{"id":341122,"date":"2017-05-17T09:00:40","date_gmt":"2017-05-17T01:00:40","guid":{"rendered":"http:\/\/techcrunch.com\/?p=1479810"},"modified":"2017-05-17T09:00:40","modified_gmt":"2017-05-17T01:00:40","slug":"theres-no-shame-in-a-100m-startup","status":"publish","type":"post","link":"https:\/\/people.utm.my\/asmawisham\/theres-no-shame-in-a-100m-startup\/","title":{"rendered":"There\u2019s no shame in a $100M startup"},"content":{"rendered":"

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Joseph Flaherty<\/span> Contributor<\/span><\/p>\n<\/p><\/div>\n

Joe Flaherty is director of Content & Community at Founder Collective<\/a>.<\/p>\n

More posts by this contributor:\n<\/div>\n<\/div>\n

The era of unicorn startups has created a distorted view of entrepreneurial success. All the talk about billion-dollar exits has inflated the numbers that define a win. Starting and selling a company for $100 million dollars is an outlier event in terms of pure entrepreneurial probability, but such outcomes are viewed as well short of success in many corners of today\u2019s startup world.<\/p>\n

This bizarre belief isn\u2019t universal, but a surprising number of VCs and industry observers are thoroughly unimpressed by low nine-figure exits.<\/p>\n

In our hype-driven society, this actually isn\u2019t so surprising. Political reporters want to write about the president and the Supreme Court, not state government. Likewise, tech journalists want to write stories about companies that spell million<\/em> with a \u201cB.\u201d Investors at billion-dollar funds want to deploy $50 million into winning companies, and $100 million exits are seen as consolation prizes instead of reasons to cheer. In this echo chamber, a $100-plus million exit seems like a jumbo-sized acqui-hire.<\/p>\n

To put this reality distortion into context, we examined the outcomes of a special segment of the successful founders over recent decades \u2014 those who have become VCs. Looking at a broad cross-section of top VC firms, we identified 63 investors who have a background in starting companies. Only 11 of those founders-turned-investors have built enterprises that have IPO\u2019d or sold for more than $1 billion.<\/p>\n

Many of the most successful investors built exceptional startups, which only by today\u2019s distorted standards look like \u201cmodest\u201d economic outcomes. Y Combinator\u2019s Paul Graham is one of the most influential venture capitalists of the last 10 years, yet his startup Viaweb\u00a0sold for \u201cjust\u201d $49 million<\/a>. Viaweb was a success by any realistic standard, but perhaps not by today\u2019s hyped success narrative and fundraising stockpiles. The company only raised $2.5 million before its sale \u2014 a pretty impressive return and an amazing precursor to what was to come for Paul Graham. It turns out that \u201csmall\u201d exits can lead to big things.<\/span><\/p>\n

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Note: This isn\u2019t an encyclopedic list, so if we missed someone, please let us know. Also, some of the dot-com-era exits are hard to value accurately, but citations<\/a> are available. In the case of undisclosed amounts we assume the acquisition prices were lower than the materiality threshold of the buyer. (Source: Founder Collective)<\/p>\n<\/div>\n

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Belittling $100M success stories<\/h2>\n

Not only is selling a company for $100 million often scoffed at by VCs, at times it is outright mocked by the startup community. Aaron Patzer became famous for building Mint.com, and the site\u2019s powerful UX was such a breakthrough that Intuit paid $170 million for the company. He didn\u2019t buy into the \u201cgo big or go home\u201d ethos; instead, he earned a fortune \u2014 and was roundly ridiculed for it. The disdain for \u201csmall\u201d $100 million sales is so strong there\u2019s even an Urban Dictionary entry for selling your startup for too little money \u2014 it\u2019s called \u201cPulling a Patzer<\/a>.\u201d No seriously, go look it up. We\u2019ll wait.<\/p>\n<\/div>\n

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One of our portfolio companies recently sold to a tech giant for just over a hundred million dollars. The acquisition gave us an exciting multiple in a short period, and each of the co-founders made more money than LeBron James last year. This sale was quite possibly the best realistic outcome the company could have expected and a huge win for all parties.<\/p>\n

