How Can This Be A Billion Dollar Company?

I was in the bathroom this morning catching up on all the blogs (via Feedly) that I hadn’t read this week since my head was in a bunch of other things. I came across one from Nic Brisbourne (Forward Partners) titled I’m a stock picker. I wish he had called it “This Unicorn Thing Is Bullshit For Early Stage Investing” but I think he’s a little more restrained than I am.

My original title for this post was “How Can This Be A Billion Dollar Company and other bullshit VCs ask early stage companies.”  It was asked by VCs to several companies I’m involved in last week. While I get why a late stage investor would ask the question when the valuation is in the $250 million range, I really don’t understand why a seed investor would ask this question when the valuation is in the $5m range.

Now, I’ve invested in a few unicorns in my investing career, including at least one unicorn that went bankrupt a few years later (I guess that’s a dead unicorn.) But I’ve also invested in a number of companies that have had exits between $100m and $1b that resulted in much larger returns for me, both on an absolute basis as well as a relative basis, than unicorns have for their later stage investors.

I’ve never, ever felt like the “billion dollar” aspiration, which we are now all calling “unicorn”, made any sense as the financial goal of the company. Nor have I felt it made sense as a VC investing strategy, especially for early stage investors. We never use the phrase “unicorn” in our language at Foundry Group and while we aspire to have extraordinarily valuable companies, we never approach it from the perspective of “could this be a billion dollar company” when we first invest.

Instead, we focus on whether or not we think we can make at least 10 times our money on our investment. Our view of a strong success in an investment in a 10x return. Our view is simple – we don’t really view anything below 3x return a success. Sure – it’s nice, but that wasn’t a real success. 5x – now that’s nice. 10x – ok – now we are in the success zone. 25x – superb. 50x or more – awesomeness.

We also know that when we invest in three people and an MVP, we have absolutely no idea whether this can be a billion dollar company. Nor do we care – we are much more focused on the product and the founders. Do we think they are amazing and deeply obsessed with their product? Do we understand their vision? Do we have affinity for the product? Do we believe that a real business can be created and we can get at least a 10x return on our investment at this entry point?

I recognize other VCs have different strategies than us, especially when they are investing at a later stage. Applying our model, if the entry point valuation is $100m or more, then you do have to believe that the company is going to be able to be worth over $1 billion if you use a 10x filter. But in my experience, most later stage investors are focused on a smaller absolute return as a threshold – usually in the 3x to 5x range. And, very late stage / pre-IPO investors already investing in companies worth over $1 billion are interested in an even smaller absolute return, often being delighted with 2x in a relatively short period of time.

So, let’s zone this in on an early stage discussion. Should the question “how can this be a $1 billion company” be a useful to question at the seed stage? I don’t think so. If it’s simply being used to elicit a response and understand what the entrepreneurs’ aspiration is, that’s fine. But if I asked this question and an entrepreneur responded with “I have no fucking idea – but I’m going to do everything I know how to do to figure it out” I’d be delighted with that response.

  • R. Narayan Chowdhury

    Most LP behavior is built upon some power-law analytics completed in mid-nineties by various fund-of-funds and consultants. To say the venture world has changed would be a mild understatement. Even worse, now every outlier (WhatsApp) is a justification for all sorts of scary behavior. I personally worry about the 2014 and 2015 vintages. When everyone believes they have to be in a unicorn, price be damned and diligence be damned, there’s going to be some serious negative surprises. VC is sexy again…crap. Still, I somehow doubt it’s the carnage wrought by loose credit circa 2008. It will probably serve to justify the Kauffman report.

    • http://www.feld.com bfeld

      You are a wise man! When the serious negative surprises appear, there will be a new round of justification by VCs for what happened. We are glad to have you as one of our investors.

