Plus, One-to-Many Relationships in Work, Technology, and Life

The TL;DR:

• Let’s Chat D2C: The Power of Not Raising Excessive Capital
• What I’m Thinking about this Week: One to Many Relationships in Work, Technology, and Life
• The D2Z Podcast: In this week’s episode, I sat down with Elizabeth Greene, Founder & CEO at Junglr, an Amazon advertising agency.
• App Updates & Highlights: I’ve been looking for new and interesting Shopify apps. Let me know if you know of any!
• Upcoming Events: I’m headed to Park City today until 8/28 for Recharge’s Brand Event. Let me know if you’re in the area and want to connect!

Let’s Chat D2C - The Power of Not Raising Excessive Capital

Several companies in the Shopify/ecommerce ecosystem, both brands and technology platforms, have raised a significant amount of capital over the past 4 years. For some, it was a great decision and allowed them to scale significantly. For others, the money has run out or is about to run out, and it’s unclear where to go from here.

So, today, I want to discuss the power of not raising too much money (if at all).

Raising Before Having a Clear Path to Acceleration

Personally, I am much more of a fan of raising money when you already have product-market fit (PMF) and will be using the funds to pour gasoline on the fire. Too many times, I’ve seen businesses raise pre-seed rounds, burn through some of the money, pivot successfully, but then need to raise again rather quickly because they used half, if not more, of their previous round on an entirely different product and direction. Dilution starts to get worse and worse and becomes a significant factor.

Instead, get scrappy with building an MVP and demonstrating PMF before going to raise money.

Expectations

Venture capital (VC) funding provides crucial resources for startups to scale, but it comes with significant expectations and pressures:

1) Aggressive Growth Targets

• Rapid Scaling: VCs expect fast growth and market leadership, often requiring aggressive revenue and market expansion goals.

2) Fundraising and Valuation Pressure

• Continuous Capital Needs: Securing one round sets the stage for future rounds, adding pressure to meet milestones for higher valuations.
• Dilution Concerns: Founders must balance the need for capital with ownership dilution.

3) Strategic Influence and Control

• Board Involvement: VCs often take board seats, influencing key strategic decisions and the company's direction.
• Exit Strategy: VCs expect a clear exit plan, such as an IPO or acquisition, within a specific timeframe.

There is a list mile-long of technology companies and brands that I think could have been successful as a small business but raised $10M+, and their business could not handle that sort of scale or growth.

4) Accountability and Transparency

• Regular Reporting: Founders are expected to provide detailed updates on performance, challenges, and how they are addressed.

While this isn’t necessarily bad, you can spend more time reporting on the business and its operations than growing it.

5) Personal Pressure

• High Stakes: The stakes are high, with significant pressure on founders to succeed and validate their vision.
• Work-Life Balance: The demands of rapid growth can lead to stress and potential burnout, challenging work-life balance.

In essence, while VC funding accelerates growth, it also carries with it expectations for rapid scaling, strategic alignment, and a clear path to exit, all of which are subject to intense scrutiny and pressure.

Having to Raise Again with a Down Round

Key Differences Between a Down Round and Recapitalization

Down Round (Lower Valuation Funding)

• A "down round" occurs when a startup raises capital at a valuation lower than in previous funding rounds.
• This typically happens when the company hasn't met growth expectations or when market conditions have changed, making investors less willing to pay a premium.
• A down round results in dilution for existing shareholders, as new investors are purchasing shares at a lower price.
• It’s often seen as a sign that the company is struggling or facing challenges, though it can also be a strategic move to secure necessary funding.

Recapitalization

• Recapitalization involves changing the composition of the company's capital structure, such as converting debt to equity, issuing new equity, or refinancing debt.
• It can occur in various situations, including financial distress, strategic growth, or as part of a broader restructuring.
• Recapitalization may or may not involve raising new funds. It often focuses more on reorganizing the existing capital (equity and debt) rather than just the valuation at which new equity is issued.

When They Might Overlap

While they are distinct processes, a down round could be part of a broader recapitalization effort if the company is also restructuring its existing capital (e.g., converting debt to equity) to stabilize or strengthen its financial position. For instance, a startup might undergo recapitalization to renegotiate with creditors or restructure the ownership before or as part of raising a new round at a lower valuation.

Implications of a Down Round:

• Dilution: Like recapitalization, a down round results in dilution for existing shareholders, including founders and early investors.
• Signaling: A down round can signal to the market that the company is underperforming, which might affect future fundraising efforts.
• Employee Morale: It can also impact employee morale, especially if stock options are a significant part of compensation.

Raising a new round of funding at a lower valuation is not a recapitalization in itself. However, if the company is also restructuring its capital, it can be part of a broader recapitalization strategy.

