Yesterday I was talking to an entrepreneur that was contemplating whether or not to raise a Series A round for his Software-as-a-Software startup. The business is growing nicely and it’s clear there’s a big market opportunity. With a low cost of customer acquisition and a great lifetime value, the financial model is there to scale the business indefinitely with little outside capital. Only, there’s so much market potential that with outside capital the business can grow significantly faster and gain marketshare in a relatively greenfield space.
My answer to him regarding raising money was pretty simple: do the personal math on the expected outcomes with and without venture capital.
Here are a few questions related to doing the personal math when thinking about raising money:
- How many rounds of financing will the business take and how much equity will be sold at each round?
- How much more difficult is it to find a buyer for the business when the valuation exceeds $50M? $100M? $500M?
- With no outside capital, how fast and how long do you believe the growth will persist?
- Is it a winner-take-most market where marketshare matters or is it a fragmented market with many winners?
- What are your personal goals and aspirations related to control, company size, and financial outcomes?
There’s no right or wrong answer when it comes to raising outside capital but more often than people expect, going the independent route makes more sense financially, assuming the startup can get to the point where it’s self-sustainable. The next time an entrepreneur says they’re raising outside money, tell them to do the personal math.
What else? What are your thoughts on doing the personal math when thinking about raising money?
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Do you know of any SaaS market which is winner-take-all or where network effects matter?