Don’t Raise Money
Sometimes it makes more sense not to raise money from venture capitalists. I ask entrepreneurs all the time, “Are you sure you want to raise money?”
More and more entrepreneurs have been telling me they are going to bootstrap instead of trying to raise venture capital. Charles Moldow has an article titled, “VC to Aspiring Entrepreneur: Are You Sure You Want our Money?” He explains a situation that is all to familar:
HotFeature.com has 10 employees and the founders each own 35% of the company. They pitch me on the idea and I agree with their assessment that consumers want and need HotFeature.com. They have raised $1.5M in angel money to date and have given up 20% of the company to investors. They require another $10M to grow their audience and build brand.
Here’s where things get interesting. I point out to the founders that they could probably sell the company today for $20-$30 million and that they would each make $7-10M which is not bad for a few years of work.
If they take $10M from VCs at a $15M pre-money valuation and create an option pool for the next 30 employees (assume 15%), they each now own less than 20%. To make the same $10M, the company must now sell for a minimum of $50M. Achieving this type of valuation is significantly harder, as it suggests that the company has established a brand, demonstrated a business model and proven consumer adoption.
In addition, my partners and I won’t be too excited about a $50M acquisition. This type of exit is not sufficient to ensure superior returns to our limited partners across a broad portfolio of investments-our returns are determined by home runs, not singles. As such, we‘re inclined to push for continued growth, market expansion and additional product development, which adds risk, requires more capital and creates additional dilution for the early employees (not always the win/win I seek).
Think long and hard about raising money. Often money can just amplify your mistakes…