Billy Madison Approach to Fundraising

Why being the most mature company at your stage, is a good thing

Startups face immense pressure to quickly race through fundraising rounds, often seeking the next milestone as soon as possible. It’s believed that reaching the next milestone signals progress, validation, and perhaps, an increased likelihood of success. But this race to fundraising validation is both a red herring, and actually can hamstring a company by ratcheting up the post-money valuation (which I’d also consider a “hurdle rate” for where the company needs to raise going forward). We’ve all heard of the “down round,” and this happens when valuation outpaces traction.

“Down-rounds happen when valuation outpaces traction for too long, when emotional buy of ‘vision’ is eclipsed by the rational buy of ‘traction.’”

Of course there can exist a period of time where the Steve Jobs “reality distortion field” enables a startup to raise at valuations significantly higher than might be logically justified by key performance indicators (KPIs), or traction metrics, but eventually the music stops. The music stops fast, due to macro whims, changing investor opportunity cost, or even “animal spirits.” And when it does better have the metrics to support your valuation, or the dreaded “down round” can come down like an anvil on your cap table, creating pay to plays for investors, and founder dilution. As this outcome is unsavory for all existing participants in the cap table, seasoned investors should know this, and not push companies to raise too big, too fast.

I often tell founders of what I call the "Billy Madison approach" to startup fundraising. What I offer is an entirely different strategy—one that encourages startups to delay advancing to the next round until they are truly ready.

This approach draws inspiration from the movie character Billy Madison, who repeats a school grade to become the biggest and strongest in his class (and also of course, partly because he is aiming to prove to his father that he can graduate from high school, but we’ll leave that aside). Similarly, startups can benefit from staying in their current fundraising stage longer, allowing them to grow stronger ahead of the expectations that come with every new round, specifically at Series A, B, and C.

The Benefits of “Staying Back a Grade”

In the context of fundraising, the Billy Madison approach advises startups not to rush into becoming a Series A or Series B company until absolutely necessary. By remaining at the Pre-Seed or Seed longer, founders gain the flexibility to develop their business at a more deliberate pace. This strategy allows them to build a solid foundation, ensuring that their KPIs and metrics are consistently ahead of what is typically expected at their current stage. One example of this I often see is when a high velocity pre-seed company perhaps has the opportunity to raise $7M or $10M. While there are certainly advantages to taking an incremental $3M, the cost of that is the round shifting optically from a “Large Seed” round to a “Series A.” I’d currently demarcate that line between Seed and A at around $7-8M. Therefore the benefits of accepting the $7M round are “staying back a grade,” and therefore like Billy Madison, being the biggest kid in the grade, with the most money and metrics.

Optical Advantages

One of the main advantages of this approach is the ability to manage the optics of fundraising rounds. By not advancing too quickly, startups can create the perception of being more advanced relative to their peers in the same round cohort. In Billy Madison speak, you’re the biggest, strongest kid in the grade. You’re not smallest kid subject to bullying, and peer pressure, like can happen when you skip grades. This can be particularly beneficial when it comes to attracting investors, as it demonstrates that the company is not only meeting but exceeding the expectations associated with its current stage. This methodical progression can lead to more favorable terms and conditions when the time does come to move to the next round. Terms are ratchets, and if you get beyond plain vanilla into the Baskin Robbins 31 flavors of non-standard term sheets, in most cases, there’s no going back. You can’t undo that.

Strategic Growth

The Billy Madison approach encourages startups to focus on strategic, ideally product-led growth rather than rapid advancement at all costs. By taking the time to refine product, expand true, repeatable customer base, and tighten the business model with a deep understanding of unit economics, customer acquisition cost, churn, retention, how to grow ACVs, startups can ensure that they are truly ready for the challenges and opportunities of the next fundraising stage. This approach reduces the risk of overextending the company and allows for more sustainable growth.

Conclusion

In summary, the Billy Madison approach to startup fundraising advocates for a more measured and strategic progression through fundraising rounds without the ego-driven, alluring Sirens of big rounds and TechCrunch fame before your business is solid. By staying in their current stage longer, startups can build a stronger foundation, manage the optics of their growth, and ensure that their KPIs consistently exceed expectations. This strategy not only positions them for success in future fundraising rounds but also sets the stage for long-term growth and sustainability.

If in doubt, and you can call what you’re doing a Pre-Seed, do it. If you must call it a Seed, accept it. Don’t flip the switch to Series A or B until you absolutely have to, because the stakes are higher, expectations less forgiving, and board more developed. Capitalizing the business is important, but doing so in a measured way, always asking the question “how can I be the biggest, strongest kid in the grade?” because no one wants the pat on the back for being precocious, when it means you get beat up.

For more thoughts on fundraising and valuations, see my prior post on the Goldilocks Valuation Matrix, and the trade-offs of dilution, runway, and hurdle rates, and how every pitch, no matter what stage, requires selling both Vision and Traction.

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Scott Hartley is Co-Founder and Managing Partner of Everywhere Ventures.