When and how much to invest in startups?

Recently I read an article about innovation by Maria Roche, professor at Harvard Business School.  She says, “Innovation occurs when startups stay hungry for funds – but not too hungry, and not for too long.”

Sounds like she is shooting for the infamous “just right porridge” thing, me thinks.

Allow me to share the original story of Goldilocks and the Three Bears, the English fairytale from the early 19th century.  It is the version most appropriate for founders and venture investors.

The tale starts with an “impudent old woman” who enters the forest home of the three anthropomorphic bachelor bears (no mother, father, baby bear hogwash) when they are away.   She eats some of their porridge, sits down in one of their chairs, breaks it and then takes a quick nap in one of their beds.  

When the bears return and discover her, she wakes up, jumps out of the window and runs away, never to be seen again.  An early version of venture ghosting.

Roche is a bit simplistic, because startup funding can also be likened to “any port in a storm,” “beggars can’t be choosers” and my favorite maxim is that when the hors d’oeuvres are passed, you should take a few, even if you are not hungry, because they may not come around again. 

In 2021-2022, it was a madhouse and the kitchen couldn’t put the caviar on the blinis fast enough.  Today, more like PB&J, and please cut it in fourths.

Roche writes in her article that the “uniqueness of the technology a startup develops declines noticeably after firms receive the large sums associated with the infamous Series A, especially if up to that point, the company has been bootstrapped.”

She analyzed 800,000 observations at 11,853 software firms etc.  Maybe so, but I don’t believe that money is the root of all evil.  In my opinion, valuation is vastly more critical than the amount of money invested at any given time.

“In 2024, nearly 25% of U.S. venture rounds were flat or down, which was a decade high,” according to PitchBook.   When the tide goes out, you can truly see who is not wearing a bathing suit.

My theme is that the founder needs to consider carefully all the various stakeholders in the adventure, and to prioritize them in the correct order.  Specifically, think about the early investors and give them a really good deal.  You are going to meet them again, sooner than you think and probably sooner than you want.

I attend a lot of angel investment presentations.  I can’t give you exact numbers, but my sense is that valuation is the elephant in the room. 

“If you take the pool of interesting deals that make it to the top of funnel, I’d say around 50% die because of valuation,” Ashok Kamal, executive director of NuFund Venture Group, the premier angel organization in San Diego.

Dean Rosenberg, a member of this angel group has a name for this pitch deck phenomenon, “LSER — The Last Slide Eye Roll,” or in layman’s terms, “you want what valuation, are you kidding me?”

But hope springs eternal.  I recently attended Connect’s Cool Companies program at which 30 technology and life science startups presented to a strong group of venture investors.  Plenty of buzz.

In addition, the Brink is sponsoring a contest for startups, culminating this June in a few hundred thousand dollars being awarded to the top winners.  

The puzzle of money, terms and valuation is fraught with nuance.  I encourage founders to get professional advice in this area.  It is a marriage.   It can be a marriage of convenience or a shotgun wedding, but the initial structure matters greatly.  All that promise forever, ‘til death do us part stuff is nice in concept, but think about when your venture mother-in-law comes to visit and wants to know why.  Or when.  And your answers may prove to be problematic if she sees a lambo in your front yard.

I love the stories of the frugal executive.  Ed Bastian, CEO of Delta, flies coach domestically.  He says that it allows him to experience the customer journey.   Always good to eat your own cooking.

The amount of money and the when — there is no formula.  But if you see Goldilocks in the hall, send her my way.

Rule No. 791: Treat their money like it was yours.  

Senturia is a serial entrepreneur who invests in startups. Please email ideas to neil@askturing.ai