      • ObjectMethodology.com

        Sure… It’s just like the financial news programs. At beginning of day they can’t tell you what’s gonna’ happen. But at day end they all know exactly why it went the way it did. It’s all about sales. If every morning when you wake up the financial news would say: “We have no idea what to do because there is no way to know.” That wouldn’t create a good trading industry. Just like if you walked into a restaurant and the greeter said: “We can’t be sure you’ll get the food you order.” How many times would you stop at that restaurant?

  • John Rodley

    While we’re talking about The B Word when it comes to valuation, what are your thoughts about it with respect to markets? Can you start an investable company with an initial product whose TAM isn’t 1B?

    • http://www.feld.com bfeld

      Many of the companies I’ve invested in created entirely new markets. Or, any analysis of their market at the time that I made the investment was completely specious. I give you Makerbot and Fitbit as two easy examples. In each case, there was no clear TAM. But, you could create a TAM model that looked huge (e..g everyone on the planet will want one of these.)

      I find TAM analysis at the early stage, especially with the elusive “disruptive tech” to be an irrelevant reference point. So I ignore it. Instead, we focus on understanding the themes (http://www.foundrygroup.com/themes) we invest in extremely well.

  • http://www.twitter.com/tomnocera Tom_Nocera

    Thanks for the VC insights, Brad.

    • http://www.feld.com bfeld

      Sure @Tom_Nocera:disqus. I’ve got a bunch more coming – all based on my current reality, so of which is my own personal fatigue of the “VC is sexy again” problem.

      • http://about.me/bradleyjoyce bradleyjoyce

        “VC is sexy again” problem.

        <3

  • http://www.theequitykicker.com brisbourne

    Thanks Brad. As well as multiple we think about whether the investment can return an value amount that’s meaningful for our fund (£20m). Do you also look at absolute return potential?

    Also, it’s Forward Partners, not Ventures….

    • http://www.feld.com bfeld

      We do focus on absolute return, but in the context of our overall strategy (e.g. it’s a second order effect). Our funds are $225m in size and we generally invest $5m to $15m in a company, so 10x effectively sizes the return. Sure – we’ll be delighted with a 10x return on a $1m investment – that’s great also, but that would be an exception since most of the companies we fund will end up consuming more than $1m from us.

      Fixing the name now – sorry about that.

      • http://www.theequitykicker.com brisbourne

        Thanks for changing the post to say Forward Partners. I always feel a bit of a dick when I’m precious about our brand, but I guess it’s important.

        • http://www.feld.com bfeld

          Don’t feel bad at all. Whenever someone calls us The Foundry Group, I remind them that it’s just Foundry Group (or the Foundry Group).

  • http://www.virtuallybing.com/ Bing Chou

    In addition to affecting an investor’s funding decision (rightly or wrongly) asking the question “How does this startup become a billion dollar company?” impacts something at least as important: the entrepreneur’s behavior. Unfortunately not enough entrepreneurs have the balls to answer “I have no fucking idea…” but instead try to find a path to billion dollar valuations to increase their chances of being funded. Last time I checked there are plenty of startups worth pursuing that will never have a billion dollar valuation.

    • http://www.feld.com bfeld

      Well said Bing – totally agree. The game to “answer the VCs question to get funding” which has nothing to do with what the entrepreneurs are actually trying to do, or know, or think, is a bad game to play.

    • http://bicycl.co/ Peter Maffey

      Yes, Bing. And how many entrepreneurs & companies (and VC’s) have gone bust trying to shoot for the moon? How many viable businesses creating real value (and jobs) would still exist if the people involved hadn’t gotten sucked into this mentality and ridden off a cliff believing their good horse was a flying unicorn? A sustainable ecosystem should not be built around the outliers (unicorns). But right now, that’s the way it is. It’s not an easy change to make.

  • ObjectMethodology.com

    Isn’t it about knowing your goal? If a VC has the goal of investing only in companies that will reach $1B shouldn’t they ask the $1B question? If you can’t define a wildest dreams road map to your destination should you start the journey? For example if your goal is to drive from Denver to Hawaii shouldn’t you lay out a map *before* you leave? If not, when you get to the coast, you’ll find it may have been an unrealistic goal.

