This week, 3 SaaS startup founders told me people are telling them to raise a seed round of VC funding. They asked me if they should listen to these experienced mentors and play the big funding game.
– Each has an early product, some revenue, and a few customers.
– Their products are showing good results with customers.
– Other prospects are already interested in their software products.
Here’s what I asked them before recommending anything:
1) If someone offered to buy your startup now for $30 million in cash, would you take it?
If you would, don’t raise VC funding ever. Be very careful about raising any savvy angel investment. They would all expect you to bet your company and the next 5-10 years of your life on growing the company and selling it for $100M or more. A $30M exit for a startup already in revenue won’t be an interesting return for serious investors. Don’t waste your time–or theirs.
2) Do you expect this company to grow fast (100-200% a year) and reach at least $50M in revenue in the next 5-7 years?
That’s annual growth rates of triple, triple, double, double, double—with high growth potential after that.
Very few SaaS businesses grow that fast or get that big. But that’s the game that VCs expect when they invest. Get Big Fast, or you’re out. Some have this potential, and a few make it, but most don’t.
3) Are you ready to fire your co-founders and leaders, and maybe yourself as CEO, if you don’t get the fast growth results you signed up for?
That’s just one of the control issues you’ll deal with if you start the VC funding game. You’ll have invested partners who will have a say in how you run your business, how fast you go, and when you sell.
Again, many founders are up for this big VC game, and it sometimes works. Those are the big headlines we read about. But are you really clear how this big VC funding game is played, for better or worse?
4) Did those who recommended VC funding ask you these questions?
Did they spend a few hours with you to ensure you understand this all-or-nothing game and that big funding is your best choice?
If they didn’t spend the time to ask these questions, then two things are going on:
A) They don’t know that the B2B software game AND the VC funding game have changed drastically in the last 5-10 years. They are recommending what used to work in the old days. They are naively giving you bad advice.
B) They are selling something and will benefit if you raise a round. A lot of people have something to gain by getting you on the funding drugs.
Funders, service providers, accelerators, and ecosystems love to recommend funding and then cheer when you get it. Do they tell you this rarely works out for founders?
For each of these founders this week, playing the funding game with angels, VCs, or anyone else wasn’t good advice. They were bootstrapping, growing revenues, and being very efficient.
And they loved their optionality and control.
