13 ms·

$100M Valuation and No More Funding

66 points by tim_sw 3y ago

thelastgallon 3y ago
Somewhat related (for the discussion, not title): https://news.ycombinator.com/item?id=37869760 https://news.ycombinator.com/item?id=37869760
deleted 3y ago
[deleted]
ido 3y ago
It's 10-100x above my goals/hopes/dreams but i still found the kernel of the argument interesting/applicable despite the difference in scale: "From an entrepreneur’s standpoint, it’s easy to become engrossed in the thrill of securing funding, expanding the team, and growing the business. Yet, more growth doesn’t always equal a better business. Some markets just aren’t that big. Some markets take longer to develop. Furthermore, personal priorities evolve, and one’s perspective on opportunities can shift over time. And, every round of funding shifts the goal posts further out. "
- dangus 3y ago
  I can think of so many examples of unwise founders doing the exact opposite. They don’t recognize that their business is still ultimately a niche with a limited addressable market. I think WeWork is a great example. That market did need some freshening up and maybe even some full blown disruption, as the incumbents weren’t delivering a modernized co-working experience attractive to young professionals. But the founder took a great idea way too far, mistaking a straightforward office subleasing business for a cultural movement that could change the way people live and work en-masse. It’s that founders’ hubris of “I invented the next iPhone and the world will never be the same again.”
  - leoqa 3y ago
    In part, I don’t think this is people naively pursuing the moon shot. Rather the incentives and pressures are there to go for the cultural shift. Your investors are pushing you to do it, you can have a lifestyle business that makes you a comfortable millionaire or become a billionaire. People push for the billonaire option because it’s plausible if they have a revenue machine growing 2x every year and investors behind them. It’s likely their one shot at it.
  - ProjectArcturis 3y ago
    He also had Masayoshi Son giving him billions and telling him to build it bigger and crazier. And Adam Neumann managed to walk away with dynastic wealth, so... I wouldn't call him unwise.
    - otterley 3y ago
      I don't think we should equate wisdom with the ability to accumulate a massive amount of personal wealth -- especially when there's a lot of controversy over how it happened. Besides, when it comes to getting rich, luck often plays a huge part, as it did here.
      - zaphirplane 3y ago
        I think he was charismatic, had a vision, marketed very well I suspect he knew it was near pyramid scheme when their valuation had 9 zeros
  - ecshafer 3y ago
    I think WeWork was a great idea poorly executed. They took a huge amount of money, treated it like s tech start up, instead of having a frugal corporate office managing their various locations. But the great irony, given that WeWork might collapse at any moment (or already has?) is that it would probably be a great idea to start that right now or in the next year or so, as CBRE prices collapse and people increasingly look for cheap temporary and part time offices
    - toddmorey 3y ago
      Yes, exactly. It was a real estate company saying, "No, we're a tech company!" while contracting into an insane amount of real estate. Nothing about their technology changed the fundamental economics of corporate office space but they were building something that needed to do exactly that to survive.
    - yumraj 3y ago
      > I think WeWork was a great idea poorly executed. I would argue that it was a poor idea that was greatly executed. Everything was great for a while due to execution. But, when the realities or should I say limitations of the poor idea caught up, everything came crashing down.
      - ecshafer 3y ago
        IWG (who owns Regus) is a 45 year old company with almost 3 Billion British pounds of revenue a year. Its evidently possible to have a large successful business doing this. Shaking it up with more flexibility and nicer offices is a good idea overall I think.
        deleted 3y ago
        [deleted]
      - paxys 3y ago
        Throwing an unlimited amount of investor money at a problem without caring about profits isn't exactly great execution.
  - pjc50 3y ago
    WeWork was a huge success for its founder: https://www.theguardian.com/business/2021/may/27/wework-founder-adam-neumann-enormous-exit-package https://www.theguardian.com/business/2021/may/27/wework-foun... If Softbank are throwing money around, the rational thing is to build as big a net as possible to catch it. If that happens to involve free beer in offices then so be it.
- toddmorey 3y ago
  One thing I've definitely learned is it's easier than you imagine to scale a good business into a bad business. To over-invest in something that can't or shouldn't scale as quickly as the new investment pressures now dictate. In business there's the subtle art of keeping expectations and results in healthy alignment. I think there's more pressure to avoid having too little investment than too much, but both can kill you. And it's SO brutal on morale when doubling revenue feels like a failure because 5x was the wildly-unrealistic demand of your pretend valuation.
  - benjaminwootton 3y ago
    This is true for a significant percentage of VC backed businesses. Many could be great small businesses, but they get inflated beyond what is practical by investors seeking a return. The founders $5m turnover business success is then relatively a failure at $30m and they are unceremoniously booted out.
    - debacle 3y ago
      Twitter and reddit would be phenomenal companies if they never took VC funding.
      - ProjectArcturis 3y ago
        They would have been outscaled by other microblogging and link-sharing sites who did take VC money.
        anonzzzies 3y ago
        For that reason I would never go b2c; in a bootstrapped b2b, if you make 10m-50m/y and some unicorn comes, you can still exist for a long time and this unicorn can buy you even. In an ad based b2c, there is no way.
        ido 3y ago
        There are a lot of b2c business models aside from ads (e.g. actually selling/charging money from customers)
fairity 3y ago
