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What Today’s Entrepreneurs Should be Learning from the Fundraising Strategies of Zuckerberg, Bezos, Gates and Benioff

I was at a party recently and the CFO of a ‘hot company’ was singing the praises of his founder. He bragged about how they had raised their latest round without having touched the money from the previous round. He said this as a point of great pride. I retorted that “selling a piece of what should be the most precious asset in the world, when you don’t need to, implies weakness. It’s like taking a second mortgage on your house when you don’t need the money just to be able to announce to the world how much your house is worth.” That conversation inspired me to dig into the numbers and the conclusion is clear: The great entrepreneurs didn’t sell early.

I started by looking at the Great companies that have defined the last 20 years of tech wealth creation.  At IPO, Zuckerberg held 28.2%, Brin and Page held over 30% combined, Jeff Bezos held 48.3%, Benioff held 31.6%, the founders of Checkpoint held 42.6%, at Ebay Pierre held 42% and Bill Gates held 49%. Only at Paypal did the founders hold less than 20%. I’m labelling this group “the Greats” and on average the founders of these iconic companies owned 40% at IPO. The median inflation adjusted value of their holdings was $940M.The average inflation adjusted value of those holdings at IPO was $8.2B

Compare that to the “Class of 2019,” the software companies that IPO’d in 2019.
Only at Zoom and Datadog were the founders holding more than 20%. At Slack, the founders held 12%; at Uber they held 15%; at Lyft and 6%, and at Phreesia 5%. The Class of 2019 at IPO held on average 17% of their companies. Some of these founders are left with the same amount of equity that they would receive if they were a hired executive. The median value of their holdings was $780M. The average value of these holdings was $1.74B.

I think the facts are undisputable. The great founders owned more of their companies when they got to IPO than today’s entrepreneurs. The real question is why?

There are two obvious causes:
The first reason for the reduced holdings of entrepreneurs today is the large sums of money that are raised before going public. Companies are IPO’ing later or not at all and using the abundant liquidity in the private markets as a substitute. In many ways the mega-round today has replaced the IPO as the ‘seminal event’ and so one could argue that we need to compare ownership prior to the mega-round to accurately compare holdings. However, even taking this into account, very few founders get to the mega rounds with holdings comparable to those of the Greats.

The entire tech ecosystem encourages these mega-rounds. Founders that raise large rounds are lauded and congratulated by the tech media, investors and employees. It’s become a badge of honor and a symbol of success. The class of 2019 raised on average more than $2B prior to IPO with a median fundraising of $332M. The “Greats” on the other hand, raised an average of $450M and a minuscule median amount of $25M. What’s pretty mind-blowing is that if you take out Facebook which raised $2.2B and Paypal, the rest of the group, Google, Salesforce, Amazon, Microsoft and Checkpoint raised an average of only $17.7M. Today hot companies raise $17M prior to releasing a product! The data clearly shows that the more you raise, the less you own. It also shows that most of “the Greats” were built with what is today considered tiny amounts of outside capital.

The second reason for reduced holdings is that founders are selling their shares earlier. Today, entrepreneurs are encouraged to sell some of their shares with every fundraising round. Funds tell them that by getting liquidity they will be worry free enough to go for a “home run”, and that taking liquidity will set them up to build a bigger company. The present crop of entrepreneurs has liquidity options that their predecessors didn’t have. A lot of funds will argue that founder liquidity is a positive development, a sign of a maturing funding environment that is providing for the needs of entrepreneurs to ensure the success of the industry. But there’s also more than a slight chance that this argument is self-serving.

It is in the interests of the funds to encourage both founder liquidity and mega rounds to enable the deployment of ever-expanding fund sizes. Larger fund sizes drive ever larger fees to the General Partners so the funds are acting rationally in their own economic self-interest. They benefit from promoting an increased demand for capital. They’re also getting a good deal. Founders, so far, have been proven to be selling cheap. Founder liquidity has so far resulted in a massive transfer of value from the founders to the funds.

Founder liquidity has its place but I think the pendulum has swung too far.  Paying the mortgage off, putting some money in a retirement fund are all to be encouraged. Asset diversification is advisable and founders who don’t diversify at all are probably doing themselves, their companies and their families a disservice. Capital raised wisely and put to work prudently is a vital arrow in the quiver of a good entrepreneur. In the same way that a mortgage can allow the responsible borrower to maximize their utility over their lifetime, a well executed financing strategy will allow the entrepreneur to maximize equity creation.

However, I do think when founders sell more than a modest amount, they are signaling something. “The Greats” rightly believed that there was no better place to invest their money than in the companies they were building. I think when a founder takes ‘significant’ liquidity or raises growth capital having not touched the previous round, they are signaling that they have less confidence in their business than Bill Gates had in Microsoft or Jeff Bezos had in Amazon.

Some people will argue that more fundraising builds bigger companies and so the dilution is worthwhile because the value creation enabled by the additional capital more than makes up for it, but I think large capital raises often build smaller companies. The data shows that those companies that raise less money fare better post IPO. The excess capital raised drives ‘blitzscaling’ before product/market fit is achieved or before unit economics make sense. This creates inefficiency. Rather than making great choices, well-funded start-ups avoid making the hard decisions.  The fundraising environment is in many instances determining company strategy. The tail is wagging the dog.

So why am I writing this, especially since I make a living providing founder liquidity and growth capital? I’m writing because I want entrepreneurs to know that there is another path, that there is huge value creation in capital efficiency. Due to the obsession with fundraising, these great entrepreneurs are not getting the media coverage or recognition they deserve.

We have been fortunate enough to invest in some of these modern-day Great Entrepreneurs. Teams like Colin Day and George Liou who built iCIMS with $3M of growth capital owned over 50% of the company combined when we did a majority recap for over $1 billion late last year.   Ken Lin and his co-founders at Credit Karma still own close to 50% of CK. They’ve raised a hefty chunk of money, but they only did it when they had perfected product/market fit and so dilution was minimal.

Across our portfolio, at exit, our founders own on average 28% and have raised an average of $26M. These founders understand that what matters is not how much you’ve raised but how much you own of the business at exit (multiplied by the value of the business). Let’s change the discourse around fundraising. Closing a round is the equivalent of taking a mortgage, something important and worthwhile that many of us need to do for what it enables but not something worth celebrating as an achievement in and of itself. Instead let’s celebrate the things that matter, the passionate teams that are building awesome products, delivering incredible value to delighted customers and outsized returns to their investors and themselves.

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Written by Jonathan Klahr, Managing Director at Susquehanna Growth Equity

A special thanks to Gabriel Even Chen for her help

Jonathan Klahr

Jonathan Klahr

Born in England, living in Israel, married to a South African with two American children, third generation Arsenal fan, semi-professional tour guide, working my way through the Israel National Trail.