Paul Graham has just published one of his best essays ever, “How To Raise Money”
I was nodding my head through the entire essay, but I want to draw particular attention to what Paul has to say about valuation. Now YC companies are (in)famous for raising money at huge valuations, and Paul has been a consistent advocate for entrepreneurs. But even Paul thinks that entrepreneurs have gone valuation mad:
“Founders who raise money at high valuations tend to be unduly proud of it. Founders are often competitive people, and since valuation is usually the only visible number attached to a startup, they end up competing to raise money at the highest valuation. This is stupid, because fundraising is not the test that matters. The real test is revenue.
Not only is fundraising not the test that matters, valuation is not even the thing to optimize about fundraising. The number one thing
you want from phase 2 fundraising is to get the money you need, so
you can get back to focusing on the real test, the success of your
company. Number two is good investors. Valuation is at best third.
The empirical evidence shows just how unimportant it is. Dropbox
and Airbnb are the most successful companies we’ve funded so far,
and they raised money after Y Combinator at premoney valuations of
$4 million and $2.6 million respectively. Prices are so much higher
now that if you can raise money at all you’ll probably raise it at
higher valuations than Dropbox and Airbnb. So let that satisfy
your competitiveness. You’re doing better than Dropbox and Airbnb!
At a test that doesn’t matter.”
There is so much to love about what Paul says above. But the real kicker is that Paul backs up his opinion with facts. Dropbox raised money at a $4 million premoney and AirBnB at $2.6 million. That doesn’t seem to have hurt them. Nor did raising Facebook’s first round at a $4.5 million premoney seem to hurt Mark Zuckerberg.
Jim Fitzsimmons, the CEO I recruited to run my very first company, gave me some wise advice, back when I was an egotistical young 25-year-old founder who was worried about valuation: “You don’t make your money when you’re fundraising. You make it when you exit.”
I think Facebook, Dropbox, and AirBnB would agree.*
* Yes, I know Dropbox and AirBnB haven’t exited yet. And I’m happy to take the other side for anyone who wants to bet that they go out of business before going public or getting acquired. They’re successful, period.