What is the inevitable outcome from the amazing amount of seed capital that has been deployed to hundreds if not thousands of companies over the past few years?
- Dead soldiers? Well yes, that happens all the time.
- Amazing companies ready to soar to the next level, seeking large amounts of capital to continue their growth at sky-high valuations? Of course, welcome to the boom and bust nature of venture capital.
Somewhere between the two you’ll find the companies I’m talking about; those which have exhibited really compelling early progress, but not quite enough to naturally fall into the hype category, giving them freedom to raise whatever they want at whatever valuation someone is willing to pay.
I’ve named this middle bunch “Tweeners”, somewhat akin to that uncomfortable zone kids go through right before blossoming into full-blown teenagers with all the potential in world ahead of them. It’s not too difficult to find them if you look hard enough, but don’t confuse them with the “Weaners” – those that can wean you of your money faster than you thought imaginable! If you can find and engage these Tweener companies, it can be an amazing journey. This is classic value investing, VC style.
It goes something like this. In walks a really compelling company which is on the right track:
- Value proposition is right.
- The business solves a really well defined problem and early beta customers rave about the usefulness of its product or service.
- Technology is working great and looks great (UI). They might be in version 1.0, but their roadmap is well defined.
- The team looks solid, albeit a bit thin, as they have been bootstrapping on some early angel or seed capital that helped define and build the technology.
- The balance sheet looks solid as the team has been judicious about their cash flow and budgets.
- The business model needs some definition as they are juggling 2 or 3 revenue sources (Licensing, Subscriptions, Advertising) and determining which has the most promise (in consumer, it might be less about revenue and more on customer adoption).
And then the hammer – “We need to raise $5 million.” Sound familiar?
This used to be the place for institutional entry points, the classic series A. However, that has now been shifted to the institutional seed and angel rounds. But it doesn’t solve the problem. For the most part, these companies shouldn’t be raising $5 million. It would be nice, of course, but if they could raise the $5 million, money would have come to them before they even hit the road. What they really need is another $1-2 million to further refine the model, grow the team, demonstrate revenue / traction and focus, focus, focus.
This is the hardest thing for most new entrepreneurs to figure out. Thriving on chaos is fun but can also be very counter-productive. For everyone’s best interest, the CEO needs to set 3-5 measureable goals, metrics, and core focus points that the entire organization can achieve on the appropriate raise of capital. Such as:
- physical customer count growth
- site traffic
- average sale growth
- product features and performance
- new hires
- customer support
These should be very well defined and an integral part of the road show’s pitch. Put them out front, “We intend to use the money in the following ways and ACHIEVE these 4 things. This is how you measure your investment in us as a team and me as a leader.” This method is bankable and it is smart. It shows maturity and leadership. It gets everyone on the same page.
What does that mean for your valuation? As I have always said, don’t get so fixated on valuation at this stage. This is the time for building a great company, team, investor group and a compelling story for continued success. Focus on the size of the pie, not the slice. If you do what you say you will do, the next round will take care of itself at a very compelling valuation for everyone involved. It’s in everyone’s best interest to make this happen.
We are seeing a number of Tweener companies right now and frankly, I am enjoying every minute of it. They feature inspired young entrepreneurs with big visions and grand plans. I am passionate everyday about helping them build something great. Now let’s grow some companies!