Educate yourself on the value of dilution. The costliest round is the early round. Entrepreneur has to understand that they cannot get carried away by the artificial valuation game. This is the most important lesson that founders should understand because VC math is all about having a model. I think dilution is the most important lesson at this juncture. Know that your company is not really worth what it is being valued at. So the only thing that you can do is find yourself an investor who can raise at a much lower dilution and if you are confident about your ability to run the company, then go with that investor or optimize.
EDUCATE YOURSELF ON THE VALUE OF DILUTION. THE COSTLIEST ROUND IS THE EARLY ROUND. THE ENTREPRENEUR HAS TO UNDERSTAND THAT THEY CANNOT GET CARRIED AWAY BY THE ARTIFICIAL VALUATION GAME. THIS IS THE MOST IMPORTANT LESSON THAT FOUNDERS SHOULD UNDERSTAND BECAUSE VC MATH IS ALL ABOUT HAVING A MODEL. I THINK DILUTION IS THE MOST IMPORTANT LESSON AT THIS JUNCTURE. KNOW THAT YOUR COMPANY IS NOT REALLY WORTH WHAT IT IS BEING VALUED AT.
You need to have what you think is meaningful. In the end, if you think 10 percent is meaningful for you, or whatever the number is. If you continue to be motivated by that number, you don’t say that it’s a Monday morning: all the days of the week, all times of the day are just harmonious. They just fly by when you are having a lot of fun. It should be good and aim for something much, much bigger because the bigger it gets, your insignificant percentage also becomes a big number. An absolute big number. That is what my advice would be. Work on increasing the overall pie, not just your share of the pie.
During a random conversation, someone told me, no matter how much you raise, the first investor will take away 20 percent. Because there is no valuation, what do you have, and you also don’t know, and it is okay because it is your first time. He said even the second one will take 20 percent away. Then after that, you can become more discerning, you can show some graph of ARR or something, so then you can be a little bit more, and that is in the ballpark and then you start settling in on, well, okay, we got into some serious three-digit millions of dollars of valuation and things kind of started becoming better after Series B and C and all that.
- UNDERSTAND HOW DILUTION WILL IMPACT THROUGH VARIOUS ROUNDS
- DON’T GET CARRIED AWAY BY THE VALUATION GAME. UNDERSTAND THE PARTNER YOU ARE GETTING ON BOARD