> Companies positioned to achieve such scale should consider it, but those that don’t meet the threshold (e.g. $200 million ARR with 30% yearly top-line growth) would benefit more from focusing on the private equity path I’ve found that the founder community is woefully undereducated on the potentials of exiting to private equity. And, I believe it’s partially because VC’s (and YC) want founders to shoot for the moon instead of taking a lower (albeit life changing) outcome. I feel like there’s a giant opportunity for a PE firm that simply invests in founder public relations and educates them on the path to a PE exit.
corry 3y ago
Throwing some #'s up - just picking up % that are probably on the low-side for the later 2 exit types: 1) 100% of a 10M exit = $10M 2) 10% of a $100M exit = $10M 3) 1% of a $1B exit = $10M Path is (very) arguably the easiest on the $100M exit? You likely raised outside funding, had a big enough market, grew your team and didn't have to slow-play everything, and still get a decent exit. Paid yourself some salary during that time. As the article says, lots of M&A in the ~$100M range. $10M exit - a lot of risk, probably slower growth, bootstrapped, etc. Tons of small exists happening at that level too, but also more competition. $1B exit - personally this seems hardest, even if probability of each occurring was the same. The size of team, scaling issues, etc all required. Of course you'd almost definitely own more than 1% at IPO. Then stack your odds of success against those figures. Still feels like $100M is the optimal balance of risk/return.
- Retric 3y ago
  I suspect potential 10M businesses have higher odds of a positive outcome, but hitting 100M with outside funding is so much faster people can get more attempts.
  - toddmorey 3y ago
    That's an interesting argument that I hadn't considered. Going for a $1B exit in some ways de-risks you as a founder because you get the press, attention, and connections but with less actual pressure to ultimately succeed since the bet is so big. I'm not saying it's not hard, but a harder path may be turning down the investment (you crazy fool!) to focus on building a really great cash machine in the $10m - $100m range.
  - corry 3y ago
    Possibly - my instinct is to agree with you - however, I also think the 'time factor' is working hardest against the $10M business. In the $100M case, you raised VC and are trading money (someone else's money) for time - you get there faster, you can take more risk, etc. "Time kills all deals" can be extrapolated into "Time kills all companies". On the other hand, in the time it takes you (even with VC rocket fuel) to get 1 company to $100M with 10% ownership, you can probably start 2 or 3 smaller business that could end up at $10M.
peter422 3y ago
Serious question: why would any employee want to work at this company? If the founder has already taken money off the table at $100M valuation, they must have an overwhelming equity stake. If they aren’t trying to reach any type huge growth exit then it seems there isn’t much upside for employees.
- toomuchtodo 3y ago
  Some combination of quality of life, enjoyable/meaningful work, competitive total comp without an equity component comes to mind. Equity can be important (in either a VC or employee owned enterprise), but is not necessarily mandatory to meet these requirements.
- wink 3y ago
  If they pay an agreeable salary and the work sounds interesting, why wouldn't they? Even if you're wary of startups you have a founder that seems set for a predictable direction instead of hypergrowth and you might have a better chance of it not going bust next year. Then again if you're in it for the shares and the big opportunity, then probably not.
- LeifCarrotson 3y ago
  Because the company can offer a weekly paycheck at market rates, of course. Why else would someone work at any company at all? VC funds with dozens or hundreds of investments may like a landscape where one or two make a 10x or 100x valuation and the rest go bust chasing that goal, but I personally can't afford to gamble my family's future with my 2,000 hours per year on a 1% chance that my employer will rocket to the moon. Also, job-hunting is a pain, I'd prefer that my employer not go through massive layoffs or risk bankruptcy unnecessarily. Equity growth or profit-sharing bonuses are just that - bonuses, mostly ignored when comparing total comp unless the 'bonus' is extremely stable and reliable. I need to take home a reasonable salary in exchange for my labor.
EGreg 3y ago
This is ridiculous. When demand is low, drop the price. Not the end of the world
presidentender 3y ago
My cofounder and I raised an absurd sum at a valuation which was pretty insane during the last months of the zero interest rate environment. We had months of no interest in the idea, then we got one term sheet, and then we had three term sheets, and it was hard to say no to the very large ego number. In retrospect, a lot of things would have gone differently and better if we'd been forced to take a smaller bite first. Our round was nominally a seed, but it was the size of an A or B from years past. We'd have been better off with what's called a pre-seed in today's terms.
danjl 3y ago
There's a great book called "Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists)" by Basil Peters on this topic. The other option is, of course, to bootstrap instead of taking investment, which allows you to focus on revenue and building a great product for your customers rather than "getting the next round of investment".
stinkypantsman 3y ago
This entrepreneur may find that they are not in control of what happens. If they raise at a $100M valuation they are likely trading board seats to the preferred investors. If the preferred investors provide liquidity to the founder ("de-risking it") then they are aiming to align everyone (founder & investors) to aim for the $1B+ IPO outcome, not the PE-exit that the entrepreneur is wishing for. And if they are selling board seats in this round the founder may not be able to get authorization to sell. Once you take VC money and ESPECIALLY if you sell board seats and sell your own options you are agreeing to go big.
g-b-r 3y ago
https://www.youtube.com/embed/8ZgfTarNxdY?start=94 https://www.youtube.com/embed/8ZgfTarNxdY?start=94

