Venture is in a bubble, and inevitably, that bubble will pop. As a founder, what should you do? Well, you could do what Peter Thiel did while he was at Paypal: he raised more money than he needed.
Recall Thiel was one of the founders of PayPal in 1998. PayPal went on to list on the NASDAQ after the bubble burst in February 2002 with a $1bln market cap, and then sold out to eBay 6 months later for $1.5bln. In a fantastic book called Inside The House of Money by Steven Drobny, Paypal’s preparation for the dotcom bubble is well documented in an interview with Thiel himself. According to Thiel: in the Spring of 2000, Paypal “had an excellent product but needed time and money to grow the business. At the same time, we were concerned about the equity bubble inflating on our Palo Alto doorstep. We believed it would pop and it would thereafter be difficult to raise funds, regardless of product quality. With that in mind, we raised $100mm in March 2000, at the very peak of the bubble, which was more money than anyone thought we needed in the shorthaul.”
The decision to raise too much money ahead of the bubble was a good move. According to Thiel “The extra cash gave us the runway we needed to finish building Paypal into a robust business. Had we done what everybody else was doing, which was to ignore the forest and just work on a particular tree, we wouldn’t have seen this enormous forest fire coming and we would have been burned along with everybody else. We raised more than many thought we needed at the time of the offering. Had we not raised the money when we did, PayPal’s future would have been much less assured.”
Very appropriately, Thiel ends the portion of the interview discussing his time at PayPal by saying “chance favors the prepared mind.” Whether concern about a slowdown in VC funding causes you to cut costs, run the business for profitability, or raise more capital the way PayPal did, make sure the business is prepared to withstand a forest fire.