I had an interesting discussion with an entrepreneur friend yesterday. She has a consumer Internet (Curated marketplace) startup, which she has been working on since Jan. She soft launched it in May and has been seeing a doubling of revenue every 2 weeks so far. She is on the fund raising circuit and has a few interested people.
After a quick 30 min on her market segments, the traction and her supplier base, I was very keen to invest myself. She’s a very talented entrepreneur and passionate engineer, so I was a little concerned that she did not have anyone from the domain on her team. So, I demurred, asking her to connect with a few other folks I invest with.
One of the investors I talked to asked me how much she was looking to raise. I mentioned she was looking for about $500K.
“Why not $5 Million and go big”? was his question.
I started to offer some “rational” arguments as to why not – first, she did not have enough traction to justify a $8 – $10 Million valuation, she would not know what to do with the money, she was still trying to form her team, but I was thinking at the back of my head – “What if’?
What if investors did give you 10X the money you were asking for?
I understand that’s rare and largely impossible for most entrepreneurs to get, but what if?
So, I did a quick thought experiment with my entrepreneur friend and asked her to think, but not spend too much time modelling what her investments and metrics would be at $5 Million invested in the company.
At first, she was excited and said she could use all that money to hire people, expand into SF and other cities, etc.
A good 15 minutes later, she called back, much sober and asked – what % of the company would she have to give up for that kind of money – I said I did not know but suspected it would be 60-70% at this stage given the risk. Maybe if she was lucky, 50%. Again, I did not know, but I doubted that she would be able to get away with less.
After 30 more minutes, she called again, now asking me for the metrics that she’d have to hit. I thought she would not ask me that question, but I am glad she did. As an investor I wanted to have 5X to 10X return in 18-24 months, so I said she’d have to be at $50 Million to $100 Million valuation within 18-24 months.
She was doing $1000 per month. Even if we gave her a rich valuation, she’d have to be at $2 – $3 Million revenue per month in 18 – 24 months I thought.
She then pulled back.
Nope, she said. She was happy with raising $500K. Much less money, much more control, but much less stress.
I think we learned a lot from this thought experiment.
What would you do?
I dont think there’s a single person who would not expect more money (as investment) to mean more stress, but that’s the nature of the business.
You can work your way into it, or work towards your goal. Either ways, it is a lot of work.