In the last 5 months, I have invested in 5 software startups as an angel investor.
When I talk to founders about raising money, I always ask this question:
“If someone wrote you a $30 million check for your business today, would you take it?”
There isn’t a right answer to this question.
But it’s the fastest way to see which growth-and-investment game these founders are really playing.
1) If they say they’d take the $30M (or a number less than $100M), then they are playing the game of grow efficiently and exit sooner than later.
These create “home run” prizes for founders and their teams. And there are 10x returns for early angel and seed investors in this category.
But since these are “base hit” exits for VCs with big funds, they won’t invest in you. Or if they do, they don’t want to sell until you have “VC-scale” returns of $250M or a billion or more. Anything less hurts their performance.
So the game here is not raising a ton of venture investment in Series A, B, C, D rounds. The efficient approach actually increases the odds of a good founder-first exit.
Most serious startup founders are actually this kind of practical founder. They know that only 1% of funded startups actually IPO, despite how much those few companies dominate the news headlines.
2) If the founder says they won’t take the big exit money, then they are playing the go big or go home game of raising lots of funding, growing as big as they can, and aiming for an IPO as an independent company.
This is a completely different game for founders and investors than the efficient growth+early exit approach.
These are the companies we hear about that are raising big venture capital funding rounds, hiring fast, expanding as fast as possible, and with founders that see a big IPO exit after their unicorn phase.
This game also works, but the odds of winning for founders are not as high as the efficient-growth approach. The prizes for those that win big here are often larger for the few that do win, but not always.
Investing early in these go big startups is a different game. Most won’t make it, but a few will make it very big.
It’s an all-or-nothing proposition for investors here. Is this really one of the few super-fast growth companies in new markets with a founder that can go all the way?
Four of my recent investments are with the first type of practical founder. They are just as savvy and serious, but they aren’t betting everything on being a unicorn soon.
Only one investment was a go big founder ready to bet it all based on early traction that shows big potential. Even though he is young and doesn’t have any assets, he wouldn’t take the early exit prize.
The first rule of the game is to know what game you are playing.
Knowing which growth and funding game you are playing is one of the most important jobs of the founder/CEO.
** If you’re a founder asking the question about which game you are playing, just DM me and we’ll talk it through. No pitches, please.