It’s 1938.

Fujio Hayashi, a 22-year-old pilot in the Imperial Japanese Air Force, has volunteered for a mission of certain death: strap into a fighter plane loaded with 500 kilograms of explosives, fly to mainland China, and dive-bomb into the first enemy position he sees. Japan is experimenting with a new weapon of war: the Kamikaze, a suicidally effective means of knocking out enemy ships and bases used to terrifying effect in the Pacific theater of World War II. Hayashi is the very first Kamikaze.

Sort of.

He dutifully takes to the air, identifies a military installation, crashes into it — and survives. The bomb doesn’t go off, a technical malfunction common in beta-testing. He unstraps, gets back to base, survives the war, and lives until 93. His grandkids said he loved classical music and stray cats.¹

A warning for founders: You are probably not Hayashi.

I regularly see startups chasing what I’ve come to call a “Kamikaze” funding round: an early, enormous check tagging the company with a valuation vastly outpacing its current status in the market. Just like Hayashi, the founders see certain glory, but unlike Hayashi, they aren’t consciously suicidal; they’ve got visions of becoming the next OpenAI or Uber, and some of them might be.

A core characteristic of a great founder is having a grand, unshakeable vision of world-changing technology. In some cases, raising enormous gobs of cash becomes a self-fulfilling prophecy — the high-risk/high-reward path to dominance in a competitive market. Someone else, potentially even from within the shared hallowed halls at Founders Fund, could make the case for why you should always raise as much as possible at the highest price possible.

But the raw, unavoidable truth is that for the vast majority of founders who go Kamikaze, it has not been a path to glory: it’s been a death trap. It’s been effectively suicidal. The pressure to grow quickly forces companies to take huge risks without solid revenue, and failure to live up to inflated valuations can set off a downward spiral of dilution wiping out founders and early investors.

Say I’m an early-stage AI-enabled-something startup with some hype building around the company. Investors start calling. This is the prime time to go Kamikaze, when I have no revenue and my gigantic valuation is purely theoretical. Everyone can keep dreaming without getting bogged down by pesky data around company performance.

I’m offered a Kamikaze check. Gold-plated venture firms with partners telling me I’m a visionary. I take the money. I go full Kamikaze.

Our incentives are not perfectly aligned. Investors are under pressure to deploy huge amounts of capital and generate wins big enough to return the fund. For me, a “medium” win — raising, say, $100 million and exiting at an incredible $500 million — is life-changing. For them, it very well may be a rounding error. Their preferred stock options are designed so that if the Kamikaze bet doesn’t pay off and we’re only medium successful, they can extract most of the value before the original team gets paid.

I’m intoxicated by the brand boost of a big early round: it raises our profile, possibly attracting more capital, talent, and customers. But that’s a short-term calculation disconnected from the long-term risks to the health of my company.

Six months or a year later, the reality of these misaligned incentives kicks in. My company’s revenue has grown, but it’s still well short of expectations. When I go back out for another round, investors are suddenly skeptical. They no longer believe my sky-high valuation with a triple-digit revenue multiple. A savior investor is willing to cut a check to keep the dream alive but the terms are punishing. My desperation makes me easily exploitable.

The fundamentals of my company don’t change. Our growth rate slows and we’re forced to raise a downround. My earliest champions pay the heaviest price for going Kamikaze.

This cycle often ends in ruin.

Look at Katerra, a much-hyped construction company promising to revolutionize the industry by integrating and automating the supply chain for component parts of buildings. Making, say, an apartment requires sourcing parts from a vast, fractured supply chain: there are separate suppliers for lumber, plumbing, insulation, HVAC and so on. Katerra ran its own production facilities, pre-fabricating all the constituent parts currently sourced from subcontractors, and then snapped them together to make new buildings.²

That’s a solid idea.

Started in 2015, Katerra raised $200 million over the next two years, manufacturing apartment complexes from a 25,000-square-foot plant in Washington. The company ran into inconvenient facts of physical reality early: a prefabricated wall for a three-story apartment, for instance, doesn’t actually work for a ten-story one as there are different weight, electric, and other design demands.³

But then, in 2018, came the Kamikaze round. Softbank, the Japanese mega-fund, led an $865 million round pegging Katerra with a six billion dollar valuation. There was no longer any time for incremental innovation. The company quickly ballooned to 7,500 employees and built another huge production facility in Phoenix without addressing its core problems of technical complexity and the need for customization in construction.⁴

Within a year, Katerra started laying people off and shut down half a dozen projects. Then COVID decimated demand and, despite an emergency $200 million infusion from Softbank in May 2020, the company suffered another five rounds of layoffs — and then bankruptcy.

This is the Kamikaze death trap: early promise; the huge check; eager founders with glory in their eyes; issues of profitability that go ignored under the huge pressure to expand; lackluster growth; down rounds; layoffs; and then, often, insolvency.

Of course, venture investors like me have a financial incentive for companies to accept lower valuations, so take my advice with a dollop of skepticism if you like. But this scene from Silicon Valley does capture the hard reality of twenty-plus years of Kamikaze rounds. The Pied Piper protagonist gently asks a founder who’d just flamed out: “What if you had asked for less?” The founder is stunned. He can’t process the question: “Like....negotiating down? Can you even do that?”

Yes, you can. It doesn’t violate the laws of finance, physics, or technology to take less money at a lower valuation. Sure, venture funds benefit from more realistic prices, but you benefit from avoiding the painful death of your company.

At Anduril (where I am a co-founder), we’ve never taken the highest price offered in any round. Whatever we’ve lost in not-strictly-necessary dilution, we’ve more than made up for in overwhelming demand and the stampeding build of price-per-share momentum over the last eight-plus years. This is the way.

So founders, remember: You are not Hayashi. This will likely end in an explosion. Don’t go Kamikaze.

—Trae Stephens

FOOTNOTES

¹ The Real Kamikaze (AP News)

² What does Katerra’s demise mean for the contech and modular industries? (Construction Dive); Why You’d Want to Build a Skyscraper Like an iPhone (Wall Street Journal)

³ How a SoftBank-Backed Construction Startup Burned Through $3 Billion (Wall Street Journal)

⁴ Katerra’s $2 Billion Legacy (Architect Magazine)