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So @garrytan has some good points in this thread about power laws in investing. But there is a different point in this discussion that has nothing to do with whether the investor is getting a good price and is all about what the *startup* does after it raises.
Have you ever heard someone say that a startup failed because it raised “too much money”? I couldn't understand what that meant, until I saw it happen, up close and in slow motion.
The problem, of course, isn't having “too much” money. The problem isn't even exactly being undisciplined in spending it.
The problem is *thinking you're at a later stage* than you are.
The problem is *thinking you're at a later stage* than you are.
“Lean Startup” became a thing because circa 2008 too many companies were raising a ~$7M Series A and then doing a big press launch for a product they hadn't validated any consumer demand for or product-market fit with. (Spoiler alert: these companies flopped.)
Of course, the money doesn't cause misjudgment—it's more the other way around; companies raise a lot because they misjudge what stage they're at. But the money—and even before that, the enthusiastic investor response that lets you raise it—has a way of affecting your judgment.
You can make this mistake in the opposite direction too. In retrospect, I raised too *little* money for @fieldbookapp and didn't do *enough* product development before launching. Again that was primarily my misjudgment, but the amount of cash in the bank affected my judgment.
So when @garrytan says “Startups don’t ever die because they raised a full round at $20M valuation… They die because the product sucks or the market doesn’t care”, this is true. But sometimes raising at $20M can help blind you to problems in your product or market.
And yes, there are some cases where a company raised “too much” money but had great product-market fit and put the money to good use! Money is not poison. That doesn't mean the effect I'm describing doesn't exist.
I think the takeaway for founders is: raise as much as you can (at a reasonable valuation that you can grow into), but think carefully about *what stage* you're at and don't let money or investor response (positive or negative) cloud that judgment
And the takeaway for investors is: don't worry too much about price in early-stage deals, but do evaluate whether the founder has good judgment about what stage they're at (and the deal valuation can be a proxy for that)
