From: thepipeline_xyz
Carl, a partner at Six-man Ventures, an early-stage crypto fund founded in 2021, emphasizes that building enterprise value and a company is more crucial than solely focusing on product development [00:02:11]. He notes that while first-time founders often prioritize product, experienced founders understand the importance of distribution [00:02:18]. The ultimate goal for founders should be to create enterprise value for themselves, their employees, and the ecosystem [00:02:30].
Most founders typically spend 70% to 80% of their time on product-related activities, but Carl argues they should allocate more time to company building [00:03:34].
Pillars of Company Building
Carl outlines several critical aspects of company building that are vital for success:
Cash Management
Effective cash management is paramount for any founder [00:03:44]. The primary reason companies fail is running out of cash [00:03:52]. Founders must be meticulous about where cash is stored, how much they have, and their burn rate [00:03:57].
Fundraising for a Massive Financial Outcome
Companies succeed or fail based on their ability to articulate a compelling vision to the right investors who can provide the necessary capital [00:04:06]. Significant time must be dedicated to this process [00:04:17].
If founders accept Venture Capital dollars, they must optimize for a massive financial outcome [00:10:05]. As a venture investor, Carl seeks a path to a 100x investment, especially in pre-seed stages, as a 10x return is not sufficiently interesting [00:10:31].
Avoiding Early Dilution
A common pitfall for teams is over-diluting equity too early in the business’s lifecycle [00:10:47]. For instance, raising 10 million valuation results in 20% dilution, which is acceptable for a first round [00:10:53]. However, subsequent large dilutions can make it challenging to attract significant Series A investors seeking meaningful ownership [00:11:17]. Carl strongly advises against excessive dilution in consecutive rounds [00:11:37].
Prioritizing the Right Partners Over Valuation
Founders should not excessively worry about a few percentage points in valuation if it means securing the right partners who can contribute to success [00:12:16]. Building a business, especially one aiming for a billion-dollar outcome, is incredibly difficult [00:12:27]. Carl suggests that founders might opt for a lower valuation to bring in a Tier 1 investor, even if a Tier 2 or 3 investor offers a higher valuation [00:13:10]. The marginal difference in personal financial outcome for the founder (e.g., 5% less) is less significant than the increased chance of success with strategic partners [00:13:39]. For investors, that valuation difference can represent a substantial 25% return difference [00:14:00]. The focus should be on optimizing for a massive financial outcome, not marginal valuation differences [00:14:19].
Goal of Capital: Create Enterprise Value
The purpose of raising capital is to create enterprise value [00:14:38]. The milestone to aim for is not just building a product, but delivering tangible enterprise value that justifies future capital raises [00:14:46]. Product Managers focus on products, but CEOs must focus on enterprise value [00:15:01].
Enterprise value can take various forms:
- Revenue: The most clear and powerful form of value [00:15:07].
- Brand Awareness: Being recognized as a leader in a specific crypto category [00:15:25].
- Data: Proprietary data accumulated from many customers [00:15:46].
- Partnerships: Collaborations with Tier 1 companies [00:16:02].
- Distribution Channels: Exclusive access to large user bases or platforms [00:16:11].
Founders should consider the enterprise value they need to create for their next funding round and then back into the capital required to achieve it [00:16:54].
Raising with a Margin of Safety
Always raise capital with a margin of safety [00:17:03]. Relying on a small amount for only six months of runway is overly optimistic [00:17:08]. Markets, meta trends, technology, and customer demand can change rapidly [00:17:19]. Building in extra runway is crucial, as planning down to the week or sprint is unrealistic [00:17:51].
Role of Advisors and VCs
While some VCs believe advisory tokens should not be given, Carl suggests there’s a place for advisors if they provide specific, tangible value, especially when tied to vesting obligations [00:54:22]. For example, an advisor who can provide access to specific industry connections (e.g., game studios) can be invaluable [00:54:53]. However, dedicating 4% to 5% of tokens for advisors seems excessively high; founders might be better off converting that value into additional runway [00:55:19].
Regarding the balance between market share and revenue, Carl generally biases towards market share in growing markets [00:28:42]. Companies that maintained or grew market share during bear markets, even without significant revenue, often saw substantial revenue growth when the market recovered [00:29:00]. However, he cautions against assuming product-market fit if users are not willing to pay for the product [00:29:55].
Regarding bootstrapping versus raising capital, Carl advises bootstrapping for as long as possible to minimize dilution [00:58:29]. However, raising capital becomes strategic when:
- It helps accelerate scaling once product-market fit is established [01:00:06].
- Specific connections or advice are needed that would be difficult to obtain otherwise [01:00:12]. An external, respected capital allocator’s check can provide credibility and connections that accelerate the business [00:59:27].