Don't raise more money than you can chew

It's that time of decade. For the first time since 2000, it would appear that for companies with north of $50M or $100M in revenues, the IPO market is starting to heat up a bit. As most VC backed companies do not go public however, my partner, Brian, and I have found that watching the average acquisition prices be a bit more telling, as that's the typical exit for most companies.

A few weeks ago VentureWire reported that median average valuations for acquisitions of VC backed companies rose to $105M, 2X what they were a year ago. Last year the median acquisition price was $50M. It's been at this lower more typical level since the bust in 01 basically.

One of the things I've looked at is how much capital can a company raise and still make for a good return for investors-- but more importantly for entrepreneurs, as it's entrepreneurial drive and determination that create success. Demotivated founders and managers is the worst thing for a startup. If a founding entrepreneur raises $40M then exits at $50M then that's not a good result for anyone, after interest, dilution, closing costs, etc. An exit at $100M is better clearly, depending on how much dilution the $40M took. Here's the hitch: the average age of a company exiting ranges from 4 to 8 years depending on the market and segment (right now it's 6-7 years for IT companies I think).

Hence, an entrepreneur never knows if they will be exiting in a "good" $100M + market or a poorer $50M market. As an entrepreneur, you can pray that when the time comes to exit that you are in a bubble or an elevated 2X the standard merger and acquisition environment like we are in now, which always coincides with a decent IPO market. That window opens once every 6-8 years in my experience. But isn't it easier to just build a more capital efficient business that consumes less capital, than pray that 1/ not only do you deliver on the promise of your business but 2/ time the exit right?

Unfortunately, I've invested in 3 companies that cleared $25M in revenues with north of $50M in capital, only to get a goose egg (a "0") or near goose egg for everyone involved, so I talk from sad experience. There is nothing worse than building a great business, only to find out you consumed too much capital to make it rewarding for anyone. The lesson I took away was don't raise much more money relative to the experience of management putting it work on an efficient basis.

In other words, if your team has never handled more than a few million dollars, don't raise $25M without a bringing on team that's managed that type of capital efficiently. In addition, even if you could bring on such a team, I am still skeptical that they can break the average exit levels of $50M, as $25M is less likely to be used efficiently, even by capable managers, than smaller amounts. Bottom line is: don't put more money in your bank account than you can chew efficiently, as you will pay for it in the end, the exit.