66 points by tim_sw 3y ago

Somewhat related (for the discussion, not title): https://news.ycombinator.com/item?id=37869760 https://news.ycombinator.com/item?id=37869760

deleted 3y ago

[deleted]

ido 3y ago

It's 10-100x above my goals/hopes/dreams but i still found the kernel of the argument interesting/applicable despite the difference in scale: "From an entrepreneur’s standpoint, it’s easy to become engrossed in the thrill of securing funding, expanding the team, and growing the business. Yet, more growth doesn’t always equal a better business. Some markets just aren’t that big. Some markets take longer to develop. Furthermore, personal priorities evolve, and one’s perspective on opportunities can shift over time. And, every round of funding shifts the goal posts further out. "

dangus 3y ago
I can think of so many examples of unwise founders doing the exact opposite. They don’t recognize that their business is still ultimately a niche with a limited addressable market. I think WeWork is a great example. That market did need some freshening up and maybe even some full blown disruption, as the incumbents weren’t delivering a modernized co-working experience attractive to young professionals. But the founder took a great idea way too far, mistaking a straightforward office subleasing business for a cultural movement that could change the way people live and work en-masse. It’s that founders’ hubris of “I invented the next iPhone and the world will never be the same again.”
- leoqa 3y ago
  In part, I don’t think this is people naively pursuing the moon shot. Rather the incentives and pressures are there to go for the cultural shift. Your investors are pushing you to do it, you can have a lifestyle business that makes you a comfortable millionaire or become a billionaire. People push for the billonaire option because it’s plausible if they have a revenue machine growing 2x every year and investors behind them. It’s likely their one shot at it.
- ProjectArcturis 3y ago
  He also had Masayoshi Son giving him billions and telling him to build it bigger and crazier. And Adam Neumann managed to walk away with dynastic wealth, so... I wouldn't call him unwise.
  - otterley 3y ago
    I don't think we should equate wisdom with the ability to accumulate a massive amount of personal wealth -- especially when there's a lot of controversy over how it happened. Besides, when it comes to getting rich, luck often plays a huge part, as it did here.
    - zaphirplane 3y ago
      I think he was charismatic, had a vision, marketed very well I suspect he knew it was near pyramid scheme when their valuation had 9 zeros
- ecshafer 3y ago
  I think WeWork was a great idea poorly executed. They took a huge amount of money, treated it like s tech start up, instead of having a frugal corporate office managing their various locations. But the great irony, given that WeWork might collapse at any moment (or already has?) is that it would probably be a great idea to start that right now or in the next year or so, as CBRE prices collapse and people increasingly look for cheap temporary and part time offices
  - toddmorey 3y ago
    Yes, exactly. It was a real estate company saying, "No, we're a tech company!" while contracting into an insane amount of real estate. Nothing about their technology changed the fundamental economics of corporate office space but they were building something that needed to do exactly that to survive.
  - yumraj 3y ago
    > I think WeWork was a great idea poorly executed. I would argue that it was a poor idea that was greatly executed. Everything was great for a while due to execution. But, when the realities or should I say limitations of the poor idea caught up, everything came crashing down.
    - ecshafer 3y ago
