Note: this is a very Europe oriented post!
It's pretty simple. Build your company to be big. Go for broke! Try to win it all! Mom is always going to like what you do so even if you suck, she'll be nice and love you anyway. The business world is not like that. I understand the need for people to be humble and demure. Yet, please do so in other lines of business. In VC backed companies, you need to deliver returns that are above and beyond the norm. This is expected. I'm measured by the same standards as you are when it comes to my returns.
I understand that people are scared right now and not only entrepreneurs are thinking safe. Lots of VC's have crawled back in their shell and basically moved away from risk. It's very unfortunate though when I get a pitch and hear that someone wants to be the best in a small market or a small geography. It's not enough to just be big in Germany or France or the UK? Sure, there are a few that were able to get big enough in just one country. We actually had a couple in our portfolio and they were very successful exits for us. Yet, it's better to go big and in a worst-case scenario just be the market leader in your country. Could be worse! But what's the worst-case scenario if you're just trying to win the German or French market? Get my point?
Really? Isn't this part of what has made the VC industry do so poorly over the past few years? It's easy to think big but delivering on that depends on the market. With the amount of money VCs raise these days, it's no wonder that they can't get 20x value for that money. To me it's about having the right sized fund with the right portfolio companies so that your fund of y dollars returns 20x value. If you have a $200M fund and the market's only $1B in size, you have a problem no matter how big the entrepreneur thinks.
Part of me thinks the biggest problem in the industry is that VCs have forgotten how to make money in a smaller market. Everything has to be global simply because they've raised too much money for their own good. A $5M investment that generates $100M in value doesn't need a multi-country strategy. A $50M investment on the other hand needs China and India just to hope to be successful. Both can return a 20x return. VCs ignore the $5M investment to chase the $50M investment far too often.
Posted by: Derek Licciardi | October 19, 2009 at 03:44 PM
Derek, I spoke nowhere of fund sizes. We, as a $100 mio. fund, do quite well selling companies at $50 to $100 million valuations. Yet, you don't get these valuations building local heroes. Sure, some companies can get this valuation in a specific region as is more often the case in Europe (Germany, UK, France, Scandinavia) than in the US. But, nevertheless, my argument was about venture backed businesses. If you want to attract VC's, even if you're raising less money net-net, you still need to hit home runs for VC's to care. P.S. Name one European company which only raised 5 million and sold for 100 million plus. I can't think of one! It usually takes more money.
Posted by: Paul Jozefak | October 19, 2009 at 03:56 PM
I'm in the US so my comments might get lost in the translation between the markets and I had no idea what size fund you worked with. I can't name you a company that had $5M invested and sold for $100M, then again VCs all ask for 20x valuations and if it takes more than $5M to sell a company for $100M you're not getting 20x.
I'm pitching a deal here in the US. Based on the market size and the current economy I'm pitching a deal that will generate a 9x valuation in 5 years, maybe more if some unknowns at this time go right. If I increase the numbers in the business plan to 20x valuations, I begin to depend on those unknowns happening in my favor which makes the business plan less believeable. I've always lived by the motto of promising what you can do and then over-delivering. Are you suggesting that I put in the numbers to show 20x in 5 years and then come back when it only generates 9x with disappointing news? Would you pass on 9x simply because it doesn't look big enough? In today's scared VC money economy, something tells me that I won't even get a sniff at that 20x plan. What I'm more interested in doing is telling a VC that I'll get him solid returns based on assumptions I can control with a chance at huge returns if some unknowns go our way but more importantly, I'm not going to make his fund look any worse that it is today. That's why I said reaching for the stars has to be tempered with what the market size will bear.
That said, if VC money wasn't so scared right now in the US, I'd be all over showing a 20x return. If times were good then it's easy for risk-adverse VCs (nice oxymoron for you) to see all those unknowns going our way. I haven't been shown that VC in the US has the ability to think about the coming recovery because they're too scared about what's happening now. I'm not saying your company is that way nor am I saying that all US VC is that way. Kudos to you if you're still actively investing in this market. I admire a VC with the guts to stick to his vision in these lean times. Unfortunately, you guys are few and far between in the US where thinking big has been replaced with thinking about how not to lose money.
Posted by: Derek Licciardi | October 19, 2009 at 04:47 PM
Derek, we're still actively investing. Cautiously but still at it. We never stopped. Nevertheless, forget the 20x misconception. If you can convince a VC that you're going to deliver 10x, you're already golden.How many VC's have you already pitched? Are you basing you assumptions on feedback from VC's or what you've read in blogs? If the latter, be a bit more critical about which advice you take!
Posted by: Paul Jozefak | October 19, 2009 at 04:57 PM
A little bit of both. We're just starting the process. I need to raise money for our prototype so we're more into the angel funding step at this point. That said, the business plan had to be built to look for second and third round funding so I had to consider the final exit strategy for everyone involved and how the company would be valued five years from now. Currently, I'm trying to raise $500,000US by raising $250 from private equity and $250 from the Kentucky Science and Technology Center. I found your blog on twitter and liked the timeline post for it's insight causing me to read on. Thanks for your insight and glad to hear that VCs somewhere are willing to back away from 20x when it's warranted.
Posted by: Derek Licciardi | October 19, 2009 at 11:02 PM