Editor’s Note: In the new podcast Masters of Scale, LinkedIn co-founder and Greylock partner Reid Hoffman explores his philosophy on how to scale a business — and at Entrepreneur.com, entrepreneurs are responding with their own ideas and experiences on our hub. This week, we’re discussing Hoffman’s theory: you need to raise more money than you think you need — and potentially a lot more.
When Mariam Naficy launched her cosmetic company Eve in 1998 she never expected she’d be paying $50,000 to a 5-year-old girl for the domain.
Fortunately, Naficy had raised enough money to cover the cost. In fact, in its first first year of existence Naficy raised $26 million to get her company Eve off the ground and prep it to scale.
“You have to plan, paradoxically, for the unknown. And that’s the first reason you should raise more money than you think you need,” says Reid Hoffman, who interviewed Naficy for the podcast Masters of Scale, a 10-episode series hosted by the LinkedIn co-founder and Greylock partner in which he offers an unconventional theory about scale and sets out to proves it through conversations with iconic entrepreneurs.
But not every entrepreneur agrees with that statement – or at least wants to admit to it. Raising money often means giving away equity and control, two things founders obsess over. Despite these concerns, Hoffman argues that because of entrepreneurship’s twists and turns, it is imperative to have your war chest stocked with cash.
“Tech businesses absolutely need to raise more money than they think they’ll need,” he says in the podcast. “You’ll need that capital for all of the unknown pivots, whether it’s new customer needs or competitive attacks.”
Naficy supports this belief, while another guest, Selina Tobaccowala of Evite, an online invitation site, cautions that entrepreneurs, can indeed raise too much.
“We took way too much capital. We took $37 million the end for online invitations. Like, it sounds crazy, it was crazy,” she says on the podcast. “At the time, it was all about: Get the eyeballs. Put a billboard on [Highway] 101. Spend the capital. Hire, hire. The thing I’ve learned was: Make sure you have a strong business, and then scale it out. Make sure you have the right unit economics, make sure you have the right fundamentals. And there was no reason we should have taken so much capital.”