In today’s world of abundant capital and frothy valuations, it’s easy to think this is the new normal. While that could be the case, it’s likely that we’ll see some reseting of valuations to a lower normal in the next five years, but who knows if that’s three months from now or three years from now. This especially comes into play with exit expectations and capital raised.
Remember this: startups generally need to exit for 10x the capital raised for everyone to be happy.
Raise $2M more, raise the exit bar another $20M.
Raise $10M more, raise the exit bar another $100M.
Raise $100M more, raise the exit bar another $1B.
Last week I was talking to an entrepreneur about this very topic. Do they raise a huge amount at a big valuation and set an incredibly high bar, or do something more modest and maintain more optionality? There’s no right or wrong answer, but the financial return goals are an important consideration.
Entrepreneurs should understand the trade-off between more capital and higher exit expectations. When raising capital, consider an exit of 10x the funding as a standard.