Why Early-Stage Investing is Broken and What We Can Do About It
Founders, THIS is why it’s so hard to raise money, and what you can do about it…
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There are 3 ways to launch a business – all completely different.
1. With no money 2. With some money 3. With serious (VC) backing
Very few companies start with no money. (It’s possible, but rare.)
Here’s the problem if you’re considering #2 or #2.
They are absolutely not the same.
I’m pretty confident about this because I’ve invested in 77 companies since 2012.
Some are great businesses, but only 4 have gone on to raise what I’d call proper venture money.
Here’s how it really works, 95% of the time…
Most founders are NOT building a $50m company, let alone a unicorn.
It’s too hard.
Most don’t even want to.
The truth is, many founders would be satisfied if they ended up running their own, profitable company.
A $10m exit would be fine too.
(They may not be buying yachts, but they’ll cover their opportunity cost and, boy… what a story!)
Most first-time founders would be ecstatic with a $20m exit.
They’re not going to tell investors that, though, because they’ll never get funded.
Instead, they often expect early investors to swallow a $2-5m valuation, because “that’s just how it works”.
Sure, that’s ok if you’re building the next Nvidia…
…But generally these companies are not worth $2-5m.
VERY occasionally, a founder goes on to raise true venture capital, perhaps has a trade sale, or IPOs and delivers large sums to early investors.
(You’ve probably read about them in TechCrunch.)
But 99 times out of 100 these are horrible deals for investors.
If you’re not building Netflix, but are in fact building something with a ~$20m upside, standard terms and a $5m starting valuation is simply not workable. Depending on dilution, angels in these deals might double or triple their money.
This. Is. Not. Worth. The. Risk.
(Remember, their other 9 investments all returned 𝘻𝘦𝘳𝘰.)
So what’s the answer?
Well, at DQ, we’re helping founders to build multi-million-dollar companies (NOT unicorns).
We need a fairer and more realistic approach to funding, which works for both founders and angel investors (upon whom so many startups depend).
We’re putting together an approach and investment docs that:
a) De-risks early-stage deals for investors through better terms; and
b) Makes it easier and more transparent for founders raising money, thus de-risking their journey as well, while still protecting them if things go better than expected.
If you’d like a copy—or access to these kind of deals—DM me or drop a note in the comments and I’ll make sure you’re on our mailing list.
Anyone disagree that the above needs fixing?
Anyone want to help?
