Vinod Khosla on the the Risk-Money Connection

From a grounded presentation by KPCB’s Vinod Khosla on what works and what doesn’t in venture capital, these two figures compare the pre-bubble and bubble funding model. One is fully funded before all the risks are out, while the other (pre-bubble) starts small and then sensibly ties new tranches of venture money to reduced risk. Guess which one works best?

[Update]Apparently some people are finding this chart hard to read, and not everyone is a Flickr member [ed. Can it be true?] to see the larger version linked to there. The gist: Pre-bubble it was common in technology to parcel out cash in increasing amounts at each stage as risk was reduced. So you might get a little at Idea, a little more at proving Technology Feasibility, more again at First Customer, and so on. In the late 1990s it became much more common to fund things all the way to the point at which expansion capital was required, thus meaning that the VC basically sat on his/her hands and prayed while time passed by.

The former financing technique is generally better (but not always), so Khosla’s point, and mine, in bringing it up, was that you could do worse that bring back stages tranches to financing tech. One poster here points out that fully-funded for some companies can come much sooner, with purchases happening early in the cycle. While that’s true, you can’t/shouldn’t build companies that way, planning, as it were, for a miracle exit. You’re always better to build the company as if you really mean it, not like you’re just messing with lottery tickets on an otherwise boring Monday morning.


  1. I am assuming the rhetorical question means that “old fashioned is best”?
    That being the case, I would question the logic. With old fashioned you have one section of the start up whose almost sole pre occupation is begging VCs for money and going through endless presentations. These are the self same people that in the “Fully funded Folley” would be running and growing the business. That is an inherant inefficiency.
    What seems to be more successful is a mix of the two, in this web 2.0 world (sorry, said it) where businesses (or more likely technologies) can be built and sold without going through many rounds of funding. Instead they are “fully funded” on just seed or seed and R&D capital.

  2. Sorry, on my screen (a lovely borrowed Mac), the charts are undreadable. And the possibly ironic rhetorical questions don’t really give a clue. I tried clicking on the images, but I don’t really feel like signing into Flickr.
    Could you do us a favor and boil it down? A picture ain’t really worth squat in this instance.

  3. As an update to the update, I can vouch for the fact that some companies are doing exactly what you advise against here. However that was not actually what I was alluding to (but not being clear about, sorry).
    What I was meaning to convey was the approach of a company living “frugally” and within their means until they become cash flow positive. Ideally only looking for further capital injections as and when the opportunity arises as opposed to when the need arises.
    Of course not every type of business can be built this way but it is a middle ground between the two approaches on the slides.

  4. I’ve been thinking about it and I’m not sure whether it’s a good idea to advise people to build real businesses.
    I have no problem competing with people’s who list powerpoint slides as non current assets.

  5. Though staged funding diminishes risk to the investors on the one hand, and provides the startup with lower overall cost of capital, there is a real cost in terms of increased risk of failure as well.
    Among the increased risks are those mentioned in the comments including dilution of effort on the part of the team, but also others like missing windows of opportunity or giving potential competitors a longer timeframe to compete. Another very real one is that a start-up funded using the just-in-time model also sees its hiring pool diminished, because the contributors who might be willing to participate are restricted to those who are willing to take jobs where their short-term continuing employment is conditional on raising further funding. Especially in an environment where a startup competes with other similar but “fully-funded” startups, a desirable potential hire might easily reason that it makes little sense to take on the additional personal risk.
    Typically, this is counteracted by giving these contributors a higher level of equity participation in the company, mitigating some of the cost savings of having raised less capital early on.