Are we in a bubble? Yes. No. Maybe. Who knows. Tons of materials and opinions out there. Recently though, internally at Cue Ball (thank you TT and CM), we started talking about what the implications were. Meaning what should startups do now to optimize their position in the market that we are in today.
The first is obvious. Raise capital – even if they don’t need it. BUT only if they figure out a way to be capital efficient. CB Insights released some data surrounding how startups now have complete disregard for what it means to convert the money they raise into actual bottom line dollars. Or they have no path to a sustainable business model. Or they don’t invest in making the best of the best product out there. I hear tons of entrepreneurs say they are “opportunistically” raising but not many have shown discipline in terms of laying out a concrete plan of “xyz – this is what I am going to use that money for”. And by that I mean a very detailed budget and not just “I will use it for sales & marketing”. Tell me how and on what exactly.
Moving on to the second point. SELL THE BUSINESS if no clear path to monetization. The market could not be better to pay one for lacking there. From a VC perspective, here’s why it is important – if a startup raises more money at a higher valuation, they just need to make sure their exit (IPO or a sale) price is that much higher to get the return they are looking for. And this includes founders; at the end of the day they too need to think about the waterfall and probability of achieving that exit price to not be wiped out by the preferred stock holders. For my non VC friends, here’s an overly simplified numerical example.
Startup raises $40M at $60M post money valuation. Currently investor owns 2M shares which they bought at $2 a pop. Common has 3M shares. New round added 10M investor shares at $4 a pop. Assume investors have a 2x preferred structure. Company sells at $100M. Investors take $88M (2 * $2 share price * 2M shares + 2 * $4 share price * 10M shares) and founders/common holders get $12M.
Now the other scenario is company doesn’t raise. It sells for $20M. Founders/common holders get the same $12M as investors get $8M (2 * $2 share price * 2M shares).
That’s an $80M difference in exit price and that is huge! And no one can argue getting valued at $20M is definitely less steep of a milestone to reach than being valued at $100M.
But let me reiterate my point earlier. If you think you can build the business to that $100M mark and above, and that your business model will continue to sustainably scale (augmenting your recurring revenue base and leveraging your fixed costs) – by all means, please feel free to ignore this junk! But if you don’t, seriously consider the above as you think through your fundraising strategy.
“Instead of burning the midnight oil, you should try selling it” – Jarod Kintz