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Raising Capital In A Frothy VC Market: Leverage Shifts From Investors To Founders

By Matt Cohen

With headlines like “Mmhmm raises $100M” popping up every other week, it’s hard not to feel like we’re in the midst of an extraordinary bubble. Some investors are even having flashbacks to 1999

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Unprecedented liquidity is flowing through VC funds, making it a great time to be raising money, but founders should be careful and leverage this market wisely. All too often, I find myself in the unusual position of advising founders not to opportunistically leap to raise as large a round as possible.

First and foremost, this can be shortsighted. Having been the founding investor of a successfully exited startup myself, I’m keenly aware of the short-term highs and the long struggles of building a company. 

When you raise capital, you’re committing to grow into your new valuation. I like to compare it to climbing a mountain. It’s all good and well to get high above the tree line and reach the summit, but if you haven’t brought and conserved enough food and water to get you back down again you might not make it all the way back to base safely.  

That return trip down the mountain is akin to returning capital to your shareholders, and that’s your responsibility when you raise capital. You don’t want to be burned out, or — even worse — fall off the edge of the cliff and die. 

You want to build a lasting company with a sustainable business model.

Second, as a founder right now, you have the opportunity to be selective in deciding whom to raise capital from. Just going with whoever will give you the most money may not be in your best interest. 

The tables have turned. Now, instead of founders going door to door trying to drum up rounds, VCs are competing amongst themselves to get in on deals. 

Matt Cohen, founder and managing partner at Ripple Ventures.

This puts founders in a position to find those VCs who can provide them the capital they need and expertise and guidance for years to come. Whether it’s operational experience building startups, a wealth of relevant industry knowledge, or a deep bench of connections to prospective customers, VCs can bring your startup crucial advantages that can be the difference between your company succeeding and failing.

Founders now have the ability to hand select the terms of their rounds. Historically, VCs have held onto minimum ownership thresholds, while exercising outsize influence in securing pro rata rights for follow-on rounds. 

In addition, funds often withheld reserves as a means of luring founders into deals without providing guidance on how to unlock those reserves for future rounds. Nowadays, the tides have shifted and the onus is on founders to push back against these ambitious practices. Let’s face it — if you’re building a great company, you’ll be able to raise more capital when you need it without relying on existing investors’ reserves or stipulations.

VCs also have to step up to be more competitive in cutting deals and delivering value to startups right from the start. For the Tiger Globals of the world, that may simply mean issuing enormous checks that can’t be matched. But for most VCs, and especially at the early stages, it means coming to the table and concretely demonstrating how you’ll be there with founders through thick and thin over the long haul, providing them with support to maximize their odds of success.

It’s these structural changes to VC deals I’m most excited about. Even if this bubble pops, we will have grown as an industry and set a new standard for empowering founders to build great new companies and get down the mountain safely.

Matt Cohen, founder and managing partner at Ripple Ventures, was founding investor of Turnstyle Solutions, which was acquired by Yelp in 2017.

Illustration: Li-Anne Dias

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