Founder Math for VC Money to Make Sense

Today I was talking to a journalist who asked a variety of questions about my startup. One of the things he was surprised by was that we’d gotten to our decent size without raising money from VCs. Normally, people mention that it’s unusual and then move on to the next question. Well, he legitimately wanted to know why we didn’t raise money. I quickly explained that it didn’t make sense for 99.9% of startups to raise institutional money for a variety of reasons.

When entrepreneurs ask me about raising money I like to ask them: what’s your founder math for VC money to make sense? I believe entrepreneurs should build their business to last with no exit strategy, but if you do have a goal of selling it in 5-10 years some founder math related to equity is in order. If you take a look at founder equity at time of IPO you’ll see it’s in the 4-15% range and only 5-10% of companies that raise VC money exit for more than $100 million.

So, owning 10% of something worth $100M, which would be a phenomenal outcome, and happens a tiny fraction of the time for VC-backed companies (a very high bar), nets you $10M. $10M is a huge amount of money, but what amount of effort and luck is required to make $10M without VC money. To make $10M you could build a business with $6M in revenue, $2M in profit, and sell it for 5x profit for a total of $10M. The “small” exit is 100x more likely of a scenario than the big exit.

It takes a special situation for the founder math to make sense to raise VC money. It exists, but is rare.

What else? What do you think of the founder math for VC money to make sense?