If venture funds are begging you to take their money, there is a good argument for raising more capital than you need. Peter Thiel did just that while he was at Paypal, and it saved his company.
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 short haul.”
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.”
Peter could have been wrong about the market and ended up over-raising. His downside there would have been a little more dilution that he wouldn’t really notice in the long run anyways. The upside to over-raising was that he avoided the nuclear winter in venture capital and his business survived. If you have the luxury, it’s never a bad idea to top off with a little more capital than you need.
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