By Lenny Rachitsky · lennysnewsletter.com · @lennysan on X · YouTube · LinkedIn
Lenny Rachitsky answers a SaaS founder's question about when a small startup should raise money and start hiring. His core guideline is to wait until product/market fit is found, since hiring before then slows a company down while hiring after speeds it up. He describes three stages of a business (search for PMF, growth, maturity) and argues growth is the best time to raise, because money can then fund hiring, paid channels and sales. He warns against premature scaling, which burns cash before PMF exists, and recommends raising only when extra capital yields growth worth the dilution. The newsletter also links several guides on fundraising timing.
01Key takeaways
- Do not hire heavily until you have found product/market fit, since early hiring drains runway without speeding learning.
- Treat the search for PMF as the risky stage where money is most likely to be wasted on premature scaling.
- Raise capital once you have PMF and can deploy funds into channels or sales that drive faster growth.
- Before raising, define what new hires and spending must achieve for the raise to be a net win.
- Weigh the dilution cost of raising against the value of a higher growth rate, since faster growth raises a company's valuation multiples.
02Key sections
- Hire only after product/market fit
- Hiring before PMF slows a startup down, while hiring after PMF accelerates it. Before PMF, the goal is to survive as long as possible while iterating quickly.
- The three stages of a business
- Companies move through searching for PMF, growth, and maturity. Raising money is most valuable at the growth stage, not during the costly search for fit.
- The danger of premature scaling
- Spending heavily on growth before PMF is discovered is a common way startups die. Raising early mainly increases dilution and time pressure.
- When raising capital makes sense
- Raise only when you are confident the capital will produce a higher growth rate that is worth the dilution. Be thoughtful about how much you raise and from whom.
- Further reading
- Lenny points to guides on bootstrapped fundraising, Series A timing, and SaaS capital raising in 2019.
03From the post
“Hello and welcome to another edition of my weekly newsletter 👋 If you’re finding this newsletter valuable, consider sharing it with friends 🤜🤛 Q: We’re a SaaS startup with a three-person team. We’re at a stage now where we’re onboarding a few new customers per week and things are picking up. When you were building Localmind – at what point did you put your foot down on the hiring? We’ve raised some angel money before but not sure when it’s right to raise more. We want to move as fast as possible but don’t want to risk quadrupling the burn rate only to run out of money. It would be great to know your thoughts and what you would suggest regarding the right timing on growing the team and balancing speed vs cost. At Localmind, we never got anywhere near to this stage (late 2000’s consumer social, location, mobile-based businesses FTW 🥴), but there’s a fairly clear guideline for when any business should raise meaningful money, start hiring, and focus on growth: after you’ve found product/market fit. “In general, hiring…”
04Frameworks mentioned
Summary and takeaways written by PM Atlas; quotes are short excerpts. © the original author.