I think people sometimes forget that the flip side of only 1 out of 100 companies getting funded is that as an investor that means 99% of your job is saying "no". As you might expect, I find that there are a lot of reasons to say "no". Some reasons make the decision super easy like "I'm pretty sure this person is a legitimate con-artist". In other circumstances the decision can be much more difficult but deep down I know it's the right call. One of the hardest for me is when I come across a founding team that's checking all of the right boxes but it then becomes apparent they're heading for a funding war.
“I personally know founders that have sold their companies for $300MM+ but still need to keep a day job because the company was caught in a funding war and they ended up with a nearly worthless position upon exit.”
One of the things we pride ourselves on is that, as early investors, we want to align our incentives with the founder so that if our fund is successful, they're successful too. That basically means that during an exit, the value of each of our pieces of the pie is a really big number. By contrast, a funding war is perhaps the most common way for both of us to get screwed even if the company turns out to be incredibly successful.
A funding war is basically a way of saying whoever raises the most amount of capital the fastest wins the market. Sometimes this is the unavoidable fate of a particular market. This usually happens when you have a widespread market problem, that's easily solved by software, that becomes a very obvious opportunity to people in Silicon Valley including those that don't have direct experience in the industry. The competitive barriers to entry are low, the potential reward is very large, and in the beginning it just looks like an open field to run.
As new entrants begin to join, founders can find themselves in a position where they have quickly built a great product, sales are growing organically 20%+ each month, and then over night the big VC floodgates open and you start to see competitors raise $100MM+ financings. The natural inclination of founders in this position is to fight fire with fire and try to outgun everyone. If you're the company with the biggest war-chest that's great but for everyone else that's a loosing proposition. It's the reason I say "no" in these situations. I can see that the founder is heading down a path where it'll require us to invest a huge amount of money only for both us and the founder to get screwed on returns at the end of the day.
My advice if you find yourself in this situation is to instead find a corner of the market that you can own; where you have a natural competitive advantage over the other guys raising big dollars. If the overall market is big enough then even a small corner could be in the $100MM's. If you can grow in that space capital efficiently, then whenever the big guy emerges from the funding war victorious, they will naturally be inclined to buy you out at a decent return to you to expand their share of the market.