Fundraising might not be the easiest thing for a startup, and many founders eschew it completely. But for David Sacks, founder of the social software Yammer that sold to Microsoft this summer for $1.2 billion, the approach to fundraising is clear.
“The risks are hugely asymmetric,” Sacks said Wednesday at the Founder Showcase in San Francisco. “The upside is you prevent the company from dying, and the downside is the company dies and you could have saved it. So because of those risks, I think you should raise more than you think. I think most founders, and I know I have, tend to underestimate how much money they’ll need.”
Fundraising is a time-intensive process, and there’s always the fear that a founder will sell off too much of his or her company, he said. Take George Lucas, for example:
“I’m sure we all wish we could own 100 percent of their companies,” he said. “But the reason why George never needed to raise money was he was the only one who could ever do Star Wars.”
Sacks pointed out that for most entrepreneurs, if they discover something new, it won’t be long before competitors will be at their heels and they’ll have to find a way to stay ahead. Fundraising can help them stay in first place, which is important.
“If you win the market, the number one company isn’t worth just a little more than the number two company,” he said, noting it could be worth hundreds more than the second-place competitor in a space. “So it’s hugely important to be number one.”
And when you’re not number one, or your product is suffering? Unlike plenty of entrepreneurs or investors, Sacks is honest in noting that a pivot isn’t something to aim for. But at a certain point, it’s the best way to go, he said.
“I don’t think pivoting is desirable, but if what you’re doing isn’t working, the best thing you can do is admit it and move on.”