      IWG (who owns Regus) is a 45 year old company with almost 3 Billion British pounds of revenue a year. Its evidently possible to have a large successful business doing this. Shaking it up with more flexibility and nicer offices is a good idea overall I think.
      - deleted 3y ago
        [deleted]
    - paxys 3y ago
      Throwing an unlimited amount of investor money at a problem without caring about profits isn't exactly great execution.
- pjc50 3y ago
  WeWork was a huge success for its founder: https://www.theguardian.com/business/2021/may/27/wework-founder-adam-neumann-enormous-exit-package https://www.theguardian.com/business/2021/may/27/wework-foun... If Softbank are throwing money around, the rational thing is to build as big a net as possible to catch it. If that happens to involve free beer in offices then so be it.
toddmorey 3y ago
One thing I've definitely learned is it's easier than you imagine to scale a good business into a bad business. To over-invest in something that can't or shouldn't scale as quickly as the new investment pressures now dictate. In business there's the subtle art of keeping expectations and results in healthy alignment. I think there's more pressure to avoid having too little investment than too much, but both can kill you. And it's SO brutal on morale when doubling revenue feels like a failure because 5x was the wildly-unrealistic demand of your pretend valuation.
- benjaminwootton 3y ago
  This is true for a significant percentage of VC backed businesses. Many could be great small businesses, but they get inflated beyond what is practical by investors seeking a return. The founders $5m turnover business success is then relatively a failure at $30m and they are unceremoniously booted out.
  - debacle 3y ago
    Twitter and reddit would be phenomenal companies if they never took VC funding.
    - ProjectArcturis 3y ago
      They would have been outscaled by other microblogging and link-sharing sites who did take VC money.
      - anonzzzies 3y ago
        For that reason I would never go b2c; in a bootstrapped b2b, if you make 10m-50m/y and some unicorn comes, you can still exist for a long time and this unicorn can buy you even. In an ad based b2c, there is no way.
        ido 3y ago
        There are a lot of b2c business models aside from ads (e.g. actually selling/charging money from customers)

fairity 3y ago

> Companies positioned to achieve such scale should consider it, but those that don’t meet the threshold (e.g. $200 million ARR with 30% yearly top-line growth) would benefit more from focusing on the private equity path I’ve found that the founder community is woefully undereducated on the potentials of exiting to private equity. And, I believe it’s partially because VC’s (and YC) want founders to shoot for the moon instead of taking a lower (albeit life changing) outcome. I feel like there’s a giant opportunity for a PE firm that simply invests in founder public relations and educates them on the path to a PE exit.

corry 3y ago

Throwing some #'s up - just picking up % that are probably on the low-side for the later 2 exit types: 1) 100% of a 10M exit = $10M 2) 10% of a $100M exit = $10M 3) 1% of a $1B exit = $10M Path is (very) arguably the easiest on the $100M exit? You likely raised outside funding, had a big enough market, grew your team and didn't have to slow-play everything, and still get a decent exit. Paid yourself some salary during that time. As the article says, lots of M&A in the ~$100M range. $10M exit - a lot of risk, probably slower growth, bootstrapped, etc. Tons of small exists happening at that level too, but also more competition. $1B exit - personally this seems hardest, even if probability of each occurring was the same. The size of team, scaling issues, etc all required. Of course you'd almost definitely own more than 1% at IPO. Then stack your odds of success against those figures. Still feels like $100M is the optimal balance of risk/return.

