Episode Summary
Executive Summary: Jason Calacanis, from Italy, discusses follow-on funding strategies in a pre-taped Founder University segment, focusing on how founders can secure additional investment. He defines key terms like runway, pro rata, bridge rounds, and extensions, offering insights into investor decision-making and capital allocation. The episode also includes an 'Ask Jason' segment with early-stage investor Zach Coelius, covering topics like technical co-founders, founder qualities, red flags for investors, and a critical view on cryptocurrency regulation.
Main Topics: Follow-on Funding Mechanisms and Terminology (Priority: 5/5): Explains definitions of runway, pro rata, bridge financing, extensions, preemptive rounds, and inside rounds, detailing how each works and their implications for founders and investors. Investor Decision-Making and Capital Allocation (Priority: 5/5): Discusses how investors evaluate follow-on opportunities, comparing bets on existing portfolio companies versus new investments, and the discipline required to avoid putting good money after bad. Founder Strategies for Successful Follow-on Funding (Priority: 4/5): Advises founders on communicating needs, offering plans, using tranched financing, and incentivizing investors with warrants to bridge rounds when growth targets are not fully met. Technical Co-founders vs. Outsourcing (Priority: 4/5): Zach Coelius emphasizes the importance of in-house technical talent for long-term success, comparing outsourced development to running a bakery that buys pastries from a factory. Qualities of Successful Founders and Red Flags (Priority: 3/5): Discusses tangible founder qualities like product-building and team recruitment, and low-key red flags such as pride in zero CAC, slow execution, and obsession with non-critical governance issues. Due Diligence Red Flags (Priority: 3/5): Identifies common diligence issues: misrepresentation of revenue, accounting problems, lawsuits, and cap table problems like dead equity from co-founders or excessive equity given to development shops. Regulatory Future of Cryptocurrency (Priority: 3/5): Jason and Zach argue that government-issued digital currencies and regulation will likely co-opt crypto innovations, reducing the role of decentralized cryptocurrencies like Bitcoin and Ethereum.
Key Arguments: Investors seek outlier returns (100x-200x) from a portfolio of bets, so they must carefully choose where to deploy follow-on capital. Bridge rounds often signal weakness; founders should aim for a proper Series A led by new investors setting a valuation. A convincing bridge request includes a clear plan, milestones, and possibly tranched financing to reduce investor risk. Technical co-founders internalize product development; outsourcing is compared to running a storefront that merely resells others' products. Great founders build great products and great teams; inability to recruit team members or create product is a fundamental failure. Low-key red flags include being proud of zero customer acquisition cost (CAC) without building paid acquisition muscle, and slow product velocity. Cap table problems (e.g., dead equity from non-working co-founders or excessive equity to agencies) are major deterrents in due diligence. Government-issued digital currencies and regulation will likely centralize crypto innovations, diminishing the value of decentralized cryptocurrencies.
Data Points: Typical team cost: $8,000-$9,000 per month per employee - For a 10-person remote company spending ~$100k/month total, equating to about $1 million annual burn. Example pro rata calculation: 1% ownership requires 1% of new round - If investor owns 1% and company raises $1M, investor needs to put in $10K to maintain percentage. Seed round typical ownership: 10%-15% - Firm typically takes 10%-15% ownership in seed-round companies. Example bridge round qualification: Double-digit monthly growth for six months - Jason's firm considers bridge rounds only if company shows consistent double-digit month-over-month growth. Revenue growth for preemptive offer: 4x year-over-year - Example given: company doing $300K in revenue, on pace for $1.4M, may receive preemptive funding offer. Typical fund return target: 3-4x - A fund aims to return 3-4 dollars for every dollar invested to be considered successful. Example bridge amount: $100,000 from 7 investors, ~$14,285 each - Founder may ask each existing investor for ~20% of their original $70K investment to spread the pain.
Pivotal Quotes: "This would be like running a bakery and then you're ordering your pastries from a factory and then bringing them to your bakery and then putting them out there and you dress as a baker. Yeah. That's what a person who doesn't build the technology in-house is basically doing." — Zach Coelius: Explaining why having a technical co-founder is critical versus outsourcing development. "I love founders that are dumb enough to bash their head through brick walls, but who are smart enough to realize sometimes you can walk around it." — Zach Coelius: Describing the most attractive tangible quality of a founder: persistence combined with adaptability. "Speed is success, and going slow equals death. You will get caught. The zombies will catch you, they'll overwhelm you, and you will be ripped to shreds and they will eat the flesh off your bones." — Jason Calacanis: Emphasizing the critical importance of urgency and fast execution in startups.
Implications: This episode provides actionable insights for founders on navigating follow-on funding and investor relations, emphasizing the need for clear communication, realistic plans, and focus on product-market fit. The discussion on red flags and due diligence helps investors sharpen evaluation criteria, while the critique of cryptocurrency offers a sobering long-term perspective on regulatory risks.
About This Week in Startups
Jason Calacanis covers startups, tech, markets, media, and all the hottest topics in business and technology. He also interviews the world’s greatest founders, operators, investors, and innovators.