Raising less money at lower valuations

David Hsu
David Hsu
Founder and CEO @ Retool

Dec 22, 2021

At Retool, we decided to raise the smallest Series C we could, at a valuation substantially lower than most offers we received. Why? Because even though maximizing our valuation and money raised might be optically good (the press loves to report on large financing rounds at large valuations), it hurts the core constituency that got us here: our team.

Reaching peak valuations too early results in substantially less upside for employees. For example, let's compare two incredible companies: Uber and Coinbase. While they IPO’d at a similar market cap (~$82.4B for Uber, $86B for Coinbase), the financial outcomes for employees were strikingly different.

If you had joined Uber five years before their IPO, and received $1M in stock, it would’ve been worth $2M at the IPO. But if you’d done the same at Coinbase [1], your stock would've been worth $57M! That’s because in the five years leading up to their respective IPOs, Uber’s valuation only doubled, whereas Coinbase’s valuation rose by ~57x. While both companies achieved similarly great IPOs, the latter resulted in much better returns for employees.

Sudden rises in valuation are also bad for employees, especially ones that join after the financing. If your valuation jumps from $1B pre-financing to $5B post-financing, employees that join post-financing now pay substantially more to exercise their options.

This is particularly interesting because the underlying company likely hasn’t changed much during the financing: the customers, revenue, and team are likely quite similar pre and post-financing. So new employees are paying substantially more—for the exact same shares—that they could’ve gotten just a few weeks earlier at a much lower price. [2]

Sometimes, founders also try to maximize the other headline number: amount of capital raised. Unfortunately, this is also bad for employees, since they often get unnecessarily diluted.

Investors typically have pro-rata rights to protect their ownership stake, but employees don’t. If you look at companies that consistently raise large amounts of capital, you’ll see that employee returns suffer, because their ownership stake will get diluted substantially from their initial ownership position.

Let's take Snowflake as an example. By all metrics, Snowflake is an outlier company, and achieved an incredible outcome when they IPO'd at a $70B market cap. But by raising more money in the early days, employees were diluted by more than strictly necessary. Their Series C raised $80M at a $260M valuation (30% dilution), Series D raised $100M at a $500M valuation (~20% dilution), Series E raised $263M at a $1.5B valuation (18% dilution), Series F raised $450M at a $3.55B valuation (12% dilution).

That's approximately 60% dilution to get from a valuation of $260M to $3.55B. In contrast, at Retool, we expect to achieve a similar rise in valuation with around ~9% dilution.

Here's how we've decided to raise differently at Retool:

  • Raise at the right valuation, not the highest valuation possible
  • Raise the least amount possible to achieve our goals
  • Align with investors who put the team first

To keep the news short: we’ve raised $20M at a $1.85B valuation, from our existing investors: Sequoia Capital, Elad Gil, Nat Friedman, Daniel Gross, and John and Patrick Collison. This set of investors led our Series A and Series B, and we’re excited to be partnering with them again.

But the much more important news is that we’re making great progress building out the team and product, which is helping us deliver more value to our customers. Today, our customers use Retool to encourage voter turnout, track their vitals, and deliver food to millions.

Our paying customers now span all industries, from fintech (Brex, Coinbase, and Plaid), to e-commerce (Amazon, Allbirds, Rakuten, and Peloton), all the way to automotive (Jaguar Land Rover, Mercedes Benz, and Volvo). Over the past year, we’ve shipped major product improvements, such as best-in-class datepickers (that automatically handle timezones!), and hundreds of product updates that polish up the overall Retool experience.

And yet, we’re still so far away from our goal of bringing better software to everybody. We think that Retool is a better way of building business software, and that better software is one of the best levers for increasing economic productivity. But if we look at what percentage of business software is built in Retool today, it’s shockingly little! (We estimate that out of all the businesses in the world that should be using Retool, only .03% of them are using Retool today.) For us to fulfill our ambitions of bringing better software to everybody, we need to make major product improvements, and acquire substantially more customers.

To do that, we need the right team! We’re looking for teammates who are interested in long-term value creation, not just short term rises in valuation. We’re looking for teammates that think rigorously about the tradeoffs in company strategy, and don’t just optimize for vanity metrics. We’re looking for teammates that want to change how developers build software, and understand this is a long journey where the hardest work is yet to come.

If that describes you, and you want to join a company that puts employee ownership—in every sense of the phrase—first, please come join us.

[1] Uber went from $40B => $80B in the five years leading up to their IPO, whereas Coinbase’s valuation went from $1.5 => $80B in the five years leading up to their IPO.

[2] The problem is that fundraises are discrete events in the lifetime of a private company. Ideally, private company valuations would rise gradually as the fundamentals (e.g. revenue, customers, team) improve.


David Hsu
David Hsu
Founder and CEO @ Retool
Dec 22, 2021