• PG’s essay The Fatal Pinch is about startups that have:

    • Raised money and now have high burns.
    • Have not met existing investors’ expectations.
    • Need to raise more, but can’t because they’re seen as failures.
  • PG gives you advice toward getting out of the fatal pinch.

  • Let me help you avoid it altogether by understanding investor expectations.

  • VC is about grabbing future cash flows.

    • Real winners in a VC portfolio yield returns above 20% IRR.
    • The easiest way to model a startup’s cash flows is as perpetuities.
    • This is because your revenue should be roughly monotonously increasing.
  • Present Value of a Perpetuity = Dividend / Required Rate of Return

    • Dividend = Present Value * Required Rate
  • Startups don’t pay dividends, but if you consider:

    • the dividend as new revenue generated after an upcoming round
    • and the present value to be the money invested during an upcoming round
  • Then you can use this simple test to see if you should raise your upcoming round:

    • Will X in cash enable us to increase revenue by at least 20% of X?
    • If yes, raise.
    • If no, you’re setting yourself up for a fatal pinch.
  • Btw, the 20% IRR use here is a low cutoff for success.

    • The IRR of unicorns is closer to 40%.
  • Someone told you “it’s about long term cash flows, not short term revenue”.

    • Don’t let seed stage dynamics set your expectations for later rounds.
    • Institutional VC holding periods just aren’t that long.
  • Someone told you “we need to focus on month-over-month growth in”.

    • All startup metrics worth considering are just proxies for cash flow.
    • Even a good cash flow proxy becomes a vanity metric if you fixate on it.