
Startups need to respect the laws of retail physics - prostoalex
https://techcrunch.com/2016/07/05/startups-need-to-respect-the-laws-of-retail-physics/?ncid=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Techcrunch+%28TechCrunch%29
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slededit
If venture capitalists want to give you lots of money at ridiculous valuations
I don't see why its incumbent upon the startup to create a worse deal for
themselves. At the end of the day its the venture capitalists that will lose.

However the VCs aren't stupid, they understand this which is why most insist
upon liquidation preference. Ultimately the high valuations will end up
working against the founder because these unrealistic expectations mean that
those with preference will win and the rest will get nothing.

When signing a deal you really need to consider what happens at every outcome.
Not just the binary choices of wild success and abject failure. You can bet
your adversaries in the negotiation have already done this.

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replicatorblog
Accepting lots of money at a ridiculous valuation _is_ a worse deal for most
startups.

\+ Scenario 1

Imagine a VC offered you $100M on day 1 of your startup, valuing you at $300M.
Is that a good deal? Or a disaster in the making?

Well, what if someone offers to buy the company for $100M, your VC will balk.
Maybe you discover barriers that will prevent your company from ever being
worth $300M. Your VCs encourage you to experiment and take a hail mary shot.
Ultimately the company flops and goes out of business. In this scenario you
raised a bunch of money, got a "great deal." but have little flexibility on
the exit.

\+ Scenario 2

Now imagine another scenario where you raise $5M, valuing your company at
$10M. This is a "worse" deal in terms of dollars raised and valuation. But now
imagine that same acquirer comes along offering $100M. Your VC will be happy
with a 10X return and you'll pocket $50M.

The quality of the deal ultimately can't be assessed until you exit. But don't
mistake big dollars and high valuations as evidence of success. Fab and Quirky
both raised huge piles of money to build out new ecommerce businesses and
failed dramatically. Wayfair by contrast, raised no VC and built a $4B
business. Choose your metric wisely.

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adventured
> Imagine a VC offered you $100M on day 1 of your startup, valuing you at
> $300M. Is that a good deal? Or a disaster in the making?

That's solely dependent on the terms. It isn't possible to say whether it's a
good or bad deal without clarifying the exact terms of the investment. That's
an amazing deal if the terms are stacked in the favor of the business owner/s.

~~~
replicatorblog
Assume the terms are within modern norms. In this case, just based on the
distribution of exits, $100M would handicap most startups.

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paulsutter
The average revenue multiple for all public companies is 1.62. It varies by
industry (see [1]), but eventually most startups will settle into ordinary
revenue multiples for their industry, whether they like it or not.

[1]
[http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...](http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/psdata.html)

~~~
jcrben
They'll settle into ordinary earnings multiples. Sofware companies typically
have much higher revenue multiples because they have much higher gross
margins. In this case, the article is talking more about brick & mortar
startups.

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kfk
The lack of financial modelling in most of the startup conversations is
astounding. The poster say you should not make decisions only based on models,
based on what then? Gut feelings? I know many people want to escape from
Corporations into startups, but dismissing finance as non important is not the
way to do it. Even a recent post from Buffer in the end was about bad
financial modelling (and they had to fire people for that). There is a lot of
wisdom in the financial world that would help many CEOs avoid "hard lessons"
that didn't need to be in the first place.

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soundlab
"The stock market doesn’t reward big acquisitions in these categories as they
often do with Silicon Valley giants, and they’re expected to justify these
purchases, at least partially, on financials. This massively constrains the
realm of possible outcomes."

Yes! Let's do much more of this.

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calgaryeng
> The stock market doesn’t reward big acquisitions in these categories as they
> often do with Silicon Valley giants, and they’re expected to justify these
> purchases, at least partially, on financials. This massively constrains the
> realm of possible outcomes.

Read this twice, and try not to LOL.

~~~
Tinyyy
Elaborate?

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LaurentVB
I'm sorry, I'm probably missing something, but... Why even sell when you only
get 1y of revenue from the sale?

~~~
replicatorblog
Assume you have a 20% margin, then one year of revenue equals five years of
profit, or a 5X profit multiple. It may not be ideal, but if the alternative
is raising more money, increasing your risk, it's attractive. Also, VCs need
liquidity so 1X on a large number today is more attractive than 3X you many
never achieve.

