I have had a couple of conversations with entrepreneurs recently around runway and term sheets. While there are different paths, early on in your startup I highly encourage keeping your options open while you are still figuring out the product-market fit, go-to-market strategy, and scaling potential for the business.

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Time for early learnings

It just takes time to have enough conversations and early customers to figure out your focus and value proposition. Rather than raising a lot of money and building too much too soon, stay lean and give yourself a longer runway to figure things out. Do things with services and manually that don’t scale. Then once you start figuring things out, you will be that much more confident to go build what is needed.

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Investor expectations

If you raise a lot of money early, you can be subject to what size exit the investor wants. Does their desired exit valuation and strategy match yours? Once you start taking institutional money and bringing on multiple investors, that may push the required exit valuation higher and higher. Make sure you are okay with the new bar you will need to hit in order to exit, as well as understand the waterfall of how exits below that bar will pay out given the applicable terms.

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A tale of two startups

I often share this simplified tale to entrepreneurs of two wildly different paths. Neither is better, just different. Startup A had two co-founders that each owned 50%. They were all bootstrapped, took a little longer, no fanfare, got some big name customers, and ultimately sold for $20M with each founder taking home half. Startup B had several co-founders and executives, raised an A/B/C round from top investors, had a trendy downtown office, in multiple publications, and ultimately sold for just under $100M. By the time the waterfall trickled down, the founders in Startup B made less than the founders in Startup A. Which path do you prefer?

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While there are no perfect choices, I encourage entrepreneurs to maintain optionality early in the business until you really start to figure things out and know what path you want to be on. Be careful committing to a path before you know the direction you are headed. Shortening your runway and/or committing to bad terms can really endanger your business.

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