“Entrepreneurs should raise as little [venture capital] as they can until it works for their business, then raise as much as they can to scale,” says prominent angel investor Gil Penchina. “If you raise too much before the correct formula is achieved, it can mean bad news for the valuation outcomes.”
Exitround (a hub for small tech M&A deals) recently reviewed relevant factors of 200 deals. In their study, the startup companies that had raised $3-10 million in venture capital actually ended up with lower valuations upon exit than startups that had raised $2-3 Mil in venture capital.
That conclusion matches what we have been seeing over the past few years. As specialists in accelerated growth for mid-sized companies (not startups), we have noticed that companies often had to overstate their valuations to attract $5-10 Mil in startup venture capital. They then struggled to actually become the valuation they had promised.
The leaders of those companies tend to be the people who forget that big ticket exits typically require about 10 years to happen. Therefore, those entrepreneurs end up spending an inordinate amount of their time chasing higher and higher levels of venture capital and/or glamorous IPOs…when an acquisition could have been an excellent exit strategy within five years.
What could your existing business do to deserve the infusion of $5 Mil of growth financing? Now that’s a more exciting question to ask.
The word “entrepreneur” gets thrown around so much that the meaning has been diluted.
The true spirit of being entrepreneurial is about the process of innovation…but not just for the sake of having something new! It is applied innovation to solve problems and create value. The solving problems piece is about the customer. The creating value part is about the business entity within which the entrepreneur functions.
Being able to solve problems for others involves awareness, actually caring about what other people are doing and being curious about where they are going and what they will be trying to do tomorrow. Self-serving EGO can quickly get in the way of the entrepreneurial spirit. A little success can go to one’s head. Business owners can start believing their own media clippings.
It pays to sustain investment in externally focused research. Encourage team members from various disciplines to surface potential customer problems for the company to solve. Thinking that innovation and product development is the divine right of the R&D department is passé. Some of the most significant products can be traced to collaborative effort across departmental lines.
Being able to create value also requires awareness. Products/services need to be scalable for value to be built. Over dependence on individuals may fuel EGOs but is the enemy of value creation. Replicating processes and looking for sustainability rather than depletion of resources are not academic phrases or idealistic pipe dreams. These things are at the core of building real value.
Ask yourself if the concepts of scalability and sustainability come up early in your product development process. If not, could they? It is surprising how many business models are obsolete before they get off the ground.
Entrepreneurial spirit isn’t about EGO. I know that is difficult to believe with the “celebrification” of entrepreneurs. Be careful who you and your team members emulate. Some of the celebrities may have made big piles of money once…when he/she sold software for billions of dollars to another company and the software never worked for anyone. That person may be a shrewd sale person. But is it entrepreneurial? Are self-serving EGO-driven transactions what you want your employees to celebrate and emulate?
As an investor, perhaps you are a shareholder of APPLE stock. When you review news clips or IR reports, you might wonder what is behind the acquisition of the headphone company BEATS. You have invested in APPLE because they have been a major innovator and industry leader, so you wonder if this acquisition will add or detract from APPLE’s position as leading innovators.
As an APPLE customer, you wonder if your iPhone or iPad will now benefit from improved audio quality, or will you yet again be forced to buy a completely new product to get upgraded technology? You also can’t help but wonder why APPLE needed to do such an expensive acquisition to improve sound quality? Won’t this acquisition just raise the prices on APPLE purchases?
Perhaps you are a “techie” and get a kick out of analyzing product engineering. You quickly figured out that the BEATS technology isn’t all that special. You assume that APPLE has grown to prominence because its executives understand marketing. You wonder if the acquisition of celebrity-driven BEATS is more about marketing. If that is all the acquisition is about, wow…that is expensive marketing.
Maybe you oversee a sizable portfolio or are an asset manager within a wealth management firm. You saw how FACEBOOK recently made some acquisitions to slow competition, control emerging technology and buy time. Maybe that is what is going on at APPLE. After all, Steve Jobs is no longer at the helm. Is APPLE using its resources to buy time? Maybe APPLE’s strategic direction isn’t all that clear right now.
As a President of a midsized company, you watch the moves of major corporations like APPLE. You wonder if maybe APPLE’s research department has surfaced a trend that your company is too small to see. Perhaps there is a hot target market that APPLE can penetrate more aggressively. If your company’s products/services are tied to what APPLE does, will this be something important to explore or a distraction?
What do you hope that the directors on APPLE’s board are asking?
Directors of industry leading corporations have greater impact on all of our lives than most people realize.