantly. But I think think this is a mistake. The right cash burn for your business is dependent on your stage, the opportunity in front of you and your ability to manage scale, more than it is a function of the cash on your balance sheet (obviously cash can’t be ignored, but having more cash in the bank doesn’t equate to a license to spend money more rapidly). Think of your larger Series A as really an A/B round together (or at least A and part of B). And spend accordingly. I counsel entrepreneurs who have raised a larger A round to act like they still raised the typical $3-$5m. Set burn appropriately and look for specific product and market milestones to increase cash burn, just as they would if they had raised less cash. Ultimately this takes advantage of the larger raise. Because in my experience, in the early stage of a business, spending more money generally doesn’t equate with a higher degree of likelihood of success (nor often true speed to market).

  • Great point Seth. We are doing our series A and have been told by several friends/advisors that if you are raising below 5mn most VCs espl in US will find it too small. As I see, focus should be on knowing how much you really need, what you will do with the money and having a reasonable valuation, so that everyone is happy at the time of exit.

  • I have lived this. After my partner and I sold EnviroMetrics in 1999 we went different ways, he needed to move (promised his wife). We still are best friends and I was on his board.

    We both started companies. He raised $6mm out of the chute. I did a very small (less than $500k round). We each spent accordingly (two year runway). We both achieved the exact same traction. The problem is we could tighten our belts a bit and survive, they had to take a bridge round and do a fire sale. We eventually bought out our investors at a premium (you are right this is very rare, our DLA lawyer who does hundreds of venture deals with a staff of eleven had never seen one)

    Until you know (not hope, not think, not project) you can hit the gas pedal and go faster you chance burning up. The ending is that He has a very successful solar company with no investors. I have a great business with no investors.

    • Great anecdote Phillip. Thanks for sharing it!