In this unicorn-obsessed startup era, the lack of appreciation for these victories is a failure of vision at best, and unfortunate cynicism at worst.<\/p>\n

\u201cGo big or go home\u201d is broken logic<\/h2>\n

We\u2019re not suggesting entrepreneurs should look for quick flips or undervalue their company\u2019s potential. We want to fund the next Uber, Google and Facebook. The reality is that not every business is suited for that. Part of the reason so many of these VCs had great outcomes at well below unicorn fantasy levels is that they raised the right amount of money for their businesses at valuations that maintained exit options.<\/p>\n

Ideas that look like billion-dollar businesses at the seed stage can run into unexpected barriers. For modestly funded startups, these mistakes don\u2019t need to be fatal. Unfortunately, most VCs are sized such that they can only succeed if they have several companies in their portfolio exit for more than a billion dollars. So VCs overfund startups with decent but uninspired progress, which cuts off realistic and enriching exit opportunities.<\/p>\n

For example, you might have a company with $10 million last year in gross revenue that earned a $50 million valuation in its last round. This company hopes to double its revenue this year and is in a sexy category, but it has thin margins and a loose handle on its unit economics. In a normal environment, that company might raise $20 million on an $80 million pre-money valuation as the next step up.<\/p>\n

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It turns out that \u201csmall\u201d exits can lead to big things.<\/p>\n<\/blockquote>\n<\/div>\n

Instead, in the current climate, a VC will see signs of progress, get excited by the market and convince the founders to \u201cgo big or go home.\u201d This VC has $20 million burning a hole in his pocket (he needs to deploy this capital to raise his next fund) and convinces the entrepreneur to take $40 million (with half to insiders) on $260 million valuation instead. Now, with a $300 million post-money valuation, the company needs to sell for a billion dollars to be worth the VC\u2019s time.<\/p>\n

With only $10 million in revenue and very thin margins, the company has sold its option of a $500 million exit. If they had raised less money, a sale for half a billion dollars would have made everyone happy. Instead, they\u2019ll probably increase their burn rate and raise more money. Eventually, this promising company could possibly go out of business when no acquirer wants to pay the inflated price and VCs lose interest in funding the excessive burn rate required to continue to fuel false hopes.<\/p>\n

Fund size tells you everything<\/h2>\n

A lucrative $100 million exit is only possible if you don\u2019t over-capitalize your business. If you want flexibility, you\u2019ll have to fundraise strategically. This starts with choosing your investor. Founder Collective partner David Frankel often says, \u201cfund size tells you everything.\u201d As a very rough rule of thumb, your startup needs to be able to make a case for that it can exit for at least the value equal to the size of the VC\u2019s fund. Raise from a $50 million fund, you can sell for $100 million easily. Raise from a billion-dollar fund and you need to shoot for the moon. Choose carefully and make sure you know what you\u2019re signing up for.<\/p>\n

There\u2019s no shame in a $100M startup<\/h2>\n

The vast majority of tech companies are sold for less than $100 million dollars. Raising a relatively small amount of money and selling a company for $100 million dollars should be celebrated. For most founders-turned-VCs, this was the definition of success when we sold our own companies. In some cases,\u00a0selling for tens of millions of dollars<\/a> can be more lucrative for founders than selling for hundreds of millions, or even billions of dollars.<\/p>\n

Selling a relatively successful startup can create enough wealth to allow you to live comfortably for the rest of your days. It can put you in prime position to start another company \u2014 or perhaps the leading accelerator in the world. Many founders turn \u201cmodest\u201d successes in the entrepreneurial realm into amazing careers in venture capital.<\/p>\n<\/div>\n

Featured Image: maiteali<\/a>\/Getty Images<\/small><\/p>\n","protected":false},"excerpt":{"rendered":"

\"\" The era of unicorn startups has created a distorted view of entrepreneurial success. All the talk about billion-dollar exits has inflated the numbers that define a win. Starting and selling a company for $100 million dollars is an outlier event in terms of pure entrepreneurial probability, but such outcomes are viewed as well short of success in many corners of today’s startup world. Read More<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

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