Nov 14 2012

Some thoughts on your ABBA round

I’ve noticed an ongoing trend over the past year or so that’s worth highlighting and commenting on. As valuations have risen (become “frothy” in VC speak, which is our nice way of saying “too high”) companies have started raising much larger Series A rounds. This is anecdotal – I’ll try to validate it when the numbers are released – but where companies used to raise $3-$5M for their Series A, one response to higher valuations has been a much larger number of companies raising larger and larger Series A rounds (say $6M-$10M). I think this is driven both by entrepreneurs who want to take risk out of their business with more cash on the balance sheet, as well as by investors who, despite higher frothy valuations, are looking to hit certain ownership thresholds. The obvious result of this is much higher post money valuations of Series A companies which puts more pressure on the exit dynamic (ownership thresholds may still be achieved, but the threshold for the proverbial¬†10x has gone way up).

But that’s not what I want to talk about.¬†I want to talk about your cash burn.

You already know that I believe that you’re burning too much money. This is an especially slippery slope when you have $7M or $10M on your balance sheet. Traditionally companies raised enough money in their Series A to last 12-18 months. And there’s a temptation with that much cash on your balance sheet to up your cash spend. Maybe significantly. But I think think this is a mistake. The right cash burn for your business is dependent on your stage, the opportunity in front of you and your ability to manage scale, more than it is a function of the cash on your balance sheet (obviously cash can’t be ignored, but having more cash in the bank doesn’t equate to a license to spend money more rapidly). Think of your larger Series A as really an A/B round together (or at least A and part of B). And spend accordingly. I counsel entrepreneurs who have raised a larger A round to act like they still raised the typical $3-$5m. Set burn appropriately and look for specific product and market milestones to increase cash burn, just as they would if they had raised less cash. Ultimately this takes advantage of the larger raise. Because in my experience, in the early stage of a business, spending more money generally doesn’t equate with a higher degree of likelihood of success (nor often true speed to market).