4 ms·

> Is your business large enough? Most companies are not large enough to be backed by venture capital. To raise venture capital, companies should be in multibill

> Is your business large enough? Most companies are not large enough to be backed by venture capital. To raise venture capital, companies should be in multibillion-dollar markets or have the potential to make revenues of more than one hundred million dollars a year. That seems to be a nonsensical and arbitrary figure pulled out of thin air. Let's say hypothetically there's a business that needs $1m to start, the maximum revenue it can make is $50m/year of which $20m is profit. Why shouldn't they raise venture capital? The business would be providing a return for the investors because the business would be making money. Not every company needs to be making billions of dollars to exist. VCs make their money by investing less in a company than their stake is/will be worth, if they invest $1m for 10% of the company and that company is then making $20m/year profit they have made a worthwhile investment... haven't they?

davidcann 15y ago
$1m is more in the range of angel investments than VCs. I think angel investors would be very happy with a $20m/year profit company after only $1m investment.
gyardley 15y ago
Too early to say. VCs get paid when they can sell their stock, not when the company makes a profit. Business making money != VCs making money. (Also, VC-backed business making money != founders making money. Your VC probably isn't going to let your company issue a dividend, which is how you'd get those profits out.) The $100MM is probably a 'minimum revenue to plausibly take the company public and get paid' figure.
- citricsquid 15y ago
  So my understanding of raising money is completely wrong, the only part that matters to investors is if the company goes public or is sold?
  - dfriedmn 15y ago
    No, it's not wrong - but as always it's complicated. VC's have a relatively short time horizon within which they need to provide a return to their LP's, and their returns typically are driven by a few outsized successes (>7-10x). Sometimes entire funds can be made because of one mega-hit, and that always seems to be on people's minds when considering cos. Dividends aren't ideal for returning a fund, and investors are often nervous about deals with a capped upside.
  - brandnewlow 15y ago
    VCs just don't do divdends. Why take money out along the way when you can invest it into the company to get a bigger exit?
    - maaku 15y ago
      Not saying VCs dont' think that way, but sometimes throwing money into a company wont have the slightest effect on size of exit.
- donw 15y ago
  In the category of 'potentally stupid questions', why can't VCs also make money from dividends?
  - citricsquid 15y ago
    This is my confusion too. I was under the impression that was the normal way that VCs made their money and companies going public or being sold is the outlying (but most desirable) result.
  - il 15y ago
    VCs don't want your dividends, they want you to deploy that capital into growing the company.
    - donw 15y ago
      At early stages, I can completely understand this. Consider Craigslist. Fantastically successful business, makes hundreds of millions of dollars a year using less people than you'd need to run a McDonalds. Growing this kind of company is not capital-intensive beyond a certain level. So, should you end up building a Craigslist, why would the VC firm want an exit, rather than a continuous (and large) flow of checks from dividends?
      - il 15y ago
        Craigslist is a horrendously mismanaged business. I wouldn't be surprised to see AirBnB dwarf Craigslist soon- that's the kind of company VCs want to invest in, not something like Craigslist that has been stagnating for years.
        prodigal_erik 15y ago
        AirBnB started out by attacking Craigslist as well as the commons. They probably will win; I'm continually disappointed at how eagerly we reward bottom-feeders.
        DennisP 15y ago
jasonlbaptiste 15y ago
It's all based upon the exit. The VCs get diluted along the way and 1 million is the first step down the road. You'll probably raise way more. I believe the average dollars amount raised for tech companies going public this year was 65-70 mil. It's the general rule of thumb to gauge a market. Millennial Media had about 100 mil in rev and went public a few weeks ago at a 2 bil market cap (yes, the multiple was ridic, but let's leave that factor out).
noahc 15y ago
The word you are looking for is opportunity cost. Put simply they have an opportunity to make more money some where else. However, different investors have different risk profiles and prefrences and that investment may appeal to a certain class of investors.

davidcann 15y ago

$1m is more in the range of angel investments than VCs. I think angel investors would be very happy with a $20m/year profit company after only $1m investment.

gyardley 15y ago

Too early to say. VCs get paid when they can sell their stock, not when the company makes a profit. Business making money != VCs making money. (Also, VC-backed business making money != founders making money. Your VC probably isn't going to let your company issue a dividend, which is how you'd get those profits out.) The $100MM is probably a 'minimum revenue to plausibly take the company public and get paid' figure.

citricsquid 15y ago
So my understanding of raising money is completely wrong, the only part that matters to investors is if the company goes public or is sold?
- dfriedmn 15y ago
  No, it's not wrong - but as always it's complicated. VC's have a relatively short time horizon within which they need to provide a return to their LP's, and their returns typically are driven by a few outsized successes (>7-10x). Sometimes entire funds can be made because of one mega-hit, and that always seems to be on people's minds when considering cos. Dividends aren't ideal for returning a fund, and investors are often nervous about deals with a capped upside.
- brandnewlow 15y ago
  VCs just don't do divdends. Why take money out along the way when you can invest it into the company to get a bigger exit?
  - maaku 15y ago
    Not saying VCs dont' think that way, but sometimes throwing money into a company wont have the slightest effect on size of exit.
donw 15y ago
In the category of 'potentally stupid questions', why can't VCs also make money from dividends?
- citricsquid 15y ago
  This is my confusion too. I was under the impression that was the normal way that VCs made their money and companies going public or being sold is the outlying (but most desirable) result.
- il 15y ago
  VCs don't want your dividends, they want you to deploy that capital into growing the company.
  - donw 15y ago
    At early stages, I can completely understand this. Consider Craigslist. Fantastically successful business, makes hundreds of millions of dollars a year using less people than you'd need to run a McDonalds. Growing this kind of company is not capital-intensive beyond a certain level. So, should you end up building a Craigslist, why would the VC firm want an exit, rather than a continuous (and large) flow of checks from dividends?
    - il 15y ago
      Craigslist is a horrendously mismanaged business. I wouldn't be surprised to see AirBnB dwarf Craigslist soon- that's the kind of company VCs want to invest in, not something like Craigslist that has been stagnating for years.
      - prodigal_erik 15y ago
        AirBnB started out by attacking Craigslist as well as the commons. They probably will win; I'm continually disappointed at how eagerly we reward bottom-feeders.
      - DennisP 15y ago

jasonlbaptiste 15y ago

It's all based upon the exit. The VCs get diluted along the way and 1 million is the first step down the road. You'll probably raise way more. I believe the average dollars amount raised for tech companies going public this year was 65-70 mil. It's the general rule of thumb to gauge a market. Millennial Media had about 100 mil in rev and went public a few weeks ago at a 2 bil market cap (yes, the multiple was ridic, but let's leave that factor out).

noahc 15y ago

The word you are looking for is opportunity cost. Put simply they have an opportunity to make more money some where else. However, different investors have different risk profiles and prefrences and that investment may appeal to a certain class of investors.