I’ve had a particularly interesting week in Austin; through some events and lots of coffees, I’ve meet with a ton of founders, perhaps more than ever in 3 days alone. Interesting why?
Easily half, argued with me that startup investors are seeking revenue and don’t require an exit.
At least, that’s what they’re being told.
Imagine my pleasant surprise to see come across my twitter today, JD Morris, Special partner and board member of Red Hook Capital, “Seeking Capital For Your Startup? Remember: It’s About Returns For Your Investor.”
A nice coincidence.
So, seemingly, SOMEONE keeps guiding founders to conceive of Angel Investors and VCs as the same as business investors or partners.
If we’re really going to help startups thrive, we have to draw these distinctions more explicitly because we’re confusing the hell out of people and making it harder for everyone.
In the immortal words of Gust founder and venture capitalist, David Rose, “an angel typically invests in 20-80 companies over a five-year period, with about $25,000 per company; they also tend to invest along with 5-10 other angels. An angel receives up to 50 pitches per month, and angel groups receive up to 100 submissions per month.”
Why? Someone actively and meaningful investing in startups does it regularly because they know their sector OR startups. They KNOW that 90% of those investments are going to fail. Hence, the volume of investments made AND the amount of personal disposable wealth available that they can just lose.
This is REALLY REALLY important because Angels get their return from that EXIT, on the remote chance that it happens.
None of that takes away at all from someone who has invested in 1 or 2. None of that means that a business investor or partner, seeking revenues, profit sharing, etc. aren’t perfectly wonderful sources of capital.
But appreciate that their expectations are COMPLETELY different so the advice everyone is going to get from the different TYPES of investors is COMPLETELY different.
Post seed as we’re looking to that A or B round and talking to Venture Capital firms, those “VCs” take equity in your startup and don’t get it back until you exit.
Founder’s own money
Friends & Family
Angel Investors
Venture Capitalists
Private Equity
Public Markets
VCs coming in AFTER your getting going and with Angels involved, further expect that exit. They require it, because Venture Capitalists are investing other people’s money and have to go out and raise more, by delivering returns on from those investments.
Revenue is only ONE measure of traction and merit; and it’s often not even a good one for Startup Investors because a startup that isn’t oriented to exit OR will get killed by competitors despite any amount of revenue, isn’t attractive to such funds.
Exceptions to the rules? Of course. Always. Sort of.
Best advice hopefully this encourages in everyone might be this… whenever an Advisor or “Investor” gives you advice, ask WHY – question them! If they can’t clarify why they’re giving that advice or if that advice is inconsistent with your goals, there is nothing wrong with disregarding it.
If you want to raise “Funding” (investment), appreciate that you have to deliver that return; or at least, intend to.
This is excellent content
Pssh
You mean investors need to make money?! I thought they existed to get you on Tech Crunch ?
Nice write-up.
Like these two nuggets in particular:
1) “If we’re really going to help this ecosystem thrive, we have to draw these distinctions more explicitly because we’re confusing the hell out of people and making it harder for everyone.”
2) “Exceptions to the rules? Of course. Always. Sort of.”
I am surprised to read Paul’s comments around startup investors seeking revenue v exit. Paul – are you telling me that founders are trying to raise $ by promising to provide “mail box money” type returns?
I have raised a ton of PE money as an IB in the O&G space. Those are QIB investors— PE’s, HNW, FO’s that are always looking for an exit to a Pubco. I am surprised anyone would find tech investors that only want mail box cash flow. Investors can invest in bonds at a much lower risk adjusted returns and get cash flow. Am I on the right track here or am I misreading your “revenue” meaning?
Nice read! It just so happens that “Why” is one of the key elements of the lost art of Critical Thinking. Critical Thinking is a skill that lots of people seem to have forgotten. 🙂 Thanks for the reminder.
Working on a funding framework at this very moment, all focused around helping startups really uncover WHY as their focal point
Perfectly clear. Crystal
Private equity (higher in the food chain that friends, family, and angels) Are in my opinion now looking for start ups that can provide positive revenue soon and are ripe for growth by acquisition. The investment time frame is expanding, but the exit is always the end goal. I don’t know of any outside investor who wants to actually operate a business model long term.
Thanks for the knowledge shared! ??
Thanks for allowing me to be one of the founders who did not argue with you this week. Keep on educating and strengthening the ecosystem.
Was a great pleasure Branche. Remind me to send you the model. Going to bed LOL
*this* very well said! Having worked in all these models – angels, VC, PE, Public – you nailed it
Oh FUNDraising. I thought it was FUNraising.
I found this quite helpful and it intuitively made sense to me for what I envision for my company. Thanks for sharing this article along with your insights Paul.
Loved seeing you in action in person this week, Paul O’Brien! This is a great share, too!
Thank you Paul. We need more of this messaging.
There’s an even larger perspective wrt the ecosystem here and how it sends a message that “in order to be a successful startup, you raise money”.
This mantra, coupled with an ecosystem that encourages youth with little professional experience to start companies yields founders who don’t fully understand how to deliver value to investors – and it’s riskier for both sides.
From networking with other founders, I’ve learned that they anticipate raising funds as 100% necessary – and that they should be raising earlier vs later (which is to their detriment wrt how much % they give away) … but they’re not fully grasping the value of that forfeited % yet (positive/immediate/certain vs not motivation) especially if they haven’t had previous successful exits of their own.
They’re just thinking of hitting the “we’ve raised our seed” milestone that our local ecosystem and media prescribe and broadcast as the “you’ve made it!” path.
Ultimately, when you’re in an ecosystem that encourages less experienced professionals to start companies, that ecosystem should support and broadcast more education surrounding both sides: raising and not raising.
All parties would benefit from more hype and appeal around the “bootstrapped approach” – just think about this headline: “Local Startup grows XXX% without raising any money and maintains controlling interest in their business!” — you don’t see that.
I was in my early 30s when I started my business, didn’t give 3-6% to an accelerator that put me on a “raise path”, and was encouraged to raise as little as possible and to hold out as long as possible – which was great advise for me, ultimately.
Paul O’Brien I’m a big fan of Simon Sinek and “Start with Why”. In fact, my second slide in my current Pitch Deck is devoted to this. A good “Why” story can fuel a PR campaign and become an internal ethos that synchronizes the team with a common story to share with customers, partners, investors etc… Its truly impressive when you hear the same story from everyone in the organization. I would be interested to see what you come up with.
Nice work on this piece Paul. Thank you for sharing.
Great article and all founders should read. Everyone involved from investor and startup exec should be planning scenarios for both growth and exit, and both plans are organically growing as the company travels along the bumpy road (and hopefully bumpy upwards). I always advice and mentor startups to talk exit and exit scenarios, and do so with practical views – unicorns are very rare, hockey stick growth rare, and angels like more grounded less hype views to ensure the startup leaders are in it, are open to advice! Thanks for the article and I will share often to startups!
All young entrepreneurs need to read this blog post. Its understanding is critical to the process while raising capital passed the Own Money & F&F steps. Depending on your long-term plan, not all money is good money. All investors come with an agenda. Must move in same direction.
Blows my mind that it is necessary to say this.