Recently, a good friend of mine asked me how much he should raise in his round. He was lucky enough to have a range of options. My simple advice was: assume you have to return a liquidity event (sale or IPO) of at least 10x the amount you raise.
Valuations change from round to round. Later stage investors will expect lower ROI, seed investors will be looking for a lot more. How do you make sense of it all?
SaaStr Rule of Start-up Success #108: Just Multiply Amount of Venture Capital Raised Times 10. That is What You Must Sell or IPO For.
I’ve bounced this off a few VCs and they didn’t concur/get it at first, but no one disagreed with me.
- Raise a $1m seed? You’ll need to sell for $10m to make everyone happy.
- Raise $10m? It’s going to have to be at least $100m to get the table to say good job (or at least just to say yes).
- Raise $100m? That’s a billion+ IPO you’ve just committed to, sir.
We can stop there, but it gets more helpful to think about the types of potential exits especially in SaaS.
First, you’ll notice a lot of BigCos. talking about “tuck-in” acquisitions that can attach to existing revenue streams. Microsoft said expect more of these, and less Yammers. It makes sense — if you can add something to Office rather than building something in a new segment, it should be pretty high ROI. These “tuck-in” acquisitions though tend to top out at around $100m or so. That’s about all the Big Guys are willing to invest in their old products via M&A. So bear in mind, if you raise more than $10m, you’re probably giving up the tuck-in opportunity. Which may well be fine.
What’s between $100m and $1b in acquisition prices? New growth areas. Salesforce buys BuddyMedia and Radian6 to build out its Marketing Cloud in a hurry. These are the same spaces VCs want to invest tons of capital, too, so it’s all synergistic. But where I think you have to be careful is you can raise a lot of capital, but you aren’t really in a new growth area for the BigGuys, even if your ARR is solid. This can happen a lot in SaaS. There are a lot of SaaS companies doing > $10-$20m in ARR, who no one will ever want to buy. A lot of ‘em.
Which can leave you with nothing but an IPO or bust. Great work if you can get it. But it can be good to have options along the way.
T-Shirt Image from Zazzle here.