Korva is a scroll of the internet’s best ideas.
Scarce cash forces better decisions
Why frugality works
With a million dollars in the bank, the first $100,000 gets treated very differently from the last $100,000 when money runs short. An environment where the team has to be frugal forces strong, durable decisions with the capital.
Hype-level valuations tend to work against that. They rarely produce strong cash management or a company built to last, and they lead to spending that shouldn't be happening.
Airbnb's cheap rounds
Airbnb took a very low valuation: $333,000 for 6 percent from Y Combinator, then roughly $475,000 from Sequoia for 20 percent. That came to about a million dollars for almost 30 percent of the business. The founders had binders of credit cards they were maxing out, and they took money wherever they could find it, because they believed in what they were doing.
Why does a high valuation raise the pressure?
Investors who buy in at a high valuation need the company to grow into a much larger one to earn a return. A fund that wants ten times its money on a company valued at $100 million needs it to reach roughly $1 billion. If the next round comes in at a lower valuation, it is called a down round, which can trigger protections for earlier investors and hurt morale. Those pressures push companies to spend on growth before they know what works.
How did Airbnb survive its early years?
In 2008 Airbnb's founders sold limited-edition cereal boxes themed on the presidential candidates, Obama O's and Cap'n McCain's. Brian Chesky has said the boxes raised about $30,000, which helped keep the company going. The founders also carried credit card debt during those months. That run helped them earn a place at Y Combinator in early 2009.
More from Inside Startup Funding
