How You Inherit The Business Model Of Your Biggest Investors

When I talk to startup founders who think they want to raise money from investors, I always ask this question:

What kind of money are you raising?

Most founders don’t know what I am talking about.

But this is the most important funding question founders need to answer.

Each founder should be clear about how they and their investors will align on the same specific game they will play together.

There are many different kinds of investors for different kinds of startup opportunities.

Founder goals and investor business models have to be matched or you won’t raise.

Or worse, you raise and get stuck with the wrong investment partner for your actual goal. That’s actually more painful for everyone.

So…which GROWTH & INVESTMENT game are you really playing?

  1. Are you playing the “Get some funding with a SAFE then a Series, A, B, C, or D rounds then IPO or sell the company for over $1 billion” game

    This unicorn game is for 5% of serious startups. It’s the game of the biggest VC funds. Most startups don’t have “VC-scale “opportunities that are big enough to pay back these big investments.

    A VC that invests $10M at a $50M valuation still expects to get a 10X return at least. Between dilution and timing, that’s unicorn territory. But 50% of these VC investments flame out for founders.

    Founders who aren’t going to play the unicorn game shouldn’t talk about big valuations, big raises, and multiple rounds.
  2. Are you playing the “Small amount of efficient funding at practical valuations so you have the option to sell the company for $30M or $50M or $100M” game?

    Big VCs can’t win here. And neither can angels and seed funds if your pre-money valuation is too high and you keep raising.

    But you and your investors can win if you are efficient in your business, practical about valuations, and don’t raise again and again.

    There are many outside investors who like a clear and quick path to a 5X return. Some angels, growth equity VCs, and tech-savvy PEs.

    There are 20X more “founder-scale” exits under $50M than big $1B+ exits, but we only hear about the big ones.
  3. Most startups would be better off NOT raising from serious investors at all. Play the popular “Savings + profits + revenue funding + friends and family” game to an early exit. Or run it and love it for a long time.

Just grow more efficiently, say no to eager investors, and sell it for $10M-$75M. And don’t bet it all and take the next 10 years of your life trying to get a unicorn win for your investors.

There’s an old saying: You inherit the business model of your biggest investors.

The more you raise, the more this is true.

It’s the founder’s responsibility to decide and communicate which growth & investment game you are really playing, regardless of what “everyone says” you should do.

“Everyone” these days is usually the investors who expect you to play their game.

Founder-funding fit is up to the founder.

Founders should be asking investors what game they are playing too.

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