How Much Of Your Business Do You Want To Own?
I hear from both entrepreneurs and VCs that one of the most commonly cited reasons for not investing is because the "business won’t be big enough." Usually that is delivered by the uninterested investor in the negative as, "we don’t think the market is big enough," or "we think the market is going to take a long time to materialize." Steve, one of the Softbank partners I work with, has a great saying that puts a positive spin on this and really gets at the heart of the issue (actually Steve has a lot of these Steve-isms, but that’s a post for another day). Anyway, what Steve often says is, "that’s a business that would be great to own 100% of, but I’m not sure if I’d want to own 20%."
First, a little background. Early stage VCs like to own about 20% of a company. It took me a while to get my head around what seemed on the surface a random number. But, there are a lot of reasons for 20% including that they typically like to invest between $5MM and $10MM in a company over time, that they like to have a co-investor or two with roughly the same interest and that software companies usually take $15-25MM-ish to achieve an exit of $100MM-ish based on revenue of about $25MM. Add to that the need for an option pool and make room for founders and it basically works out to a rule of thumb of 20%. That’s the "typical" deal.
Now, if your business doesn’t have a real shot at $25MM+ in revenue with a healthy growth rate or have a need for $15MM+ in investment, but instead has a very solid chance of achieving a few million in revenue, take a few hundred grand to launch and has the potential to throw off $50-100K per month in free cash, then that’s a business that would be great to own 100% of! Frankly, I see a lot of the latter companies pitching VCs for money, getting turned down and being frustrated when in reality they’re in a great spot of potentially owning all of a valuable asset and not having to answer to nagging investors!