Dear Suzy:
Thanks so much for reaching out. Wonderful to hear from you. I am so pleased to hear that you are enjoying yourself and meeting with success on your entrepreneurial journey. Great news on raising your round. Heartfelt congratulations!
But at the same time, wow, that is a big raise - $10M in venture money in a first round for a tiny start-up like yours is quite a development. If I could be so bold as to step back into the professor role for a moment, my advice would be simple: spend it extremely wisely and judiciously.
As you are no doubt reading on the web and in your local news, and hearing in your local coffee shops, the cash burn rates of start-ups in San Francisco are quite simply out of control. Given where we are in the current economic cycle for tech start-ups (namely, approaching the peak of a bubble for certain types of consumer & web companies), the reality is that you and your team are extremely unlikely to see another windfall investment like this unless you have used this money to lay down some serious tracks, make some tremendous progress and achieve some incredible milestones.
With the closing of this round, the post-money valuation of your company is, well, um, astronomical. Once you take that cash off the balance sheet and replace it with the progress, product, and people you bought with it, the critical question will be whether the business you have built is worth as much as today’s brand shiny new post-money valuation.
If you have some luck and execute extremely well, it certainly could be worth all that and more. But if you don't execute, the reality is that it simply won't be worth that valuation. And the inevitable result will be that you are either going to be unable to raise any additional money, or forced to raise money on "cram-down" terms which value the company at considerably less than the post-money valuation of this round. And as you may recall from class, the way financing documents work, the damage and dilution of that "down round" will be borne to a far, far greater degree by you and the other founders than by the first set of investors. Such an outcome will, for all intents and purposes, cost you your company.
So my advice to you and your team is to sit in mis-matched chairs. In fact, tuck the chair in at crappy old desks, and do it in cheap and unfashionable office space while you are at it. Preferably sub-let from some other start-up on a month-to-month basis. In short, make sure you run as creatively and zealously lean an operation as you possibly can (despite what any idiot investors may tell you to the contrary along the way) to ensure you get really good "gas mileage" (in progress terms) with all that money.
For sure, you should spend to acquire customers, and to improve the product, and the value you bring to those customers. This money is intended for precisely that purpose - spend it cannily and opportunistically and even aggressively in pursuit of customers and revenue growth. But for God’s sake, be cheap as hell in all other respects.
In particular, hire really carefully and selectively. Back in the last dot.com boom, my company bought a few start-ups, and we were quite simply appalled at how bad the average recent hires at those boom-time companies were – for the most part, these people were absolute losers whom we, as an acquirer, could not lay off quickly enough. As you grow your business and spend that $10M, force yourself to have the discipline to hire only A Players, however long it takes and however creative you need to be to find and secure them. (No, lavish perks are not the same as creativity.) You absolutely cannot allow yourself to fall into this trap of just hiring any old gold-rush wannabe from the hordes who are heading to SF in droves these days. Great people matter - they will save your company in times of desperation. Mediocre people are just going to get in the way in the clutch and suck you dry in the meantime. So choose wisely.
But enough of the dire advice. Take at least a moment to celebrate this awesome achievement and be excited about the potential of your team and new partners. The power of risk-capital-fueled entrepreneurship to transform the world is awesome to contemplate and humbling to behold. Congrats! Keep me posted.