    • http://www.feld.com bfeld

      I don’t think your analogy works – the path from Denver to Hawaii, while there are different ones, are static. The path to success for a company, from inception, is against a very dynamic backdrop.

      And – if the VCs goal is to invest in companies that reach $1b, what’s the difference between them only investing at $800m as the starting point. Sure – I agree that having a goal makes sense, but I think the goal of an early stage company “to become a $1b company some day” is a very limiting goal.

  • http://www.dudumimran.com/ Dudu Mimran

    Hi Brad,

    If you are focused on the team mainly I can understand that. But if you also perceive the product as part of the future (unless pivoting does not count) then each product has x potential with future variable. If it is a multi market potential it is great but still quantifiable. There are always comparable companies based on the potential customer base.

    So it is not that you don’t ask, you just ask for $100MM exit. Or decide on your own.

    Dudu

    • http://www.feld.com bfeld

      But I don’t think you have any way of determining that at the beginning of the journey. And I’d argue that what you learn in the first couple of years of the company has an enormous amount to do with the answer, which is why it’s not that relevant at the beginning.

      • http://www.dudumimran.com/ Dudu Mimran

        I agree on that though when you have written that you evaluate also based on the product I was wondering on what criteria you judge it? It understood that you think that current potential is less relevant.

        Very hard to ignore this aspect during evaluation. I think that I am very biased by the potential in the early days though definitely it’s not the main criteria.

        • http://www.feld.com bfeld

          Our top level filter is our themes (http://www.foundrygroup.com/themes). The we focus on product and the founders – specifically, are they obsessed about their product.

  • http://www.pointsandfigures.com/ pointsnfigures

    As a seed investor, I’d prefer to invest in companies that at least have the potential to be a billion dollar company. The risk is so great and so many fail that you need a chance at a home run once in a while to make it all work out. There is a great seed investing strategy in the midwest where they deliberately avoid billion dollar companies. They look for companies that are going to exit between $20-$50M. Reason, then all the initial money at the table can be the money that does all the rounds until exit-and they won’t need VC. Their fear is that as soon as a VC gets involved, the value of the company has to be way north of $100M for the VC to make money and that is a different kind of company than the $50M company. Additionally, since there is so little money in the Midwest, and not too many corps are buying up companies, they need to target a path. The strategy has worked for some angel groups in Ohio.

    • http://www.feld.com bfeld

      But how do you determine this at the seed level? I’d argue that it’s a total guess.

      • http://www.pointsandfigures.com/ pointsnfigures

        For me, it is a total guess.

        For the angels that want to invest in 2-4M value companies and sell at a 30-50M valuation, they have specific criteria they look for in market, industry, vertical etc. They also have a longer courtship with the entrepreneur to make sure they are on board.

      • http://byJess.net/ Jess Bachman

        Maybe its like the Supreme Court and pornography, you know it when you see it.

    • AJ

      This is changing specifically in the Midwest. Check out Drive Capital. They have a very different perspective and a ton of $

      • http://www.pointsandfigures.com/ pointsnfigures

        Drive and I are co-invested on KapowEvents.com. (I was a seed investor, they came in on the third round). It’s one fund of $250M. Lightbank has $200M. That’s pretty much it when we think about funds that are larger. There are no billion dollar funds in the Midwest like a16z for example.

        We need more capital here. I wrote about it here: http://pointsandfigures.com/2014/06/27/24338/ and Crain’s Chicago echoed it: http://www.chicagobusiness.com/article/20140705/ISSUE07/307059983/plant-venture-seeds-with-midwest-capital

        In states like Wisconsin or Ohio, how many startups have sold over $100M in the last ten years? How many have been bought by local corporations for over $100M in the last ten years?

  • davidcowan

    +1, brother.

