Sammy is the Managing Director and Cofounder of Blossom Street Ventures. Email him directly at sammy@blossomstreetventures.comThere’s a compelling reason to keep burn down and be cash efficient: it limits founder dilution. The less money you raise, the less dilution founders absorb, but what many founders don’t realize is that the relationship is not linear. In other words, being cash efficient has a compounding effect on limiting founder dilution: in a simple analysis we did, raising 50% as much money and being cash efficient resulted in 142% more ownership for founders at exit (not just 100% which is what a linear relationship would imply). The math follows.
Not bad, but in the next table, we show what it looks like if the founder was cash efficient and raised half as much capital. Given the compounding effect of capital efficiency on dilution, in this example the founder raises 50% less cash ($33.1mm), but instead of owning twice as much equity (28%), the founder owns 35% of the business thanks to the compounding effect of cash efficiency. The value of the founder’s stake at exit is therefore $52mm or 142% more than our original example.
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