What Raising Over $900M Taught Me About Fundraising Strategy
Should you ever accept a lower valuation from one VC, even if another is willing to pay more? Conventional wisdom often says “take the money and run,” but I urge founders to think of each funding round as part of an ongoing strategy—a multi-stage game, where every decision has ripple effects on the long-term trajectory. This perspective comes from someone who co-founded two venture-backed companies that raised over $900M in debt and equity between Petal and Modern Life.
I wish I had learned this lesson sooner. The goal is always to build a good business that makes more cash than it burns, and as you scale, that becomes increasingly difficult. As my colleague Eric writes in The Two Laws Of Startup Physics, capital compounds both positively and negatively, and even when it compounds positively, it does so with diminishing returns over time. His point is that if you’re able to raise, you should be certain that you can put the capital to good use because that capital isn’t free – it costs you dilution and, more importantly, optionality later on (i.e., every subsequent round of funding becomes increasingly difficult, like levels in a game).
Raising capital isn’t just about securing funds for the next 12-24 months—it’s about laying the foundation for your entire startup journey. Imagine this process as a multi-stage game: each funding round represents a new “level,” and every decision you make can have a significant impact on your long-term success. It’s about making strategic decisions that optimize your progress throughout the entire lifecycle of your business, from seed rounds to potential exits (e.g., acquisition, IPO) or sustainability/profitability. In game theory, each move is interconnected with future moves, and your decisions today have cascading effects that influence your options later. Similarly, when raising capital, it’s crucial to think beyond individual rounds and focus on how your decisions will shape your long-term strategy and outcome.
The goal isn’t just to raise capital for the sake of raising it—the days of bragging about employee headcount (read: burn) are behind us. The true goal is to strategically validate key hypotheses and use your resources to level up in the game. The mission is optimizing for growth and eventual liquidity, whether that involves getting acquired, going public, or remaining private but achieving enough success to facilitate secondary transactions or dividends to shareholders. Playing this multi-stage game well is not just about surviving each round but also preparing for the long-term trajectory.
The Multi-Stage Capital Raising Game
Each funding round—Seed, Series A, Series B, and so on—represents a distinct stage in the game, with its own set of rules, risks, and rewards. The objective at each stage is to secure just enough capital to validate your hypotheses and reach the next level while avoiding overspending or over-dilution too early. Raise too much too often, and you’ll soon be working for your investors. Raising at too high a valuation can make future rounds more challenging.
Raising Capital to Validate Key Hypotheses
In the early stages, the startup’s primary goal is to validate its business hypothesis, and answer questions like:
- Does the product solve a real problem?
- Is there product-market fit?
- Are the unit economics sustainable?
From a game-theoretic perspective, early funding rounds are about gathering data to inform your strategy for future stages. Metrics like customer acquisition costs, lifetime value, churn rates, and others become your “playbook” for making informed decisions and optimizing your progress toward the next level. The amount of capital you raise in these early stages should align with what’s necessary to answer these questions and prepare for the next stage without overshooting.
Validate your hypotheses and be quick to change course if you need to. Building a business is more like sailing than rowing—you can’t just brute force your way to success. There are far more ways to fail than succeed, so you need to search for tailwinds and be cautious of headwinds that could slow you down. Remember that everything in company building is an experiment and that each experiment reveals information that you need to use to win the game of business.
The Importance of Capital Efficiency
Capital efficiency is the key to succeeding in this multi-stage game. In the early stages, investors understand that your company has limited data and will likely be cautious. That’s why it’s critical to be realistic about what you can achieve and raise only as much capital as you need to make progress toward the next stage. Just like in a strategy game, the key to winning isn’t just about acquiring resources (capital) but strategically managing them to advance in the game.
As you advance through the stages, things get progressively more challenging. At the Seed stage, investors are betting on your vision and team. By the time you reach Series A or Series B, they’ll be focused on unit economics, growth rate, burn multiple, and other concrete metrics. Each of these “mini-games” has its own set of evaluation criteria, and the bar for success rises with each level. Investors will demand more data, more traction, and more sophisticated metrics to prove you’re on the path to success.
If your business demonstrates consistent revenue growth, improving unit economics, and efficient customer acquisition, you’re more likely to secure the next round of funding. However, if these metrics aren’t up to par, the next stage becomes uncertain. This challenge becomes even more painful if your previous valuation was too high and gave you credit for accomplishments you haven’t yet achieved. There are no guarantees of follow-up funding. That’s why every funding stage should be treated as an opportunity to maximize the chances of reaching the next level—and ultimately achieving an exit or sustainable profitability.
VCs like to say that entry price doesn’t matter, but a deal is a deal! Ceteris paribus, VCs will always choose the better-priced deal. Valuation can work for you or against you. Suppose you’re capital efficient and don’t need to raise large amounts of capital. In that case, you can control for dilution without needing to demand valuations that are out of spec for VCs and potentially put you at a disadvantage long term. I’m not saying to negotiate against yourself; I’m saying that if you have very little traction and need a large capital injection, it’s going to be difficult to raise what you need at a valuation and, therefore, implied dilution that you’re happy with both now and later.
I want to clarify that not every business needs to stay on the capital-raising treadmill forever. If you raise seed funding, become profitable, and scale quickly without needing more capital—that’s fantastic! You’ve earned a “high score” that lets you skip a few levels. Every business is different, with varying capital needs, growth rates, and founder goals.
Evaluating Success Along the Way
Each funding stage has different ways of evaluating success. Early-stage investors focus more on potential, while later-stage investors emphasize metrics such as revenue growth, churn rates, unit economics, and market share. Eventually, public investors scrutinize your financials, competitive positioning, and long-term prospects.
As you progress through the game, remember that success criteria vary by industry. What’s considered a strong growth rate in one industry might be underwhelming in another. While you may not have perfect information about how your company will be evaluated at future stages, raising capital thoughtfully and efficiently will position you to make better decisions and increase your chances of success.
Raise Capital Strategically
Raising capital as a startup is not just about securing the funds necessary to survive the next few months or years. It’s about optimizing the entire lifecycle of your company—balancing short-term needs with long-term objectives. By viewing the fundraising process as a multi-stage game, you can make more informed decisions about how much capital to raise, when to raise it, and how to maximize value without over-diluting or overextending your business. Sure, you can also ignore this advice and raise a huge round without the metrics to back it – treating fundraising like a speedrun to exit. If things don’t go as planned, careful capital management gives you the flexibility to pivot and stay in the game..
The ultimate goal is to: (1) raise enough capital to validate your key hypotheses, (2) reach the next stage of growth, (3) repeat the process as needed, and (4) build a sustainable, valuable business that rewards you and your shareholders with the best possible chance of success. Understanding the game and playing it strategically—focusing on capital efficiency, growth, and long-term outcomes—is how you maximize your chances of winning.
