Does raising funding from VCs limit your exit?

While technically true, I believe embedded in this thinking is some bad advice.

VCs are expecting a positive return on their investment. They are hoping for 10x their money (or more), looking for 5x, and settling for 2x-3x.

So if you raise money at say a $50m valuation, and want to sell for $40m … that’s a problem. The VCs will not be happy. They may even block the sale.

But …

Two things.

First, it can be worked out. It may be messy. But if you raise at $500m valuation, and sell for $500m, the terms can be restructured. You can still pay the last round guys 2x. It may be a painful set of discussions. Many fists may be banged on the table. But it can be done, and is all the time.

So yes, you are giving up some optionality when you raise VC money — for sure. But it’s not always as black-and-white as it looks.

Second, and more importantly, the question itself is “wrong”. Venture fundraising should not be done because it can be done. You should only raise Venture Capital if you (x) have to, or (y) it’s “cheap”.

If you need VC $$$ to survive, don’t worry about it. It is what it is. I needed VC $$$ to get both my start-ups off the ground. So — why worry?

And if VC $$$ are cheap — take the money. By cheap, I don’t just mean price. I mean you can easily generate 5–10x the revenues of each dollar you take in. That the money will be super accretive.

But don’t take VC money just because you can. >> That’s the trap <<

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Published on October 5, 2016

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