Years ago I was much more averse to startups raising capital. I believed, naively, that the best businesses grew at the natural rate of customer acquisition and needed that governor to scale elegantly and cohesively. With time, and more varied experiences, I’ve seen hypergrowth, fueled by substantial amounts of capital and customer demand, scale in a quality manner while maintaining a strong culture.
Now, knowing there’s more math around when it makes financial sense to raise capital, I’ve also come to believe that if you’re going to get on the fundraising train, it’s important to plan for enough capital to get to a scale that provides for some exit opportunities in the event the business doesn’t achieve hypergrowth. Translation: the business needs to get to $10M of annual recurring revenue growing 30% or more for potential acquirers, especially private equity, to get interested.
Over the years, I’ve talked to a number of entrepreneurs that raised some money, achieved single digit millions in recurring revenue, and stalled. The startup had enough gross margin to keep the lights on indefinitely, but didn’t have enough scale or growth to find a home that made everyone happy. Herein lies the land of zombie startups. Too big to die, too small to matter.
Often, the solution is to manufacture growth with more capital. While not always efficient, more capital allows the startup to get to more scale which provides more outcome options. Scale matters to potential acquirers much more than entrepreneurs realize.
The next time an entrepreneur is on the fundraising train, make sure they know that getting to scale is one of the most important things needed to have options, so raise a bit more money than needed, or plan for another round sooner than desired. More capital is often needed for exit opportunities, so plan accordingly.
Entrepreneur
via https://www.aiupnow.com
David Cummings, Khareem Sudlow
