Great Companies vs. Good Deals
This is a four-part series on San Diego’s Total Package Deals (and why we’re seeing fewer of them these days). It starts here.
OK, great. You’re an ideal investment opportunity. You hit most of the marks. We like you. We like your team and your product is inspiring. Love is in the air. Things are great right? Not always. A good deal also means getting a good valuation which when done correctly serves the entrepreneur and the investor both.
Unrealistic terms are a real turn-off. We don’t like it when companies come in with outlandish valuations. Hearing bad terms make founders seem unreasonable and raises red flags. Inflexibility around valuation and deal terms is a turn off and could easily kill a deal. We may love you and your product but we won’t be convinced it’s a worthy investment if the risk doesn’t equal the reward. But unrealistic terms are more than just a number alone. It’s taking into account the hundreds of things that could — and do — go wrong that will probably lead to your company failing. And balancing that with the off chance that everything goes right, from perfect internal execution to all sorts of external forces such as market timing, competition, and macroeconomic trends.
At the end of the day we are partners with our portfolio companies, but we are also investors. With our capital, we help de-risk the business by providing strategy, expertise, and connections to the table. We are constantly looking to balance the high risk we are taking with the potential upside we can receive. In the very early stages, the investor risk is high, especially with a first time CEO. The capital has the most to lose at that point, so also should have the most to gain. The more progress a company can show (yes, that very overused word, “traction”), the easier it is to make a case that the valuation should be higher. However, at the end of the day, the “right” valuation is ultimately what the market tells you it is. There is no magic number, but if you are finding you can’t raise capital, either your terms are not attractive enough or your business is fundamentally flawed.
Finally, a good business doesn’t necessarily mean a good investment. The company could easily be cash flow positive and make the CEO or founders a good living, but the IRR may not be high enough, the exit opportunities not abundant enough, or the total addressable market may just be too small.
If you are a great company and have the total package, we want to know you. I know you’re out there. Maybe you’re waiting for the right time to get off the bench. Why wait? San Diego’s startup future depends upon you and your big ideas.
This is a four-part series about total package deals. For the intro, start here (you are here).
Part 1: What is a Total Package Deal?
Part 2: The Gulf of San Diego
Part 3: Crossing the Chasm
Part 4: Great Companies vs. Good Deals (you are here)
