How Much Of Your Business Do You Want To Own?

I hear from both entrepreneurs and VCs that one of the most commonly cited reasons for not investing is because the "business won't be big enough."  Usually that is delivered by the uninterested investor in the negative as, "we don't think the market is big enough," or "we think the market is going to take a long time to materialize."  Steve, one of the Softbank partners I work with, has a great saying that puts a positive spin on this and really gets at the heart of the issue (actually Steve has a lot of these Steve-isms, but that's a post for another day).  Anyway, what Steve often says is, "that's a business that would be great to own 100% of, but I'm not sure if I'd want to own 20%."

First, a little background.  Early stage VCs like to own about 20% of a company.  It took me a while to get my head around what seemed on the surface a random number.  But, there are a lot of reasons for 20% including that they typically like to invest between $5MM and $10MM in a company over time, that they like to have a co-investor or two with roughly the same interest and that software companies usually take $15-25MM-ish to achieve an exit of $100MM-ish based on revenue of about $25MM.  Add to that the need for an option pool and make room for founders and it basically works out to a rule of thumb of 20%.  That's the "typical" deal.

Now, if your business doesn't have a real shot at $25MM+ in revenue with a healthy growth rate or have a need for $15MM+ in investment, but instead has a very solid chance of achieving a few million in revenue, take a few hundred grand to launch and has the potential to throw off $50-100K per month in free cash, then that's a business that would be great to own 100% of!  Frankly, I see a lot of the latter companies pitching VCs for money, getting turned down and being frustrated when in reality they're in a great spot of potentially owning all of a valuable asset and not having to answer to nagging investors!

Comments

[Daniel Markham]

That's a great idea.

Except for the part about having the few hundred k that the owner(s) needed to scale the business to begin with. Where's that come from? (speaking from experience)

[FN]

Daniel, you raise a good point. The good news is that you don't need to have a bank account with a quarter million dollar balance to get going. There are many ways to financing a startup...Paul Graham has a good description of the options on his blog at:

http://paulgraham.com/startupfunding.html

[Thomas]

Thanks for sharing those insights!

I have read, heard, and seen many of bootstrapping models. Coming from the Bay Area, we have seen and heard it all. Indeed, it is much easier for a well-off entrepreneur to bootstrap. It's also easy for investors to talk about bootstrapping.

There is bootstrapping and there is bootstrapping! Y-Combinator article reminds me of YouTube story back in 2005: Couple of kids in their garage started a simple video upload and bootstrapped it, etc.... It was just too funny since the credit cards were black Amex, the garages were houses in Presidio and Atherton, and the friends-and-family was father-in-law Jim Clark.

I totally agree with the 100% vs. 20% ownership philosophy from an investor point of view. But an investor should never give an entrepreneur startup advice like how Steven did. No disrespect, but Steven has never been an entrepreneur. His resume is very light based on two jobs both Excel heavy. Real world is different. You, on the other hand, can and should give us advice. Because you have been an entrepreneur, has a business degree, and is looking for your next opportunity.

Also, I would like to point out that Y-Combinator and Garage Venture, both are great in giving entrepreneurs advice. Yet they both made more money from their books, Founders at Work and The Art of The Start, respectively, than healthy exit from their portfolio.