One of the most critical (and often overlooked) pieces of advice for founders is this: Think very carefully before taking any round of funding. And no, the primary concern isn’t dilution. The real issue? Funding closes off exit opportunities.
Wait, what? Isn’t an investment supposed to help you build a more valuable company, making it more attractive for an exit? Yes—but it also drastically increases the price tag on your company, which shrinks the pool of potential buyers.
The Economics of Higher Valuations
Investors aren’t in the business of breaking even. They expect a return, and their expectations set a “floor” for acceptable exit outcomes. Most professional investors aim for a 5X to 10X return on their investment. More importantly, they often have legal stock preferences that allow them to block exits that don’t meet their expectations.
At the same time, they have an anchor for how much of your company they want to own—typically 20% to 30% per round. Let’s work through some quick math based on midpoint values of these expectations:
- Investors want to own 25% of your company.
- That means the post-money valuation of your round will be 1.33X your current value.
- Investors want a 7.5X return, so the required exit price becomes 10X your current value.
Every round of funding you take raises your required exit price by an order of magnitude.
The Exit Math in Action
Let’s put this into perspective:
- Seed Round: Suppose you raise a seed round at a $3M pre-money valuation. Now, to hit a 10X investor return, you need at least a $30M exit. Doable.
- Series A: You raise at a $10M pre-money valuation. Your new required exit price jumps to $100M. That’s a steep climb.
- Series B: Now you’re raising at $25M pre-money, pushing your required exit to $250M. How many companies exit at this level annually? Only about 50 to 100.
And yet, each year, there are roughly 1,000 early-stage VC investments competing for those exits. The odds? Not great.
The Series A Cliff (and Beyond)
There’s a well-documented drop-off in exit opportunities at Series A and beyond. Every round you take exponentially reduces the number of viable buyers, making an acquisition increasingly difficult. Founders should weigh this reality carefully: is the progress you’ll make with additional funding worth the dramatically narrower exit path?
Funding isn’t inherently bad, but it fundamentally changes your trajectory. Before you take that next round, ask yourself: Are you truly ready for the stakes to go up?
This blog post was originally published on 07/02/2013 and last updated on 12/14/25.
