(Disclaimer: there’s going to be typos in this. I’m taking a brief break from working on a Sunday to clear some thoughts. This is my personal blog not a company website)
Recently at an unnamed CEO forum most of the founders discussed how to maintain control and their worries and concerns about VCs “not knowing what its like” or trying to steal control really bothers me that there is so much hatorade going around recently for VCs. I feel bad for them, in a world that is getting more and more competitive and capital less crucial as it used to be for starting a company it seems insane to me that founders would still be thinking that VCs are “evil” and here’s why:
· Most VCs would prefer you to run the company. Their job is to make money and protect it. If they wanted to be getting their hands dirty they’d have started their own company but to efficiently make money they cannot be dedicated to one idea
· VCs usually only want the amount of control that is warranted by their investment; ie they want as much as they need to feel comfortable for the risk. True some angels have ridiculous requests but its in their naivete and also in knowing their dilution of some kind is inevitable (again, a theme here in risk management)
· By definition if you are taking a VCs money then you need them, so try to also get ideas and worth from the situation not pretend as though they are valueless
Well into my third year at ConsumerBell I have started to understand the value of a VC but from a different way. We are currently angel backed and revenue generating but as we approach a new stage of the company and our product I see where a VC could be helpful to us, we need to be polished and play ball in a large B2B space. Be more “grown up” as a company and generally figure out how to disrupt a market without getting squashed by large publicly traded company. Here is how a VC could be helpful right now:
· Connections and network of other founders in a more confidential manner
· Pressure to build something larger and bigger than the initial ‘idea’
· Translating whimsical ideals into trackable metrics
· Support: once invested they will do whatever they can to help you. Not necessarily because they care but to protect their investment but atleast now someone cares about you more than your parents
· General advice: these people have seen EVERYTHING!
In a round of $360k in convertible debt ($7MM cap… slightly high for a non Y-combinator company but it’s a cap not a valuation) we have 14 angel investors of which 8 are founders who have started their own companies before and are either actively running those or now onto their next company. Part of this is because of my personal network and also part is due to the fact that another founder knows what its like to sacrifice something. They understand what its like to have your phone cut off or eat granola bars for a week to pay for your RackSpace bill. I have never once set the company aside to do an “official” round raise, nor has any family invested.
However, if you do the math that would be about $25k per founder angel but in our case that’s not how it worked out, the average “founder” angel investor put in $5k-$10k. If you think this is too small of amount then think again, it’s a symbolic token of faith as well as enough to catch someone’s attention and give you help. In a rental car leaving Summit Series Basecamp back in 2012 I was in a heated discussion with other entrepreneurs (I won’t say who all was there) but I vividly remember two founders in the car stating they would never chase after an investor for anything less than $50k. Carter Cleveland (Art.sy) and I looked at each other and said, “whatever it takes.” The concept of being too good for someone’s offer of help has never once occurred to me in the whole time of ConsumerBell. I take what we can get and Carter has since raised $7.3MM in funding to date, the other founders who were “too good” for small checks are onto their next projects. Make your own judgment but when you are passionate about something you will take every free conference pass, meal, hug, check, advice that comes your way. Those who eat, live.
Back to Numbers.
If you take our 14 angel investors, 8 are founders with 6 having invested an average of $7,400.00 per founder. That isn’t a huge amount and its also not enough to be motivated to follow it up with more money, i.e. its symbolic and holds a slot to be bought out in the next round and bragging rights for “investing” in your company early stage but its an amount that can be easily written off if things go sour and not enough to be incentivized in doubling down. The other two founder angels invested $25k and $30k respectively so they obviously feel more compelled to play for a longer run but without expertise in our Saas space may not be able to help much until our next round where they understand more of the conversion of what their investment is and what kind of value I have actually landed upon and built. What have I actually built???
(actually we have built lots of stuff as you can see here but I am referring to strategic value)
So what about the other 6 investors? Who are they? A VP of a large international bank, hedge fund manager, partner of a law firm, ex-wall streeter and 2 professional investors who are publically known with dozens if not hundreds of investments. Of these 6 who is most likely to understand the fundamentals of running a startup? Who knows the struggles of a founder or how to build a product? Half the time this group doesn’t even understand what ecommerce actually is but when we are in diligence for being acquired (which has happened 3 times now) or I need to understand the bonus structure of a publicly traded company we are bidding on for a recall, these are our people. They have access to Bloomberg, connections to old money and are inspired by the thought they invested in a startup super early stage (and usually from some bizarre chance of meeting me. One of whom I literally met on an airplane and pitched him to invest the next day and he did.)
