Burn, Baby, Burn

I was at our annual Impellent Ventures Finger Lake Summit last week when the inimitable Eric Paley said something that really registered in my brain - he said that entrepreneurs should measure their dilution in burn, not dollars invested. It stuck with me.

The past three years have been written about breathlessly and often as a unique period in company building and venture capital. I'd argue that oceans rise, and empires fall, but when you're in the middle of it it always feels singular. But as my wife always tells me, I'm ever the (slightly annoying) contrarian. In any case, a tidal wave of financings at high valuations has given way to a historic drought: markedly fewer rounds across the stack and discount pricing. So entrepreneurs have had to go into war time mode and figure out a way to conserve resources that they may extend cash runway until they hit their next inflection point - whether that be a downstream financing or liquidity event. Q1 and Q2 of 2024 is looking mighty interesting from a supply and demand standpoint as the backlog of companies needing money to continue operating finally gasp their last breaths of the last round and head into market together, at the same time - but that's a topic for another time.

If a company finds itself in the precarious position of being in-between rounds, and in-between growth spurts, it can get pretty hairy for a cap table. I've written about this before, but the current environment (outside of AI) adds insult to injury to the entrepreneur - you need to prove more on less money, and then be paid less for said proof (higher traction metrics, higher cost of capital, lower valuations). But all is not lost, and iron has proven to be forged in fire - some really high flyers came out of an arguably similar environment in 2008-2010: AirBnB, Square, Slack, WhatsApp, Uber, Instagram, Pinterest. That's a whole lot of enterprise value right there.

We at Impellent believe that it is of vital importance that 99% of the startups out there lower their burn and lengthen their runway. That's not unpopular advice - and easier said than done - but pretty standard stuff. We've even gone as far as to form gentleman/woman's agreements with founders upon the inception of a financing to plan for 24 months of financing to be in the bank, and a burn rate to match. We think it's important to have visibility into 2025, and thereby enough time to adjust milestones and make it to the next round of financing/inflection point. There is a renewed focus by downstream investors (Series A, B, C, and beyond) on unit-cost economics and actually building a business - a flight to quality, if you will. Another golden "Paley'ism" is that businesses need, now more than ever, to build intrinsic value for their customers, and construct an economic engine behind it. I like that. But it's the downstream investor's prerogative to slow down, really. In times of less liquidity (the IPO window may be opening a bit with Instacart and Klaviyo...but that will take a while to have trickle-down effects), these folks hold the purses and they become preternaturally...deliberate. It doesn't pay in environments like these to play it fast and loose.

Back to Eric's original wisdom - measure dilution in dollars spent not dollars invested. What I believe he means by this is that if you do all of the stuff I mentioned above, you may not need to raise another round of financing - or if you do, it'll be on your terms (and a higher valuation). Lean on your investors to help you dig into your operating models and figure out how to get more lean and efficient. Have those hard conversations with VCs, mentors, and your team now. Make more progress on less dollars spent and you will have optionality into a subsequent financing, if there even is one. This means you will have less dilution and you all will own more of your company.

It's not the original valuation and round of financing that nukes your ownership (pre-seed and seed are typically the least dilutive rounds, comparatively), it's when you have to pay up for the downstream rounds. You don't need money you haven't spent. Case-in-point, Andrew at Klaviyo has spent a grand total of $15M of the $454.8M primary venture capital he has raised, resulting in his taking Klaviyo public with 38% ownership of the juggernaut. Andrew is the walking embodiment of measuring dilution in burn, not dollars taken in. If you can, be like Andrew, and listen to my friend Eric. It'll reward you and yours generously.