20. EXIT!
$50 MM
Founders VC A VC B
50% 17% 33%
$25MM $8.3MM $16.67MM
21. WARNING!
Incredibly difficult to raise venture capital.
It takes 5.4 years to exit a company by M&A. *
7 years for IPO, and only the very best.*
Chances of you staying CEO is low.
Notes:
* VentureSource Data
Let’s say that you are a company which is venture backable. Let’s say you, the founder, have come up with a novel technology which creates delicious food which makes the person eating it lose weight with no side effects. That’s a huge market opportunity! Who would not want that?\n\n
You know that you would need $2 million and 1 year to get this product into production phase.\nHow are you going to finance this? You could fund it yourself, but you’re a poor student with very little savings. Also, the bank isn’t going to fund this idea because it’s not a business model they understand. You think you can turn to a venture capital as a funding source because they know how to deal with the risk profile of a potentially high growth business like yours.\n\n
You know that you would need $2 million and 1 year to get this product into production phase.\nHow are you going to finance this? You could fund it yourself, but you’re a poor student with very little savings. Also, the bank isn’t going to fund this idea because it’s not a business model they understand. You think you can turn to a venture capital as a funding source because they know how to deal with the risk profile of a potentially high growth business like yours.\n\n
You know that you would need $2 million and 1 year to get this product into production phase.\nHow are you going to finance this? You could fund it yourself, but you’re a poor student with very little savings. Also, the bank isn’t going to fund this idea because it’s not a business model they understand. You think you can turn to a venture capital as a funding source because they know how to deal with the risk profile of a potentially high growth business like yours.\n\n
You know that you would need $2 million and 1 year to get this product into production phase.\nHow are you going to finance this? You could fund it yourself, but you’re a poor student with very little savings. Also, the bank isn’t going to fund this idea because it’s not a business model they understand. You think you can turn to a venture capital as a funding source because they know how to deal with the risk profile of a potentially high growth business like yours.\n\n
You know that you would need $2 million and 1 year to get this product into production phase.\nHow are you going to finance this? You could fund it yourself, but you’re a poor student with very little savings. Also, the bank isn’t going to fund this idea because it’s not a business model they understand. You think you can turn to a venture capital as a funding source because they know how to deal with the risk profile of a potentially high growth business like yours.\n\n
You know that you would need $2 million and 1 year to get this product into production phase.\nHow are you going to finance this? You could fund it yourself, but you’re a poor student with very little savings. Also, the bank isn’t going to fund this idea because it’s not a business model they understand. You think you can turn to a venture capital as a funding source because they know how to deal with the risk profile of a potentially high growth business like yours.\n\n
You know that you would need $2 million and 1 year to get this product into production phase.\nHow are you going to finance this? You could fund it yourself, but you’re a poor student with very little savings. Also, the bank isn’t going to fund this idea because it’s not a business model they understand. You think you can turn to a venture capital as a funding source because they know how to deal with the risk profile of a potentially high growth business like yours.\n\n
How do you pick the right VCs? Well, it is incredibly important to find VCs that understand your business, either through prior investments or their previous experiences. Many VCs were ex-entrepreneurs or operators. You don’t want to find a VC who specializes in social media when you are doing a consumer good. Unfortunately, not that many VCs have invested in the consumer packaged goods space. Luckily, there is at least one VC in town which has: Cayuga Venture Fund.\n\nSo you go in and pitch a VC, what are they looking for? Well, all of the stuff that Vinay talked about earlier apply here as well. Furthermore, they may be looking for different forms of traction: sales, partnership agreements, letters of intent, key hires, and most importantly, your background.\n\n
How do you pick the right VCs? Well, it is incredibly important to find VCs that understand your business, either through prior investments or their previous experiences. Many VCs were ex-entrepreneurs or operators. You don’t want to find a VC who specializes in social media when you are doing a consumer good. Unfortunately, not that many VCs have invested in the consumer packaged goods space. Luckily, there is at least one VC in town which has: Cayuga Venture Fund. And there is also our friends at Highland Capital Partners in Boston.\nSo you go in and pitch a VC, what are they looking for? Well, all of the stuff that Vinay talked about earlier apply here as well. Furthermore, they may be looking for different forms of traction: sales, partnership agreements, letters of intent, key hires, and most importantly, your background.\n\n
How do you pick the right VCs? Well, it is incredibly important to find VCs that understand your business, either through prior investments or their previous experiences. Many VCs were ex-entrepreneurs or operators. You don’t want to find a VC who specializes in social media when you are doing a consumer good. Unfortunately, not that many VCs have invested in the consumer packaged goods space. Luckily, there is at least one VC in town which has: Cayuga Venture Fund. And there is also our friends at Highland Capital Partners in Boston.\nSo you go in and pitch a VC, what are they looking for? Well, all of the stuff that Vinay talked about earlier apply here as well. Furthermore, they may be looking for different forms of traction: sales, partnership agreements, letters of intent, key hires, and most importantly, your background.\n\n
If they like the initial pitch, there will be follow-up conversations where they will involve their partners and associates to dig deeper into your company. If they like you, they will offer you a term sheet. After further diligence, they will close the transaction and give you the money. That is EXTREMELY rare. But let’s say it happens. Congratulations, you just closed your “Series A”.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
VCs don’t just give you money for free. They provide capital in exchange for equity, which gives them control and share of the profits at exit. The mechanism for that is valuation. Let’s say that, after much negotiation, the VC says that the “pre-money” valuation of your company is $3 million, implying a “post-money” valuation of $4 million. The better your position, the higher your valuation. They would own 25% of your company. That’s not majority control, but there are other terms that we won’t go into too deeply. One important thing is that they will often set up a board of directors, whose primary function is to advise, hire, and fire the CEO. Boards are generally 5 people, 2 founders/management, 2 investors, and 1 outside tiebreaker. Board control is how you can own 75% of the company and still be fired as CEO.\n\n
So now you have $1 million in cash wired into your bank account. It feels great! Now you have “runway” for 1 year (remember what we said earlier?) During that year, you start to hit production and get things up and running. \nNow you are ready to take this baby to market. You will need to scale manufacturing and distribution as well as hire sales, marketing, and other positions. But you don’t have any revenue yet. So you need to raise more money. You estimate it will take you $5 million to grow the business for 1 year. It’s a bigger company, and so you need more capital.\n\n\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
You go out and raise money again. Sometimes it is from the same investors, sometimes it is from others. \nDepending on how you have been doing, the valuation of your business will increase. Let’s say your investors have been super impressed by the progress you have made. You hit all of your benchmarks and more. They give you a new pre-money valuation of $10 million, post-money valuation of $15 million. That’s great! You have cash to grow your business, but now you just got diluted in ownership even more. New terms apply, and your board composition might change. Because you are giving up even more ownership, you own only 50% of your company now.\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Let’s say that as you are growing your company, things are going super well and all of a sudden, Kraft decides to buy your company! They want to own the whole company and they are willing to pay $100 million for it!\nWhat does that mean for you? Well, since we made the math easy for ourselves, your Series A investor takes out $17 million and your Series B investor takes out $33 million and you take out $50 million. Not a bad return!\n
Of course, those are highly imaginative numbers. In reality, companies such as this take a very long time and may take a lot of dilution. There are also other terms which VCs can use to maximize their return. \n\n
Of course, those are highly imaginative numbers. In reality, companies such as this take a very long time and may take a lot of dilution. There are also other terms which VCs can use to maximize their return. \n\n