Building Value and Making it Worth it
I know founders hate thinking like this, but you really have to start placing value on your stock. For example, as I sit back and reflect on my life and personal debt and time and issues I realize the opportunity cost of my life, family relationships that could be stronger and generally closer bonds with people. I have 4,000,000 shares in our company stock (I’m not going to go into preferred versus common today I will only use “stock” and “shares” lets keep it simple). There’s close to 1,500,000 shares outstanding for the company for Advisors and employees (again not going to go into what’s common vs not) but in total lets say that’s 5,500,000 shares of ConsumerBell stock. Okay.
The way I see it, for the risk that one particular partner has taken in our company (300,000 shares) I should do my best to 3X his time and investment. To me that roughly ends up being a $5.00 a share minimum (napkin math... won’t go into more detail of this here). Okay, so that means, $5 a share X 4,000,000 my shares = $20,000,000 dollars or $20MM. This is actually the average exit for startups so not a crazy wild number. Most startups that get later staged financed or IPO usually land somewhere around $12-$20 a share. My brain cannot even comprehend what that makes me worth if our stock is worth $15 a share (holy shit that is $60Million dollars if I retained my current ownership stake, hi mom!)
One of my goals is to eventually buy an apartment in New York City (lets say that’s $3.7MM). In order to even qualify to buy it I would need 5X that so $18.7MM in networth so within range of the $20MM of my stock worth if I can get to that $5 value I’d like. But for my stock to be worth $20MM that would mean all 5.5MM shares be worth a $5 each value totaling a = $27.5MM COMPANY VALUE.
Question: How do you make your company worth almost $30MM??
· Have an annual revenue of generally 5x so $6MM. That’s $500,000 a month in revenue.
· Be wickedly strategic
Now let’s look at those numbers above. I think we already are wickedly strategic (as such past acquisition offers would reflect) and our revenues are currently near the 4% of 500,000. Can we be ten times cooler, better and faster? Absolutely. We have barely even scratched the surface with what we are doing and working on. But let’s go back to our angel investors, 6 are founders who arent’ that invested, 2 are famous and busy traveling the world, 4 are more or less on wall street not understanding how a subscription based SaaS company operates and two don’t know each other so feel isolated as investors. Given I’m a first time founder without true co-founders, how am I expected to reach this 500,000 a month in revenue? What is our go to market strategy, how to do I get more signups and clients and also battle with the “big guys” or companies while also navigating polite rejections of acquisition offers of large stoic companies that are half tempted to squash us if we don’t take their advances? Who is going to stand in my corner when shit gets real or we have to redo some code or the website needs to be redesigned? Our hedge fund running angel investor? No. Our corporate counsel investor? No.
Its going to be my founder friends who have already done it before that are going to be able to help, many of whom are unfortunately busy.
But guess who would know which founders have the time to mentor and help right now?
And who would be able to put in more cash so we have enough money for a large marketing campaign to break into the pharma B2B space?
And who is going to know some tips to keeping relationships with potential acquirers polite but also be able to make us look more sturdy from the outside?
VCs to the left, VCs to the right
So from my perspective I don’t need all these 4,000,000 shares of stock, I need to get to $20MM in my stock worth and the only way I’m going to be able to get that done will be with smart people who can either help open doors or buy us a better lock from Home Depot to install so we have more time to code and get users and make traction.
And you know what is even cooler? VCs need founders now more than ever to help build value and be innovative so they can make their margins and help the whole VC funds from not becoming abolished in a world where other markets and tools are making faster bigger numbers for individuals with wealth.
I’m tired of founders, VC backed and not, freaking out over “bad VCs” or “dumb” VCs. The point is that this is an ecosystem, we need VCs and they need us to keep this world turning. While myself am not currently backed by a VC I look forward to the day that we are because it means that we didn’t take one of those crappy acquisition offers from a large competitor and can build more innovative and disruptive value. It also would mean our RackSpace bill would never be in danger and we could potentially get a bunch of MBA’s fresh out of school to create copycat companies (as they will once they see we raised X). They may even find a way to do what we do better, I hope so. In the end I know who they are going to try and poach or call and when they do I look forward to being an Advisor.
And then, even one day later in the future, I may even be a VC and when a founder calls me in desperate need I will be able to help them not only with a check but in the value I can bring to their table. I wouldn’t want to run their company as I would have already done it but who doesn’t enjoy watching something grow from an idea to a commonly known company and make money while doing it?
Don’t blame the VCs, get back to work on traction and the smart ones will find you.
There will be updates to this post. I plan to “RapGenius” it with links and backlinks.
If you are in NYC stop by, I love visitors or email me with your startup questions and I’m always happy to help. ConsumerBell, 475 Park Ave South, 4th floor, New York, NY 10016, firstname.lastname@example.org. I already see a bunch of typos. Oh Well.