A major competitor just raised a huge VC round. Now what?
A major competitor just raised a huge VC round. Now what?
In late 2018, a major competitor at the time announced some big fundraising:
TechCrunch declared it was the largest series B in Australian history. Everyone wanted to know how we’d respond.
🤷
I responded by drinking a tea and feeling sorry for the new CEO. He’d just jumped on the world’s biggest treadmill. (4 years later, he was out of a job.)
But feeling zen about it isn’t enough. Tech hype is real, and it’s easy to get caught up in it if you don’t know what’s going to happen next.
What you should change when your competitor raises big
Most of the time, nothing. The message is simple: Don’t panic. This doesn’t change our strategy.
Our CEO Jake, and GM Phil, did an extremely good job of this message every time this happened to us.
It’s easy to look at the top line number and assume all that money is going to be spent on crushing you. Instead, let’s dive into what’s actually going to happen.
What your competitor will change when they raise big
The early team that made the company good will start to quit, or stop putting in as much effort.
The first big expense line was founder liquidity. That will decrease the amount that gets raised by the business by a decent amount. What’s founder liquidity? That’s just a finance term for, the company’s founder(s) cashing out some of their stake in the business.
This is aspirational to TechCrunch readers, but it’s off-putting to employees and customers at your competitor. Where they once saw a hard working and dedicated founder, overnight they see someone buying expensive houses and not returning their calls because they don’t have reception on their yacht.
So right off the bat they’ll spend a bunch of money to piss off their customers and their team.
Just because you spend more money on sales doesn’t mean you’ll make more sales.
Most of the rest of the cash will be spent on sales and marketing. Luckily, the market is a great leveler. When this happened to us, we’d been doing a great job making ourselves known in the markets we had a good product for (and where we weren’t, we know what we need to fix), so most people who were looking at workforce management software were at least considering us. And we knew that once people considered us, we came out ahead most of the time. Would the competition hiring a bunch more salespeople change that? Doubt it.
But what about markets you weren’t in? What about outbound sales? Sure, they could find a way to reach out to a few more people that weren’t even looking for a product. But those deals are much harder to win and come at a much higher cost, which again meant the big cash stockpile was suddenly depleting more quickly for less gain.
VCs will point you to markets they like, not markets you’re good at
On the topic of markets we weren’t in… that turned out to be an unexpected bonus. Since this was an Australian company raising money from American VCs, the message in the CEO’s ear was “grow in America grow in America grow in America”. This was a much more difficult market than the Australian home turf, so more money was spent more quickly and resulted in less new customers.
Meanwhile, we kept focusing on the markets we knew best - the ones that had hard, complex problems that were valuable to solve.
The curse of “under new management”.
One thing we saw immediately soon after the raise closed was their customers turning up as our leads, complaining about their issues due to the “new ownership over there at [XYZ competitor]”.
This effect makes sense when you consider that early key staff will leave in volumes, while the brand and product will inevitably begin to look and feel foreign, as the VC’s paint their own brush over the product.
How to respond to the big raise
First, don’t panic.
As detailed above, the best case and likely scenario is that your competitor misallocates the money on enriching founders and doing sales less efficiently.
The worst case scenario is that your competitor puts a lot of money into making their product better.
Either way, the best response is to keep focusing on what you do best:
Make a great product
Sell it to the right customers
Improve it based on their feedback
Being a bootstrapped company helps with this mindset. If you haven’t raised much money, then when you look around you, everyone has raised more. And yet, over the last 5 years we’d entered new markets all over the world, and outperformed lots of cashed up incumbent competitors - many of whom had since merged or closed down. Not everything competitors did made it onto TechCrunch, but none of our customers read TechCrunch. (If our customers read TechCrunch they’d probably get more spooked, because they’d find out that this potential vendor is distracted. Maybe we should have sent them the news!)
Another important thing to remember is that people in the tech world love to describe fundraising as “amazing validation”. But this is nonsense. All VCs can validate is the numbers you put in front of them. The hard working ones might call a few of your customers. But they don’t use the product and they don’t understand the market like you do. If you want validation, get it from your customers. If anything other than customer revenue is described as validation, that’s deceptive.
Everyone has a strategy until something unexpected happens. A good strategy takes into consideration bad scenarios and works during those too. If you’re already focusing on the right things, then the worst thing you can do is knee-jerk respond to things outside of your control. Keep that in mind next time a headline full of big numbers comes your way.
Thanks to Phil, Jake, Lachlan, and Elliot for reading drafts and sharing experiences.