Retric 3y ago
I suspect potential 10M businesses have higher odds of a positive outcome, but hitting 100M with outside funding is so much faster people can get more attempts.
- toddmorey 3y ago
  That's an interesting argument that I hadn't considered. Going for a $1B exit in some ways de-risks you as a founder because you get the press, attention, and connections but with less actual pressure to ultimately succeed since the bet is so big. I'm not saying it's not hard, but a harder path may be turning down the investment (you crazy fool!) to focus on building a really great cash machine in the $10m - $100m range.
- corry 3y ago
  Possibly - my instinct is to agree with you - however, I also think the 'time factor' is working hardest against the $10M business. In the $100M case, you raised VC and are trading money (someone else's money) for time - you get there faster, you can take more risk, etc. "Time kills all deals" can be extrapolated into "Time kills all companies". On the other hand, in the time it takes you (even with VC rocket fuel) to get 1 company to $100M with 10% ownership, you can probably start 2 or 3 smaller business that could end up at $10M.

peter422 3y ago

Serious question: why would any employee want to work at this company? If the founder has already taken money off the table at $100M valuation, they must have an overwhelming equity stake. If they aren’t trying to reach any type huge growth exit then it seems there isn’t much upside for employees.

toomuchtodo 3y ago
Some combination of quality of life, enjoyable/meaningful work, competitive total comp without an equity component comes to mind. Equity can be important (in either a VC or employee owned enterprise), but is not necessarily mandatory to meet these requirements.
wink 3y ago
If they pay an agreeable salary and the work sounds interesting, why wouldn't they? Even if you're wary of startups you have a founder that seems set for a predictable direction instead of hypergrowth and you might have a better chance of it not going bust next year. Then again if you're in it for the shares and the big opportunity, then probably not.
LeifCarrotson 3y ago
Because the company can offer a weekly paycheck at market rates, of course. Why else would someone work at any company at all? VC funds with dozens or hundreds of investments may like a landscape where one or two make a 10x or 100x valuation and the rest go bust chasing that goal, but I personally can't afford to gamble my family's future with my 2,000 hours per year on a 1% chance that my employer will rocket to the moon. Also, job-hunting is a pain, I'd prefer that my employer not go through massive layoffs or risk bankruptcy unnecessarily. Equity growth or profit-sharing bonuses are just that - bonuses, mostly ignored when comparing total comp unless the 'bonus' is extremely stable and reliable. I need to take home a reasonable salary in exchange for my labor.

EGreg 3y ago

This is ridiculous. When demand is low, drop the price. Not the end of the world

presidentender 3y ago

My cofounder and I raised an absurd sum at a valuation which was pretty insane during the last months of the zero interest rate environment. We had months of no interest in the idea, then we got one term sheet, and then we had three term sheets, and it was hard to say no to the very large ego number. In retrospect, a lot of things would have gone differently and better if we'd been forced to take a smaller bite first. Our round was nominally a seed, but it was the size of an A or B from years past. We'd have been better off with what's called a pre-seed in today's terms.

danjl 3y ago

There's a great book called "Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists)" by Basil Peters on this topic. The other option is, of course, to bootstrap instead of taking investment, which allows you to focus on revenue and building a great product for your customers rather than "getting the next round of investment".

stinkypantsman 3y ago

This entrepreneur may find that they are not in control of what happens. If they raise at a $100M valuation they are likely trading board seats to the preferred investors. If the preferred investors provide liquidity to the founder ("de-risking it") then they are aiming to align everyone (founder & investors) to aim for the $1B+ IPO outcome, not the PE-exit that the entrepreneur is wishing for. And if they are selling board seats in this round the founder may not be able to get authorization to sell. Once you take VC money and ESPECIALLY if you sell board seats and sell your own options you are agreeing to go big.

g-b-r 3y ago

https://www.youtube.com/embed/8ZgfTarNxdY?start=94 https://www.youtube.com/embed/8ZgfTarNxdY?start=94