Marc Andreessen: “Founders cannot raise funds without understanding the risk-liquidity relationship”

What does this risk-liquidity relationship consist of and how can it help obtain venture capital financing?

Only 1% of founders successfully get venture capital funding, while 99% have a hard time: what’s the difference between one line and the other?

Well, it all comes down to understanding the relationship between risk and liquidity. Smart 1% founders get it: They really understand how risk and cash flow are intertwined.

This understanding gives them an advantage when presenting their companies to investors.

Imagine it like this: they know the ropes, speak the language of investors, and get the funding they need, while 99% of founders don’t.

So what is this risk-liquidity relationship and how can it help you obtain venture capital financing?

So – the biggest thing that most entrepreneurs are missing in both fundraising and running their startups is the relationship between risk and cash.

99% of founders often overlook the relationship between risk and fundraising, and then the relationship between risk and cash burn.

The theory called “Risk Onion Theory” by Andy Rachleff, says that:

“As a startup (especially before seed funding), you are just layer upon layer of risk. Even after you get your first round of funding, it’s not the money that makes those risks go away, it’s what you do with it.”

At first, you may think that a startup has every type of risk imaginable.

  • Founding team: Whether the founders will be able to work together effectively.
  • Product: Can the team create the product?
  • Technical: Let’s say you need a breakthrough in machine learning or something similar. Will you have something to make it work or will you be able to get it?
  • Launch: Will the launch go well?
  • Market acceptance: Will customers accept your product?
  • Revenue/Cost of Sales: Will a sales team be able to sell the product for enough money to cover the cost of selling?

If you are a startup in the consumer products space: risk of viral growth.

A startup at the beginning is nothing more than a long list of risks.

What only 1% of founders achieve is to eliminate every layer of risk from the initial fundraising round, something that 99% do not achieve.

With each round of funding, like a seed funding round, as a founder, you can try to remove layers of risk, such as the founding team, the product, and perhaps the initial launch.

Again, if you’re raising the Series A round, try to remove the next level of product risk, maybe you can eliminate some of the hiring pain as you build your full engineering team.

So the way you can think about it is, you’re decreasing risk as you go, by achieving milestones.

As you reach milestones, you progress your business and justify raising more capital.

If you are raising pre-seed/seed (first round of financing) – it can be said that:

«With the amount of personal investment or from family friends, I have achieved the milestones and eliminated these risks.

Now I am raising seed round.

Here are my milestones, here are my risks, and at the moment I am going to raise a series A round here is the state I will be in «

Next, you can calibrate the amount of money to raise and apply it to the risks you are removing from your startup.

You might be thinking that – everyone knows this, but it’s not true – 99% of founders didn’t systematically think about how to raise money, deploy it, and present it to investors.

That’s why 1% of founders are different from the rest.

They understand the relationship between risk and money (raised and spent) and use it systematically to express it to investors.

And that’s it.