Since Volition’s inception in 2010, we have invested in financings ranging from $10M-$100M+. When thinking about how much a company should raise to capture its opportunity, let the metrics and objectives lead to what makes sense for the business. One perspective on why to raise more is to better compete in an industry where others have raised lots of capital. But beware — this often results in overspending and inefficient use of capital. The following are some thoughts for an executive leading a company in an industry that is being flooded with venture dollars. 

Many of our portfolio companies find themselves competing against companies who have completed much larger fundraising rounds. When a competitor announces a large raise, the initial reaction of a CEO is one of panic and paranoia. However, these CEOs should not shy away from well-funded competition. Lean in and embrace it. A sense of urgency and competition can be a great catalyst for your company. We have had many successful outcomes with portfolio companies that competed against others with a much bigger war chest of cash. 

There is a big assumption from portfolio CEOs that companies who raised large rounds will be able to execute effectively and grow into the expectations of these new investors. Too often, companies either fail to live up to the hype or founders are forced to move away from their capital efficient mindset given all the cash that is now on the balance sheet. Suddenly, companies may find themselves with overly high burn rates and are forced into a more binary outcome as they are now too deep into the “go big or go home” mentality. More capital doesn’t necessarily mean you will execute better or that you will generate stronger shareholder returns. Where do founders who raise large rounds fall short, and how can other companies take advantage of this? Executives of overly funded companies in the growth stage will often deploy capital to quickly fill a large pool of open hires as they look to step on the gas and expand their capabilities. The risk with growing headcount too quickly is that you may take a group of “A” players, add “B” and potentially even “C” players. The average team member now becomes a “B” player. People drive results and getting the right people in the right seats is critical to driving value. Be wary of lowering the bar for new hires to meet the hiring budget timeline. Ramping too fast may result in a loss of accountability and ownership across the organization. This coupled with losing millions in the process is not a winning hand. Keep the bar high for all new hires as bigger does not mean better.  

While capital efficiency has always been a core attribute of companies we invest in, the market has shifted from the mindset of growth at all costs to measured growth with better visibility into cash flow generation. We are all for being aggressive and helping founders achieve their aspirations for greatness, but also this should be done with a focus on sales efficiency metrics and customer unit economics. If these key indicators are strong and/or ramping in the right direction, invest aggressively to capture market share. However, if this is not the case after a reasonable investment period, the bigger the loss becomes, the harder it is to turn the corner to become a self-sustaining business. 

There can also be meaningful tailwinds to fuel growth when competing in a well-funded sector. Specifically, heavily backed competition may spend big dollars to evangelize a market and drive more awareness. The saying “a rising tide lifts all boats” can absolutely apply when competing against such well-capitalized players. Position your business for these tailwinds as increased budgets get allocated to your sector and the addressable market experiences rapid growth. Great execution coupled with leveraging the spend of others can not only drive significant top-line growth but can also help you do so in a more controlled expense manner. 

Finally, when considering taking much more capital than your business plan requires, think through whether you are doing so because it is the best decision for the business or is it that you need to accommodate prospective investors given their fund size and target check size. If the answer is more the latter, tread lightly. Being over-capitalized can be just as dangerous as being under-capitalized. Raise what is right for the business and with a partner that can be flexible to your needs. It is this disciplined approach that got you to this point. Therefore, make sure to pursue a risk-reward strategy that maximizes the chances of achieving your dreams. 

-Roger