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The Rising Tide

We’ve all heard the saying “A rising tide lifts all boats”.  What I’m thinking about lately is the rising tide of startups that are all competing with each other for scarce resources (talent and capital, mostly).  I’m seeing an interesting effect in the startup ecosystem that goes something like this:

Mid 2013: Your company raises a very nice round and is off to the races.  You, your investors and advisors all discuss the right milestones for you to raise your next round in the coming 12 to 18 months.

Mid 2014: Your company has been tracking very well.  You are not the next Snapchat, but you have scaled well and hit most (if not all) of the milestones you set out to hit since Series (X).  You are gearing up to raise your next round but all of the prospective investors are telling you that you aren’t ready yet and need to show more traction.

What happened?

What happened was that back in mid 2013 when you raised Series (X), a thousand other startups poured into Silicon Valley (or out of ABC Incubator in Somewhere, USA) and raised rounds as well.  And all of them have been gunning for their Series (X+1) right alongside of you.  So when you walk into a VC’s office now you are getting compared to all of the other startups from your chronological cohort, and unless you have been really breaking-out, you just aren’t rising above the noise.  What you and your trusted advisors thought would be “good enough” to raise the next round a year+ ago may have been true AT THAT TIME, but now the bar is higher, and it isn’t good enough.

This feels like a dynamic that may be unique to the current times, as the startups coming out of a glut of seed investment in the last few years make their way through the funding stack.  Whether or not that is true, it feels real and like something we should pay attention to.

I feel like this dynamic is similar to what happened to a lot of baby boomers saving for retirement; another case where a huge spike in a population moved it’s way through a system.  For 30-40 years they thought that if they saved $1m they would be wealthy in retirement.  But they didn’t think about the fact that by the time they got to retirement $1m wouldn’t be enough because their life expectancies would be much longer than they were decades ago.  The fact that a lot of educated people got hit with this phenomenon just shows how insidious it was…and how rarely people step back to consider the macro environment they are operating within.

I think a lot of startups are facing a similar dynamic when they go to fundraise, and it could be very dangerous for them.

So what should you do now?

If you are thinking about raising money in the next 6-12 months this would be my suggestion:

1. Take a hard look at what is required for a company to raise the round you want to raise in the current market environment.
2. Map those requirements to what your specific company/results need to look like in 6-12 months (basically whenever you want to raise) in order to get that financing.
3. Assume that everyone else who is planning to raise money in the same time period is doing the same thing.
4. Assume that your initial assumption for what would be required to get the financing you want is not good enough.  As a shorthand, try taking your original estimate and doubling it.  [We can debate specifics here, but you get the idea.]

In short, your baseline assumption should be that whatever you are planning to do, it isn’t good enough.  You need to grow faster.  Your product needs to be better.  Your team needs to level-up.  You aren’t just competing with companies in your space – you are competing with every other company that is seeking funding.  And as more and more capital seems to be consolidating in the hands of fewer big firms, your alternatives for funding may be shrinking (obviously this is also not good for you).

Basically you are about to get hit on this from both sides.  It feels like the best way out is to raise your expectations for yourself and your company.  Move faster.  Be more focused.  Hire better people.  Make these changes now, because if you wait until they are obviously necessary, it will be too late.

  • Paul W

    Great point Jason. We skate to the puck with market all the time. So a rising tide lifts all bars makes sense with respect to the competition for capital too.

BIO :

Jason helps companies prepare for, and scale through, hyper-growth periods. He often works closely with CEOs to assist with raising capital, building/managing teams and navigating complex negotiations.

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