Recapitalization

Recapitalization is a financial strategy used by startups (and other companies) to restructure their capital by changing the composition of their equity and debt. There are other reasons that financial struggles to undergo a recapitalization, but it can help it reorganize its capital structure to avoid bankruptcy or insolvency. This could involve converting debt into equity or raising new equity to pay off debt.

How Recapitalization Works

• Equity-to-Debt Swap (or Vice Versa): The company might convert equity into debt or vice versa. For example, debt holders might agree to exchange their debt for equity if they believe the company’s prospects are strong. Conversely, the company might issue new debt to buy back shares or to reduce the equity base.
• Issuing New Equity: The company might issue new shares to raise capital, which could dilute existing shareholders but strengthen the balance sheet. This is often seen in venture rounds or when bringing in new strategic investors.
• Debt Refinancing or Payoff: The company might refinance existing debt with more favorable terms or pay off debt using newly raised equity capital.
• Share Buybacks: In some cases, the company might use its capital to buy back shares from existing shareholders, reducing the number of shares outstanding and potentially increasing the value of the remaining shares.

Implications for Founders and Early Investors:

• Dilution: New equity issuance usually leads to the dilution of existing shareholders, including founders and early investors. This means their ownership percentage in the company decreases, though the value of their shares might still increase if the recapitalization improves the company's prospects.
• Control and Governance: Recapitalization can lead to shifts in control and governance, especially if new investors come in with significant stakes. Founders might lose some control if their ownership percentage is diluted significantly.
• Valuation Impact: The company’s valuation can be affected by recapitalization. For instance, if the recapitalization is seen as a move to rescue a financially troubled company, it might negatively impact the valuation. On the other hand, if it’s seen as a strategic move to fund growth, it could boost the valuation.
• Exit Scenarios: Recapitalization can affect exit scenarios, such as IPOs or acquisitions. New investors may push for certain exit timelines or terms that might differ from the founders’ or early investors’ expectations.
• Changes in Payout Priorities: If debt is converted into equity, the priority of payouts in the event of a sale or liquidation could change. Debt holders might lose their preferential treatment, or new terms might be established for different classes of shares.
• Tax Consequences: Recapitalization can have tax implications for founders and investors, depending on how the transaction is structured. For instance, exchanging debt for equity might trigger a taxable event.

The Power of Not Raising Too Much Money

Beyond all of the above reasons, and also the obvious (not raising external capital allows you to retain full control and ownership of your business), there are a few additional reasons I’m bullish on not raising too much money.

You can grow at your own pace, financing through revenue or debt rather than equity. This approach lets you focus on sustainable, long-term growth without the pressure to scale rapidly or meet investor-driven milestones. You’re also free from the pressures of premature exits, enabling you to decide the future of your business on your terms.

Maintaining control means preserving the company culture and creating compensation structures that align with your ethos. Without external investor expectations, you can experiment, pivot, and make decisions that prioritize the business’s long-term health and employee welfare, giving you the freedom to navigate challenges with a focus on sustainability and integrity

What I’m Thinking About This Week - One to Many Relationships in Work, Technology, and Life

First, let me clarify what I mean by one-to-many relationships with a few examples, that also will elucidate the value of them:

• Scaling Electriq: Instead of selling directly to brands, I focused most of my time and efforts on our tech partner relationships. Each tech partner had thousands and thousands of clients they could and did introduce us to. It would have been impossible for me to cultivate a relationship with all those brands. Hence, one-to-many.
• DRINKS x Shopify: Instead of embedding our tech on a one-to-one basis with clients, we built for Shopify, enabling us to power the tax and compliance of any alcohol storefront on their platform.
• Super Connectors: Not a big networker? A super connector is an individual who excels at building and maintaining a vast, diverse, and influential network of relationships. These people are often key figures in their industries or communities because they have the ability to connect others with the right people, resources, or opportunities. Focus on cultivating a relationship with the super connector, and you can tap into their network.

This Week’s The D2Z Podcast

#117 – The Secrets of Amazon Advertising

?? Listen Now ??

In this week’s episode, I sat down with Elizabeth Greene, Founder & CEO of Jungly, an Amazon advertising agency. Specifically, we explored the following:

?? Elizabeth’s narrative begins with her initial foray into e-commerce through retail arbitrage, highlighting the accessible yet challenging nature of starting small.

?? Amazon's advertising mechanisms and how effective advertising boosts sales and significantly enhances organic market presence.

?? How specializing in a niche can significantly improve service quality and client satisfaction.

?? The importance of building a competent team, particularly in a remote setting, and how aligning team members with roles they are passionate about is key to long-term success.

Listen Now

App Updates & Highlights - I’ve been looking for new and interesting Shopify apps. Let me know if you know of any!

Upcoming Events

I’m headed to Park City today until 8/28 for Recharge’s Brand Event. Let me know if you’re in the area and want to connect!