Office Hours Column: How (and Why) to Raise Later-Stage Capital
Spencer Rascoff serves as executive chairman of dot.LA. He is an entrepreneur and company leader who co-founded Zillow, Hotwire, dot.LA, Pacaso and Supernova, and who served as Zillow's CEO for a decade. During Spencer's time as CEO, Zillow won dozens of "best places to work" awards as it grew to over 4,500 employees, $3 billion in revenue, and $10 billion in market capitalization. Prior to Zillow, Spencer co-founded and was VP Corporate Development of Hotwire, which was sold to Expedia for $685 million in 2003. Through his startup studio and venture capital firm, 75 & Sunny, Spencer is an active angel investor in over 100 companies and is incubating several more.
I’ve seen my fair share of funding rounds, both as a founder and investor. And at the risk of stating the obvious, it's clear most startups need funding to succeed.
Even the most brilliant businesses with amazing founder-idea fit will eventually hit a dead-end if they do not have (or run out of) money to support their venture. And the unfortunate reality is these dead-ends are much more common than successfully launching an IPO.
Luckily, there are paths in place for founders and new businesses to continue on their journey towards continued expansion and solvent success. And, unsurprisingly, when it comes to raising money for startups, I have a preference for venture capital.
Last month I offered advice on venture capital fundraising for your startup’s seed round - the logical (but often intimidating) first step in seeking capital outside of friends and family, supporters or your personal bootstrapped wallet.
So let’s assume your warm intro was well received, your pitch deck was a home run, the best term sheet has been secured and the first dollars from excited investors have begun to flow. The seed has been planted, and your business is sprouting. Now what?
Keep the Funding Flowing
The biggest piece of advice I give to the companies in my portfolio is: Raise more capital. Raise it now if you can. And raise as much as possible. Bill Gurley from Benchmark Capital was on my Board at Zillow for a decade and consistently gave us great advice on this topic – imagine Bill’s baritone Texas drawl: “the time to eat the hors d’oeuvres is when they are being passed.” As usual, Bill is right.
With competitive markets (as so many are) and firms eager to invest, the time is ripe to secure additional capital. Raise as much as you can in your seed round, or water the seed with a Series A round to ensure your company’s ability to grow, compete and adapt if necessary.
I met with a founder the other day that recently emerged from an L.A. seed-stage startup accelerator with a solid $4M round. They told me they were not planning on raising again for at least another year. I immediately advised them to raise a Series A right away. The company is in a very competitive space, and if they did not raise the capital, their competitors would.
Another founder I spoke with had bootstrapped their way to a successful business venture and was already turning a profit through building software tools for small businesses. They had no intention of securing additional capital. Again, another highly competitive market. And again, I encouraged them to raise more money.
I also spoke with a founder this week who had initially raised an impressive $5M in their seed round for their incredibly innovative product. However, they did not seek funding for additional capital. Unfortunately, that company is now reaching the end of its cash after having to pivot twice. The founder regretfully admitted to me that they wish they had raised more in their seed round or went on to a Series A. With that additional funding, the business would have had the opportunity to pivot a third or fourth time, potentially saving the company.
These additional raises (fresh off the initial funding successes) allow founders and startups the continued ability to compete in their respective markets - and, more importantly, allow for faster growth. You’ll be able to spend more on hiring the best team and invest more heavily in product, tech, sales and marketing. In competitive markets where the winner often takes most, this extra funding can help companies insulate themselves against competitors and get on the fast track to becoming an industry leader.
And if the sheer number of Series A rounds and average amounts raised in 2021 is any indication - then the time is indeed now to raise.
Lean into the Momentum
There’s an interesting and continued phenomenon in venture capital investing right now - and it all comes down to momentum.
For example - I recently spoke with a company that had raised $100M at a $1B valuation. Only 6 months later, they raised an additional $300M at a $3B valuation.
The massive amounts of money and the rate at which it is being raised is amazing and unprecedented. And I predict it’s only going to get bigger and more rapid. (I’ll write in more detail about this in an upcoming article, but because VC returns have been so incredible over the last 20 years - institutional investors are now allocating more of their funds towards this type of investment. This trend is creating larger round sizes and higher valuations.)
Additionally, a comparison can be made between these late-stage funding environments and momentum trades. Venture capital is essentially a type of growth investing - and once the momentum starts building, the investors are not necessarily basing investment strictly on the analysis of the business’s fundamentals - but rather the potential future returns.
The same momentum is seen in these later-stage funding rounds, where investors - motivated by the fear of missing out and the potential of high returns - continue to push the amounts raised and valuations higher and higher.
All this is to say, startups should only raise this additional capital if they have a solid plan with what to do with it. There are reasons when raising too much capital can have downsides, including reducing the likelihood of exit offers, normalizing inefficiencies within the company (if you are solely dependent on cash - you may spend too much too soon or less effectively), and the downfalls of a down round. You should not raise the money just for the sake of having a large valuation and lots of cash in the bank. Only raise the money if you have a clear allocation plan.
For founders with a plan who are pulling out all the stops to ensure success, don’t shy away from the momentum and opportunity right now to raise more capital. A common expression in startups is “always be recruiting.” I agree, and I’d add another good aphorism: “always be fundraising.”
Spencer Rascoff serves as executive chairman of dot.LA. He is an entrepreneur and company leader who co-founded Zillow, Hotwire, dot.LA, Pacaso and Supernova, and who served as Zillow's CEO for a decade. During Spencer's time as CEO, Zillow won dozens of "best places to work" awards as it grew to over 4,500 employees, $3 billion in revenue, and $10 billion in market capitalization. Prior to Zillow, Spencer co-founded and was VP Corporate Development of Hotwire, which was sold to Expedia for $685 million in 2003. Through his startup studio and venture capital firm, 75 & Sunny, Spencer is an active angel investor in over 100 companies and is incubating several more.
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