with investors pumping so much money into the industry it\u2019s easy to see why. we\u2019re hearing more and more about \u201cunicorns\u201d<\/a> valued at over a billion dollars and companies spending enormous sums to acquire other businesses. the numbers look amazing.<\/p>\n but not all funding rounds and acquisitions are cause for celebration. we saw that with what happened to lane becker. his company, get satisfaction<\/a>, had raised over $20m in funding and was once valued at $50m. they were recently acquired, but he and his co-founders didn\u2019t see a dime of it<\/a>.<\/p>\n i appreciate the sentiment, but don’t congratulate me on the gs acquisition. the founders were washed out of the deal. we got nothing.<\/p>\n \u2014 lane becker (@monstro) april 8, 2015<\/a><\/p><\/blockquote>\n although not every deal ends like this one, it should act as a cautionary tale for founders to remind them that raising lots of money doesn\u2019t necessarily mean there will be a big payoff<\/strong>. there are many factors to consider before diving into a big vc investment. in this article i\u2019ll explain how we think about funding at magoosh and the risks that founders take when they go for big vc money.<\/p>\n at magoosh, we raised a seed round of funding in 2011 (and some more in 2012), ~$750k total. we were cash flow positive by may 2012, broke $100k in monthly sales by september 2012, and have been growing off revenue ever since. we\u2019ve had the opportunity to raise additional funding but thus far we\u2019ve decided against it.<\/strong> raising money, while alluring, signs us up for a very high-growth trajectory\u2014that\u2019s the promise we\u2019d be making to the investors whose money we\u2019d take. and right now, i believe our business, employees, and customers are best served if we continue with our current growth path.<\/p>\n some might call us a lifestyle business<\/a>, though our early investors should hopefully see a >10x return on their investment. maybe we\u2019re an indie business<\/a>. regardless of what we\u2019re called, we are choosing a more controlled growth path<\/strong> for now. a path that enables us to maintain our optionality and culture: the happiest company in education<\/a> at some point, we may choose to raise a larger round of funding. if we do, we\u2019ll do our best to ensure we have a clear path to a big return on the new investment at the new valuation. but right now it feels like too much of a gamble.<\/p>\n i recognize that some companies don\u2019t have the luxury of this choice. they may be pre-revenue and focusing on user growth\u2014the only way to survive is to raise additional capital. other founders might actually want to go big and be the next facebook, twitter or bust, and i respect that. that takes courage.<\/p>\n but if you\u2019re a founder, think before you leap. vc economics is a tricky field to master. do your research and be intentional.<\/strong> here\u2019s a primer to help.<\/p>\n when you take vc money, you should understand what potential outcomes might look like and what you\u2019re signing up for. don’t be surprised like founder alex blumberg was in this candid podcast conversation<\/a> with his investor, chris sacca (starting at 11:12):<\/p>\n with a big round of funding at a high valuation, you are implicitly making a promise to your investors that you\u2019re going to swing for the fences. in other words, you just signed up to be a big company.<\/p>\n get satisfaction raised a $10m round at a $50m valuation, so they were promising to go huge (>$500m). as lane told business insider:<\/a><\/p>\n \u201cwe took a $10 million investment very prematurely [\u2026] at the time we were entertaining some acquisition offers. in hindsight, they would have been wise acquisition offers to take. the executive team got stars in their eyes about the money and took the investment. when you raise $10 million at a $50 million valuation, that is a serious promise you\u2019re making with your business.\u201d<\/em><\/p><\/blockquote>\n raising $10m is<\/em> a serious promise. your vcs are expecting a big outcome because they\u2019ve made promises to their investors too. and swinging for the fences can actually be sound business strategy for a vc, but if you don\u2019t hit a home run, you may get nothing.<\/strong><\/p>\n let\u2019s break it down to see why this is the case.<\/p>\n a vc firm isn\u2019t investing its own money. it\u2019s investing the money of its investors, limited partners (lps). the lps would like a return of at least 20% per year. this means that over a 10-year period, the vc needs to generate a 6x return.<\/p>\n let\u2019s say the vc invests in 10 companies per year, and each company needs 10 years to reach liquidity (some type of acquisition or ipo). one approach is to invest in 10 \u201cmodest\u201d growth companies where each one grows in value by 6x over that 10-year period. that\u2019s risky because if a few of them can\u2019t hit the 6x mark in 10 years then the vc doesn\u2019t get the return for the fund. bad strategy.<\/p>\n instead, many vcs look for home runs<\/strong>, companies that might generate a 100x return (the next uber or slack). if vcs invest in these high-growth, high-risk startups, they don\u2019t have to worry about the strikeouts (i.e., companies that give them no return) because the few remaining companies will still yield huge<\/em> returns.<\/p>\n you can see why it makes sense for vcs to encourage companies to spend on growth foregoing short-term profit or an early exit. some companies might fail, some might have modest returns, and a few will be big. but those big ones, 60x or more, provide a return for the entire vc fund, and every other positive outcome is gravy. it’s a reasonable strategy for a vc, and if you raise big, you should be prepared to try to grow fast and not sell early.<\/p>\n now, this all is an overly simplistic view of vc economics, and there\u2019s a lot more nuance to it. if you plan to raise money, you should read brad feld\u2019s venture deals<\/a> cover to cover. and know that sound strategy for a vc might not be the best strategy for you. they have more \u201cat bats\u201d with other companies while founders only get one (or one every 5 or so years).<\/p>\n if you\u2019re a first-time founder, consider what raising big vc money means before you go down that path. it\u2019s not all sunshine and rainbows. at magoosh, we are choosing to be very deliberate. but if you want to take a shot at hitting the next home run, by all means go for it\u2014just know what you are getting into.<\/p>\n\n
fundraising at magoosh<\/h3>\n
with no employee having left voluntarily for another job<\/del>. (update: we have had some turnover, and while i would have loved for those employees to continue working at magoosh, they’ve made the right decision for their careers. that said, we still have a healthy culture that i’m proud of!)<\/em><\/p>\nvc economics and expectations<\/h3>\n
\nhere are some factors to consider before you dive in.<\/p>\nhigh valuation and growth trajectory<\/h4>\n
vc strategy<\/h4>\n
moral of the story<\/h3>\n