Ask YC: What to do when VCs think opportunity/market is too small?
1. I am the 100% owner of company X, several others are involved, but not full time. 2. X has generated $100K revenue in FY1 and is $60K since new fiscal 7/1. 3. I have not paid myself a dime yet, because I can afford to live off savings and business needs the revenue for R&D, marketing, etc. 4. X is the recent winner of a major CA-based business plan competition - $100K prize. 5. VCs are sold on the pitch -- product, team, competition, IP, everything. They like it.
The problem is this: Even with a $4.4B one-time revenue and $1.6B recurring annual revenue market, they think the opportunity is too small. Due to the revenue X is generating, capital needs are much smaller because each customer added means substantial revenue. However, the market is not as small!
To quote one VC: "If we put $1M in and we realize a fantastic return of 20x, that's still a small bet for us. We chase bigger opportunities".
So I'm thinking angels are a good idea, but the angel groups seem too process-oriented: several months to get considered, lots of structure, very few deals invested in and usually not over $500K. Further, I'm hearing that Silicon Valley based angel groups are highly biased towards local investments -- X is run out of Los Angeles.
My quandary is: how do I raise a smaller amount of capital from smaller funds or angels, at a fair valuation given current traction, without a lot of network to start with?
I've gotten introductions through the competition we won and VCs, but things haven't panned out substantially yet. Disclaimer: I've only been at it for a few weeks and lots of avenues still cooking, but I'm just looking for YC advice on fundraising related to smaller capital needs.
Any comments ?
20 comments
[ 33.3 ms ] story [ 248 ms ] thread1) look at http://venturehacks.com to get a better understanding of how the fundraising process works and tactically how to raise interest. investors also generally want a team in place, not one person plus some part timers.
2) if you can talk more about your company, the audience here has some rich individual investors here who wouldn't put you through the bullshit that angel groups would, and even more people who, if not rich themselves, are one degree of separation away from potential investors.
I don't know your situation, but is it possible you're trying to move at Silicon Valley, light-speed pace when it might be more beneficial to throttle back a bit?
I'd think with your continued success the money would soon be chasing after you.
Anyway, congratulations and good luck!
-no investor has shown any problem with the team. the company is extremely well advised for its space and has lots of people putting in time here and there.
-business has too much traction to pull an unknown cofounder right now and don't know anyone who is willing to jump off the cliff without money
-i am willing to talk to anyone seriously interested in investing, but this is a pretty public forum and I don't want to reveal company details here.
Your income + growth should give you a fairly healthy valuation, even if your market cap is 'only ~4B + 1.6 annual'. It does take a lot of time, but one good option could be getting together a group of angels willing to invest together. It will strengthen all of their individual investments knowing the total investment is quite a bit larger, and it will give you guys the running start you need to grow quickly. It really looks like now is the perfect time for you to take some money (without giving up everything due to your track record) and grow this company.
Best of luck.
this was pg's response: "... I have no idea how big the market is in dollars. It's not worth thinking too much about anyway. Startups evolve. It's enough to start with something you know people need."
http://news.ycombinator.com/item?id=77608
1- you raise money from an idiot, i.e. someone that really doesn't know what they are doing. You are always better off not doing that no matter how much they give you
2- you can prove the idea will work, and you can gain the trust of the investor in you and your team. In this case you might be able to convince a good VC to invest in the company but you will then have to give up the majority of your shares in the company
If the market is in fact not that big, why would you have to raise so much money! do you think its reasonable! And if no VC out there can tell how big this market really is or how good the potentials of this business (which is already making money, a rare case!) then maybe there is something theyoungceo can't see, and maybe its really not as big as s/he thinks it is
Anyways, I have a feeling this post is a bit about possibly finding some potential investors rather than getting advice. Which is fair, but not sure if these advices are really what the theyoungceo is looking for.
Also why is the name of the company not mentioned? (specially that the company is already out there and doing business!)
Also: -theyoungceo isn't naive enough to believe that investors are scouring news.yc for deals, although he'd love to be proven wrong. -i didn't mention the company name because i know everyone knows everyone in SV and it might be unprofessional to be discussing this here from an investor's perspective (IMHO)
We never thought about "revenues after 2 year run" because I preferred PG's approach of focusing on "building something people need". His take on having a business plan with "shiny revenue projections for next 2 years" is that a business plan does not matter much, since the business will change, and in the end writing it won't be that hard for a couple of smart hackers. Well... not really, especially if you're faced with questions like "how exactly you are going to get users"? And my honest reply (I haven't brave enough to give it out yet) has always been "well... you give me the money and I will hire someone with a good answer". Don't get me wrong: everybody agrees that we're solving a very real problem and there is money to be made, but the lack of clear understanding of where we're going to be in 2 years is our big problem right now.
My approach, influenced in part by PG's essays, is to focus on making people happy and "evolve" organically. This does not fly with investors at all. It's depressing: Facebook is losing money, nobody knows for how long, it is older than 2 years old and commonly considered "successful". Meanwhile, investors want us to make money, and tons of it just to get an A-round.