

Ask YC: What to do when VCs think opportunity/market is too small? - theyoungceo

Hi all, I've been a reader here since the beginning but never posted. Anyway, my question:<p>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&#38;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.<p>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!<p>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".<p>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. <p>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? <p>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.<p>Any comments ?
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rms
You have revenue coming in! This makes you eligible for loans, especially once
your business is two years old.

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mrtron
Angels don't usually donate huge sums of money, 500k is actually higher than I
had heard of.

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.

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theyoungceo
Bingo - dead on; I couldn't agree more. Now where do I find these guys ? :) I
think that is the root of the problem.

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mrtron
If I was offering that service, I would be charging for it. :)

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theyoungceo
-need it for a sales force definitely and maybe one ops head, engineers won't be necessary for a while.

-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.

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rms
Also -- if you are hoping investors will contact you based on this post, you
need to post your email address here or in your profile. The email address box
in the profile is for YC internal use only.

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shayan
Not all VC's are like that... I posted a question about a week ago about
Disqus a YC company... and asked how big was the market for YC to be
interested in the company and invest in it

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>

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marcus
That may be true for YC which does seed funding but the model for VCs that
invest large sums of money is based on the home runs and if you can't show the
hope for a home run, they'll probably not be interested.

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shayan
of course, if you are not looking for seed funding (or angel funding) and
looking to raise a serious series A then you will have problems... but I think
if your market is in fact not too big, then you must avoid raising too much
money, since there are only two scenarios where you'll actually be able to
raise that much money for a project like this:

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!)

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theyoungceo
The market doesn't need to be a quagillion dollars to need sales and ops guys;
I still dont' quite understand the point of "sizing a market" -- I have
already proven that there are plenty of people who want the product badly out
there, and always thought that would be enough. No matter what you invest at
what percent, this one has a lot of proven traction already and is more likely
to be a winner than most deals (I think). I think what I'm getting at is the
question of: what do you do if the VC model just isn't quite right? It seems
everyone assumes there is no business growing with them.

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)

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trevelyan
There are a lot of organizations looking for investment opportunities. If
scalability matters I'd find a more established company in your field and try
to get them on board.

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optimal
I haven't been in your situation, so please consider my comments accordingly,
but if you're doing well can't you continue to grow the company organically?
Can your business plan prize fund R&D and marketing for the near future?

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.

~~~
theyoungceo
optimal -- yes, and this was my longstanding position. I have had a lot of
bugs put in my ear like "if you just took some funding, this could explode
very fast, speed of acquiring customers will be key". I fall somewhere in the
middle: I think it's a good idea to take a _small_ amount of funding to get
some sales hounds on board, because I can't do sales by myself and I'm not a
fantastic salesman. The product has been winning so far based on its own merit
-- competition is really terrible, and people are hearing about it word of
mouth and contacting me.

~~~
optimal
I'm sure you know this better than I do. There are just so many stories of
companies that implode before their time, or get devoured when the piranhas
come around.

Anyway, congratulations and good luck!

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shayan
@theyoungceo: you could always try to convince someone that has better
connections and influence than yourself (like pg and others like him) to make
a small investment in your company, but in return s/he could def help you to
raise the funding you need a lot easier (if possible to raise it at all for
this company)

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dhouston
how much money do you need? what will you need it for? engineers? a sales
force? etc. what still needs to be accomplished?

1) 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.

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theyoungceo
Banks say they won't loan more than 15-20% of revenue. SBA will guarantee and
might be able to get loans up to $250K, but that requires a personal guarantee
-- if for some reason something goes wrong, I don't want to be personally
bankrupt.

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theyoungceo
the.young.ceo.0@gmail.com will come direct to me for offline chat...I can
discuss the business one on one but I'm wary of posting details publicly --
however open discussion here is definitely encouraged.

