On a recent trip to San Francisco, my discussions with founders and investors were largely focused on one question: would we raise VC/institutional capital? Immersed in the Silicon Valley ecosystem, there was immense pressure to do so. With the day-to-day challenges of building a company, it’s easy to see raising institutional capital as a panacea for growth and short-term stability. However, there are trade-offs just below the surface, many of which manifest themselves in the medium-term. To their credit, many institutional investors are candid about this dynamic and encourage founders to balance the benefits of venture capital against its potential downsides. A recent NYT article has brought this discussion to the forefront, so we decided to share how we frame that decision, perhaps shed light on an overlooked aspect of taking institutional investment, and hopefully help others determine path that makes the most sense for them.
The first time I truly understood the complex nature of taking institutional capital was from First Round Capital’s Josh Kopelman. At his talk in Philadelphia, he compared institutional capital with catching the train to New York and it resonated with me. So, I thought, why not do what SimCase does best: make a game to highlight his takeaways. So here goes!:
Welcome to the Funding Train. Your goal is to get from Philadelphia to NYC along one of two routes. Making it all the way to NYC represents an IPO exit for your start-up. However, the journey is a littered with risks and challenges. Along the way, you may be asked to leave the train, which represents having to shut down your venture. Depending on the path you choose, you may be presented with additional options. Keep a close eye on the instructions since they will guide your way as you hustle your way to the big apple!
In the spirit of learning by doing, I’ll let you decide your path forward and together we’ll unpack the benefits and drawbacks of each decision:
|Take The Acela
|Take NJ Transit
Games like this allow us to take safe risks, so regardless of your outcome, we encourage you to go back up and try your luck on the other path!
Once you’ve played both paths, crack open the following block.
NJ Transit | Bootstrap/Angel
Did you make it to NYC or perhaps elect to get off along the way? Taking an early-exit represents accepting a strategic acquisition, which essentially trades IPO upside for less medium to long term risk. Yet, forgoing institutional capital is often similar to accepting greater short-term risk since you will likely remain concerned about working capital, growth-investment trade-offs, and you may have to hustle harder for the same introductions and advice. Plus, while revenue-funding is both validating and equity-free, it can be lumpy in the early stage of a business. However, if you do make it all the way to NYC, your share of the pot at the end of the rainbow is likely to be much bigger.
The goal of this game is to highlight how institutional investment has BOTH benefits and drawbacks. Approaching the decision with the “simulated” hindsight that games provide will hopefully make that decision a bit more aligned to your unique reality. While founders are often motivated by the potential of moonshot returns, the reality is that growing into a unicorn is rare. Understanding your sector, your team, and your ambitions is a critical step before deciding if “NYC or Bust” is right for you.
Regardless of your path or outcome, we hope the journey was both illuminating and fun. The speed versus stops(s) dynamic is illustrative of the underlying trade-offs that drive the institutional capital decision (dig deeper into the economics here – link). By playing this train game, we hope entrepreneurs can get a broader perspective on that decision. Instead of lamenting what they wish-they-would-have-known, founders can reflect on what they were glad-to-have-learned before taking on capital. This is precisely the takeaway Kopelman hoped to highlight with his metaphor, and one I found myself in San Francisco glad to have already learned.