I've heard numerous times startups have had a hard time getting a smaller amount of funding from angels and VCs. As in, "I want $500k" and "no, we only do deals with $1M+", or something like that. I thought that was crazy. This is probably the pendulum swinging back, as pendulums do.
I am interested in how this situation affects larger companies. My guess is since they're so much larger this time around than back in 08-09, and since tech didn't really change all that much in the past ten years or so, there might be greater structural pressure for startups in terms of hiring talent and market direction, because the big guys have so much liquidity and are entrenched in many different verticals. It'll be interesting to see how it all plays out.
I think they get bullied into larger deals that inflate their valuation beyond what they think they're worth. It works in a growing market to fundraise beyond your valuation and then grow into it. It doesn't work when the market turns down. If your runway is sufficiently short, you'll be fundraising a down round in a down economy which will slash your valuation and make it harder to get good terms.
Yea, I had this c2015 when I was seeking 250k to grow a revenue generator. I was told to make a story that compels a 15M future valuation so I could ask for 750k now. But I didn't even believe the revenue projection need to justify! I said no, these are my numbers. I couldn't fake a 10x story and my 6x story wasnt compelling enough.
I mean VC's aren't banks giving out small business loans. If you want $500k you go to the bank or find an angel investor, not a VC. The math doesn't work out for them.
I think we just need better infrastructure for startups to bootstrap with debt. It's not impossible or unheard of but it's more difficult for fledgling startups to get decent small business loans.
It is impossible to get loans from banks for unproven business models and it always has been. Banks invest in businesses with proven models, revenue histories, collateral and audited financial statements. Its just not in any way comparable to what a venture needs.
While this makes sense, couldn't the founder personally guarentee the loan? If they have a strong income history, maybe collateral such as a home, it should be possible.
From what I've been hearing VCs are worried this is going to last awhile, and so they don't want to give small amounts of money to a company knowing it isn't enough to ride through this. If you only ask for enough funding for a year and the VCs believe the economy won't improve for another two then they aren't going to put money in.
The problem is smaller funded startups create smaller returns, and take away money that could be deployed in more promising startups that would benefit from larger deals. The money isn’t going out because it’s just not worth it at those levels.
Probably this is focused on ownership and there's miscommunication. VCs don't care that much about dollars; they want 18%+ ownership or even big returns aren't material to them.
Should you take VC -- while an important consideration -- is kind of a separate question.
Assuming you've decided to take VC, good ones won't invest small amounts of money. And this is separate from valuation; this applies even at the A stage. The reason is they want 18%+ ownership, ideally 22%. If they get less ownership, even if they have a big enough fund to fully exercise their pro-rata rights, they don't get a big enough return in a success. Hence someone who would be willing to put in $4m for 20% will be unwilling to put in $1m for 5%, or even $500k for 5%. The upside just isn't there.
A simpler explanation is that it's all driven by fund size. We all have the same 24 hours/day, 7 days/week and all investments require analysis and oversight. If I'm a VC with 600-800 million to deploy (typical large fund size), I can do, 30-40 deals/year, maybe, only if the diligence checks out, a partner is willing to commit 5-7 years to being on their board, and various other things work out.
That narrows you right away down to $20-30 million checks, maybe less if you keep reserves around for pro rata rights, but still, nobody's getting $500K out of this fund. Ownership is whatever it needs to be to generate the right returns for the fund. Also keep in mind, syndication is very common in VC so one $20 million check might be part of an overall round size of $50 million or more. Don't even bother with that if you can't show line of sight to nine, or ideally ten figures, of enterprise value.
I am interested in how this situation affects larger companies. My guess is since they're so much larger this time around than back in 08-09, and since tech didn't really change all that much in the past ten years or so, there might be greater structural pressure for startups in terms of hiring talent and market direction, because the big guys have so much liquidity and are entrenched in many different verticals. It'll be interesting to see how it all plays out.