SaaStr has a good writeup about it[1], and I've experienced the same thing at my company. Line of credit is good enough to bridge AR but not much more than that.
[1] https://www.saastr.com/once-a-saas-startup-hits-initial-trac...
That has been a universal problem for growth businesses in the US going back to the WW2 era (particularly cash thin product companies that have to plow their sales right back into growth).
Phil Knight's Shoe Dog book has an almost unbelievable account of lines-of-credit hell (despite Nike's perpetual, extreme growth - basically doubling sales every year for the first ~15 years - they couldn't find any US banks willing to fund the growth; a Japanese import/export bank ended up saving them numerous times as several large US banks dumped their business).
Why not just take the $40M if you can negotiate a strong position (which you can if you're willing to say no to it anyway) and just have more runway to protect yourself?
Let's say you raise $40M and then a year later get a really great acquisition offer for $150M. That's most likely a veto. Your investor will want something more like $500M.
The problem there is that there are fewer buyers at $500M than there are buyers at $150M. And no business is guaranteed; it could be that the next year goes slow or the market takes a dip, and it's impossible to even get a $200M offer.
The founders have now been forced to pass on a "good" outcome because the investors wanted a "great" outcome. But great outcomes aren't available to everyone. Eventually the company spirals down, falls into obsolescence, cannot raise further funding, and is forced to firesale.
The investors don't care because this loss is built into their model and they have another dozen companies on the same LP. The founders really care, because that's all they do.
If all you need is $6M it's better to take $6M and keep as much control as you can, rather than take $40M and set yourself up for failure.
Depending on how that deal is structured - liquidation preferences, board seats, voting rights of the preferred stock (which the vcs would get), you're probably giving up some control here.
It also raises expectations that, well you got $40m to deploy, go out and do it and eat up all that market share.
This assumes that your product / market fit is not only super bulletproof and solid, but also that you've assessed every type of market up to your valuation (ie $200m worth of value) and have a go-to-market ready for each.
Ok let's say you even had some semblance of that - deploying GTM on each vertical at that speed puts pressure on the sales team to close aggressive deals. This means that some deals might not be 100% fit but maybe 90% fit. Well if you're expected to grow at 10x what you initially thought, those 10% inefficiencies start to stack.
Ok NOW product team is starting to feel the heat to accommodate for all these not 100% perfect fit deals. So what do you do? Start hiring people on product to try and keep up.
The problem with rapidly scaling growth, esp in enterprise, is that inefficiencies and edge case situations compound significantly at scale.
In frothy markets like right now, it's up to the founders to figure out the right amount of money because not enough can kill you but so can too much.
http://www.businessinsider.com/why-its-better-to-sell-a-star...
Compare Huffington Post and TechCrunch. Both sold to AOL at the same time. HP for $314M, TC for $30M. Michael Arrington walked away with 25% more money than Ariana Huffington despite selling for 1/10th the price.
The Parsely team could probably sell their company tomorrow for $50M if they wanted to and everyone would make money. If they raised that $40M that sale would be blocked. I'm sure the team has higher expectations, but they preserved their options. Smart move.
TL;DR Exit becomes harder You lose control Liquidation preference (a lot of people miss that)
This is my thinking too - take the money but don't deploy it any faster or less efficiently than you otherwise would have. If that means your runway is extended to 10-15yrs, great! You now have the ability weather potential economic downturns or GFC 2.0's or other unforeseeable existential problems, it's insurance. Investors may not jive with that, preferring you to fail fast/fail early, but if you can take that investment and keep control of the board, then it's at least worth serious consideration.
In this situation you don't get rich. You just get a salary for 10 years. That's not nothing, but if you've come this far, it's hardly the best outcome.
I was busily scoping out systems to automate stuff so that we could scale, but the impression I got was that the VCs were very very interested in seeing rapid expansion of head-count because that was an important metric for them.
I remember having these weird conversations with me saying 'we don't need to find a bigger office, if we get this workflow automated, we can just go down the pub while the money rolls in'. Ah to be young and naive.
That strongly depends on the investors. The vast majority is perfectly content with a spending schedule that runs over one or more years.
Obviously VC costs you equity.
I think control is something you have and lose depending on your ability to deliver. Larry has it. Travis lost it.
I really don't understand the opportunity part. Can you give an example? I'm just drawing a blank.
The opportunity costs are choices. If you raise $40M you're investors really aren't willing to see you 'exit' for just $80M, they will want you to go for way more than that. If you don't raise the $40M and someone offers you $80M for the company, you can take it and everyone benefits. Or another scenario, some very important strategic company wants to partner with you but this big equity load that is being held by VCs is a disincentive against future possible M&A activities.
Now this only discussed raising money that you don't need which is the case here. The author points out they needed some money, but the investors they talked to were trying to push them to take a lot more than they needed. The thing about bank loans is that their 'liquidation preference' is always very close to 1.0 and they don't tell you how to run your business if you're making your payments :-). That also speaks to control.
Something to consider once you are profitable is that banks are more comfortable extending a line of credit to you, that can be used for those 'unexpected' or 'opportunistic' capital requirements while not incurring a loss of equity now or in the future. Remember, banks make money the old fashion way, they charge interest on what they loan you :-).