Tuesday, November 15, 2011

The Lifestyle Company

A business friend of mine came to visit yesterday and course we talked about business. He was wearing shorts, which is the linqua franca in his office. Even his customers know about his fashionable look.

Years ago he and his partners had raised venture capital from a few small funds in this region. Things didn't go the way they expected, and ultimately--after a lot of struggle with th e investors--they bought the investors out.

Today the company's pulling in several million a year, and is growing strongly. Half of it is net profit. The bonuses are not small. They pay 100% of health coverage. And they could probably sell it for $20 million just on a linear sale basis (EBITDA * P/E of acquiring company), nothing strategic considered.

Today, it's relatively cheap and easy to raise angel rounds. But most companies will not need a VC round. Once the VC is in, the expected path is a liquidity event within 3 to 5 years (they say 7 to 10 years but that's not what they really want). Your goals have to aligned with theirs: substantial sale or IPO.

As he pointed out, they want the hockey stick, so that's what you sell them.

But do you really want that?

They aren't technically rich yet (very well off), but they have fewer hassles than running a large company, have significant personal income, and will basically have a nice nest egg in a year or two when they sell--if they sell. And they have side projects.

Go back to your angel investors. Raise your next round from them. Take it step by step. You might want to take formal venture capital, but you really might not.

The time to take it for most companies is when your cash on hand isn't enough to safely hire new people to support and accelerate growth. But you really need to know--and I mean know, not guess--that the growth is expandable.

So build your business, nail your core value, keep it lean, test expansion, and only raise venture capital if you know you want to go down that path, knowing that most exits are not 10x your venture round, but more like 2 to 3x, and you can get there without the pressure of institutional rounds.

And you get to wear shorts to your business meetings and, it turns out, still win the business. Who knew?

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