It’s easier to build a large company than a small one - aka is my (b2b) startup Venture Fundable!

Fundability = Emotional Function (Team, Market, Timing, Product, Product Market Fit, Traction, Business Model, XFactor, Risks, and some unknowns).

I’ve been having a few debates with a few friends on the never-ending enigma of the entrepreneurship world, “What makes a startup VC fundable? 

How does one big a big company in a predictable manner?

Regardless of whether a startup is “fundable by VC’s or not”, I always believe that the real investors in a startup are YOU, the founders! So how do you decide as a founder of this startup is worth investing your time and weighing it against the opportunity cost of your investment in a different startup? Clearly, while there is an emotional aspect of addressing a problem you feel passionately about and feel confident of doing a better job than most, it's also crucial to make sure the several years of toil and sacrifices could result in a worthwhile outcome. 

From a pure Venture Capitalists perspective, it is important to understand that most VC’s also raise external capital - VC’s are not investing their own capital and rather are investing money from Limited Partners - often endowments, trusts, foundations, fund of funds, governments, pension funds and HNI’s. In other words, all VC’s you meet are doing a job - of growing the capital people have trusted them with within a finite period of time (in most cases 10-12 years). As such for any VC, the time-frame within which your company can get to a certain scale and be in a position for VCs to get an exit from will play a key role in determining the Venture Fundability of your business.

Contrary to what might seem fashionable in various forms of (social) media, VCs do not expect companies to become huge just by raising follow-on rounds at higher valuations - we are most interested in knowing can we build a solid company here with good fundamentals, revenues, and profitability - thereby justifying a higher valuation and a good return on investment for all. And companies that do provide such opportunities are strong candidates for VC investment. Again - not saying others aren’t but in somewhat predictable businesses, it becomes a lot easier.

So what are some rules of thumb for founders to follow? Here is one exercise we give founders - even if it's early in their journey. 

What’s the path to 1-10-25-100 Million dollars of Revenue? 

Why do we ask this question? Because we want to see the following:

• Can the founders even visualize making 25/100M in the future?
• Does the company simply need a single product with more bells and whistles or does it need to expand to adjacencies?
• Is geographic expansion a requirement? Are there true adjacencies?
• Will we be forced to take on established incumbents? Who are these?

Most importantly, “when do non-linearities kick-in”? These could be in CAC, in expansion revenue, in upsell revenue, etc.

Last but not least, we want to know the answer to two critical questions.

1. How much investment will the company need to get there?
2. What % of the market do we need to win - assuming we do get there?

So let’s examine the ramifications of these with simple arithmetic and logic.

Assume that the company raises a seed round of $1 M at a ~$5M valuation, a Series A of $6M at a $24M valuation, and a Series B of $14M at a $70M valuation. Of course one can model other numbers but these are realistic median numbers, even for POSITIVE outcomes.

A Simplified CAP table evolution - not counting any ESOP top-ups, etc. - is shown here. Note that such an evolution of a CAP table rarely happens - it's often messier but intended to be indicative to make the uber point - that a large outcome is the only one that matters.

The multiples of Return On Investments returns shown in the last column are about what any VC would expect in the case of any investment. This doesn’t make it automatically venture fundable - but it sure is a good rule of thumb for you as a founder to present a plan to a VC, especially in B2B/SaaS startups.

Can you get to $25M in revenue, profitability, and growth at 2-3x Year over Year with about $20M or less invested?

Lastly, so what - once you get there is there enough headroom to continue to grow - at least at 50-100% Y-O-Y - in a predictable manner. Companies that are lasting companies are attractive if they can get to IPO-scale, not necessarily with torrid growth but with predictable and solid growth. This means that such companies may list on a public market - or may be attractive enough to be acquired for a few hundred million dollars - and in both cases, the reason will be that they are still only at a small percentage of the market.

In other words, the Total Addressable Market is a second and equally critical factor in determining the value of your startup - in addition to the scale, you have achieved. In many cases, TAM will determine the value of your startup a lot more than just the current scale. It's also important to understand that large TAM’s attract competition and other investment - that’s usually a good thing, especially if you are the first mover and category creator.

Not having a huge TAM or potential for strong growth doesn’t mean you don’t have a good business - I personally know a friend whose 2 person SaaS startup is making multiple millions of dollars in a year - but the smart thing they did was not to raise VC funding because they knew all along it wasn't going to scale beyond a point.

The bottom line for VC funding is simple - if you can’t get to scale ($25-100M) with a reasonable investment and timeframe, with ample room for future growth, in my opinion, your startup isn’t VC fundable - thought it may be a perfectly good startup. That doesn't mean that every startup that gets to $25M is fundable nor does it mean that getting to $25M is the holy grail of startups - far from it. Nor does it mean you should only raise $20M - it's just a good rule of thumb - the amount of funding, the time that is taken to get to $25M, and exit rate of growth should help you triangulate and come to your own conclusion.

When you are addressing large problems, strangely the world conspires to help you and people go out of their way - but nobody steps up to help you if you are aiming for something small. The early years are difficult in all cases but employee enthusiasm, investor interest, and several things come together and things "Snowball into Snowflakes ;)"

As I've always advised founders, "It's easier to build a BIG Company than a Small One!"

Also, from a founders’ point of view, is the opportunity cost. Given the effort and time commitment it will take, I implore founders to aim to solve big problems with huge outcomes, - because, at the end of the day, YOLO-baby - You Only Live Once - make the most of it!

As you wind down 2020 and plan for 2021, ask yourself the question - "is the prize worth winning".

Note to readers: What other topics would you like me to write about? Please put them in the comments, thanks

About the Author: Sanjay Swamy is co-founder & Managing Partner at Prime Venture Partners - Prime is often the first institutional investor in several tech startups in India that are solving real problems through technology. Mygate, Niyo, KredX, Moneytap, mFine, Recko, Ezetap, Happay, Synup, Quizizz are some of the companies you may recognize and in all cases, we were among the first to back these amazing founders.