Billion or Bust… Caveat Emptor
By Cliff Sirlin
Originally Posted October 18, 2017
All hail the Unicorn. The mythical, beautiful creature that lives in fairytales. Or if you live in the start-up ecosystem (a place some would argue is a fairytale unto itself), a privately held company that achieves a valuation of over $1 Billion. When you read TechCrunch, Pitchbook or CB Insights, you are inundated with star-struck stories about companies that raise astronomical sums of $ at even more outlandish valuations.
Yet, according to PitchBook, there have been 18,642 companies founded in the last 10 years who have raised over $500k — and as of today, there are only 218 active unicorns.
As a long-time entrepreneur & investor, I have seen many successful start-ups build businesses that offer wonderful, new services and technologies and then exit for $50-$500M. And as I constantly remind entrepreneurs, there is no shame in building a successful company that leads to a life-changing outcome for the founders while providing excellent returns for company employees and investors.
But to give yourself that optionality, make sure you understand and appreciate the impact of early funding decisions.
Here’s a few things I’d suggest you keep in mind while crafting your fundraising strategy as you launch and expand a new business.
Recognize that not all businesses are meant to be VC funded. Do you want to put yourself on the growth trajectory necessary to meet the demands of VC? Many companies are perfectly appropriate for VC funding. Proper team, large addressable market, significant competitive advantages, etc. However, a much greater # are not.
When a founder or group of co-founders get together to launch a new venture, it is critically important to have alignment with regards to the objectives for the venture. There is no wrong or right answer; just a series of outcomes & consequences that naturally flow out of the decision. Understand the effects of these early decisions on an economic, social, and personal level.
Build your business model specific to your industry and the opportunity; don’t build a model that you think a VC will want to see. Be intellectually honest with yourself. If the core of your business is providing a particular service, don’t let others convince you to add VC buzzwords like “VR”; “AI” or “blockchain” in order to become venture-backable.
Likewise, don’t convince yourself or let others convince you otherwise about the opportunity in front of you. It’s one thing put something down on paper or in a spreadsheet, it’ll be on you to execute against it.
Recently, I’ve seen many first-time entrepreneurs raise way more funding than needed. This stems from an abundance of cheap capital being available in the early stage ecosystem. Early Stage VCs are raising larger and larger funds and therefore are throwing more & more capital at start-ups.
Understand that by taking on increased amounts of capital, you create a return hurdle that significantly reduces your exit optionality. Large amounts of capital push you down the “billion or bust” path. Be conscious of this as you think about how much to raise.
Start by having a clear understanding of the hurdles necessary for a positive outcome for all of your stakeholders — co-founders, employees & investors. Recognize that the more capital you raise at higher valuations early on, the less optionality you will have when it comes time to exit your business. There are far more acquirers out there for a $100M business than a $1B business.
Building a successful business is something to be proud of no matter the size or trajectory. Some of the most meaningful experiences in my life have been in the trenches working with my friends to build businesses I’ve believed in. But be you — in an ecosystem that’s increasingly pushing you toward “billion or bust” — it’s extraordinarily important to make sure you are intentional about setting yourself up to win from the beginning. And only you can decide what winning means!
Originally published at launchcapital.com.
