1. Just spent 2 meetings w/ a company that needs proprietary technology from my ($20k MRR) startup to raise their own Series A.
2. Their CEO and I have a similar background: we both geeked out on the same scientific breakthrough a few years ago and each figured out a real-world application of it.
3. I just launched an AI-augmented software implementation that I sell to SMBs as a SaaS subscription. This guy went with a hardware implementation (a steampunk machine that he travels around with) that he sells as a service to Fortune-500-level companies.
4. These guys launched ~5 years ago, are badasses and make a killing, w/ $4MM+ a year in revenue and great profits.
5. They want to raise a $5MM Series A to turn their service offering into a digital, subscription-based, pay-$$-per-user-per-month offer to their existing Enterprise clients.
6. All their Enterprise clients say "we want to put 10,000 users in at $6/month/user, BUT we would need features [X] and [Y] before we sign on". Their projection is an opportunity of ~20MM in ARR in 5 years. However this company can't deliver either X or Y with their current hardware stack.
7. They're trying to raise the Series A to build a software stack that delivers X and Y (they're budgeting 2 years and $1.5MM+ out of their raise to get there). VCs are saying that the technical risk is way too big, so they've turned to private investors.
8. Their CEO/co-founder just found out that we have already built "X", and that with our tech base we can build "Y" super easily. He's thrilled because partnering with us would completely de-risk their big strategic move.
9. On our side, "Y" is a feature that our SMB customers don't need, so we have to be very careful and strategic about going that direction since it might divert us from building feature Z that our core market desires, and which is on our direct path to product-market fit.
Where do I go from here?
6. There will always be more Xs and more Ys. Selling software to enterprises is an art and the main artform is learning how to call the bluff on feature "requirements". So I would encourage the other CEO to reconsider if he should truly be pinning his entire fundraising strategy on this feature objection.
7. What the fuck do VCs know about technical risk? Their purpose is to invest in the founders, team, and business model, not to act as an armchair CTO. I'd be very surprised if there aren't other rejection reasons (maybe they don't like the 2 years it'll take?) and this one just sounds easiest to say. I think they should find better VCs.
9. (this is the main point) If you're only going to have one customer for "Y" and they'll pay you more than all your other customers combined (seems plausible here) then you'll end up working exclusively for that one customer. If you are trying to run your own business at the same time, that will get very complicated over the long term. As you say, it'll become a big distraction. If you like this other CEO and want to work with him, you could consider an acquisition. The VCs would probably like that too.