Q: Should I raise VC @ 2.5m ARR in 24mo? A: ...

CEO: My startup is at $2.5m ARR after 24mo, and it’s just me and my co-founder. We want to raise $5-7m at around $30m post. What do you think?

Me: I hate that idea.

CEO: Why?

Me: What are you planning on doing with the money?

CEO: We think we have pretty decent PMF, so we want to build out engineering, sales, marketing, and CS teams so we can speed up.

Me: The reason I hate it is because if it’s just you two right now you don’t have any repeatable processes. So, you’ll go hire all of these people, it will be a total mess, it will slow you down, and you’ll likely end up doing a large layoff to get small again. I’ve been there. Twice.

CEO: That makes sense. What would you recommend doing instead?

Me: If you can, I’d recommend continuing to bootstrap it, hiring someone in each department first, start delegating, and see how that goes. As that starts to work, hire a couple people under them.

CEO: I’m doing the math in my head - depending on how quickly that happens, I’ll probably need money for that.

Me: You will - but not $5-$7m. I had Ryan Allis (sold iContact for $169m) on our show last week. He said something I never heard before - NEVER raise more than 1x your ARR.

CEO: Why not?

Me: Because if you do raise 5-10x your ARR and you stall out, EVER, you will join the 80% of VC backed companies where investors get their money back but the founders get nothing. Keeping your raises to 1x your ARR dramatically lowers that risk, because you’ll be so far along when it comes time to deploy those large amounts of capital.

CEO: Sounds like pretty prudent advice. But won’t my valuation be lower if I take less money?

Me: Yes, but valuation is meaningless unless you are getting a chance to sell significant secondary. I’m talking many many millions. Raising as little money as possible maximizes your probability-weighted financial outcome.

CEO: Thanks for the advice. We’ll keep bootstrapping it for now, and only raise 1x our revenue if and when we need it.

Me: And you will end up being much richer for it!

CEO: AMEN