So a lot of founders and VC talk about “optionality”, and it’s an interesting topic.
Had an investment with a quiet but big nine-figure exit this week
They stopped raising at $100m valuation
There’s something to be said for stopping there. It’s really the last stop before IPO or Bust.
— Jason ✨Be Kind✨ Lemkin (@jasonlk) August 20, 2023
So each time you raise money at a certain valuation, you’re raising the price you have to sell for, and in that sense, decreasing optionality.
Every time, think at least 3x:
- If you raise a seed round at a $10m valuation, can you sell for at least $30m? Maybe, maybe not, but that’s not so high you usually need to worry too much.
- If you raise a Series A at a $40m valuation, now you have to sell for at least $120m for the math to work out. Now it starts to get harder. There aren’t as many $100m+ acquisitions as you might think. Now there is a bit of a target on your back. IMHO, only raise a Series A round once you’re sure you have something good, with real value.
- If you raise a Series B at a $100m valuation, now you have to sell for at least $300m for the math to work out. This starts to get pretty hard. These deals happen, but you probably have to hit $30m+ ARR for real to have a real shot at it. Do you see that coming anytime soon? If not, maybe don’t raise the round.
- And here’s the thing … at any price much more than $100m valuation, you start to enter … IPO or Bust land. There just are so, so few acquisitions at $500m+ out there in SaaS to deliver that basic 3x or more. You have to just be planning to IPO, period.
So let me boil it all down to at least one point: I don’t think you need to overanalyze exit options and optionality if you just raise a small seed round.
But as you pass a $100m valuation in later rounds, remember it’s not just a game. It’s not just a number.
Raise at $150m, $200m or more valuation … and that’s probably too high to generate any good acquisition opportunity. It could happen, but you have to plan for it not to happen (an acquisition). You have to plan for IPO or Bust.
If that’s you. awesome. But if that’s not you, maybe don’t raise beyond a $100m valuation. Build your company up to $20m, $30m, $40m ARR and then look and see how things look. $20m+ ARR is when a lot of good Private Equity and similar offers come in. You don’t want to be sitting on too high a valuation here where you have to say No.
A related post here:
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