  • https://twitter.com/johnmccarthy johnmccarthy

    Thanks, hope this post will help reduce the number of requests I get from seed stage cos for financial models that show a pathway to $1 billion.

    • http://www.feld.com bfeld

      Doubtful.

      • https://twitter.com/johnmccarthy johnmccarthy

        Gotta Believe!!

  • http://twitter.com/jimhirshfield JimHirshfield

    You got me at “I was in the bathroom this morning catching up on all the blogs…”

    • http://www.feld.com bfeld

      Yeah, well, truth…

      • http://twitter.com/jimhirshfield JimHirshfield

        Shit happens

        • http://www.feld.com bfeld

          Almost every day.

          • http://twitter.com/jimhirshfield JimHirshfield

            That’s what I like about you. You’re a regular guy in the end.

  • http://www.techleaders.vc Francois Mazoudier

    amen!

  • ed

    Awesome post… I’m definitely going to use that as an answer from now on

    • http://www.feld.com bfeld

      It’s all yours! I use it regularly to describe what I’m thinking when asked about an investment of mine.

  • sandy kory

    I agree with most of the logic here but I’d say your status as a super successful investor lets you glide over one key issue. A key issue for most seed stage angel investments is if it will be able to raise additional rounds. One good filter to look at that is thinking about it from a Series A VC perspective–and many of those VC’s care a lot about the billion dollar company goal. So while it’s true that you can make a great return on a seed deal that doesn’t become a billion dollar company, a seed deal can struggle to get an A (and therefore see its growth hobbled) if VC’s don’t see big potential. However, a seed stage company that has raised money from an elite investor like FG is going to have a strong positive signal going into an A, so I’d say if FG is investing in the seed then the billion dollar question becomes much less relevant.

    • http://www.feld.com bfeld

      While I’m sure this is some positive signaling to have us involved, I don’t believe it’s impactful. When I look at how hard we have to work to get others to fund companies we’ve invested in beyond the Series A round, and how often the “how is this a billion dollar business?” question comes up, I don’t think there’s much to the reputation impact in the face of this particular bias. Which – by the way – is fine with me. I only want co-investors who believe in the company I’m involved in, not one’s who have created their own narrative about “hey Brad’s smart – let’s pile on.”

  • http://www.heyni.co Nicolas Wittenborn

    I agree that the question is abundant, but… assuming the average valuation is realistically more around $10M post, you are investing $2M and are facing 50% dilution over the company’s lifetime (because you are a small fund and have limited follow-on capacity), then you actually need the $500m-1B exits to get into ‘superb’ (25x+) or ‘awesome’ territory (50x+).

    Or not? :)

    • http://www.feld.com bfeld

      Sure, but there are lots of assumptions there. Our average entry valuation for a seed investment is not $10m post, but rather closer to $5m post. We generally own more than 20% of the companies as part of our strategy is to be syndication agnostic. And I’m perfectly happy knocking out 10x over and over again and delighted when we end up with something 25x or more, so I don’t have to shoot for that. And, half of my exits that were worth 25x or more were over $1b in outcome. So – I think the :) is the ultimate conclusion.

  • williamhertling

    I think this billion dollar question is one of the great stiflers of innovation in really large companies. They need billion dollar innovations to make a meaningful impact at their scale. But if they ask that question of every prospective business idea, then most ideas get killed way too early, before there’s any reasonable hope of knowing whether it could grow to that size.

    The alternative would be to fund good ideas, and if they turn out not to be large enough to make a dent, then they could be spun out or sold.

    • http://www.feld.com bfeld

      Yup! One of the biggest inhibitors of corporation innovation is exactly this. It’s part of why so many tech companies acquire startup companies as they are ramping and are willing to pay meaningful dollars for them. They know they have the machinery at the large company to dramatically amplify distribution and sales – once they know something is working.

  • Ferenc Huszar

    Great criticism of the simple minded ‘can this be a billion dollar company’ filter. However, I do not believe that this billion dollar question is a completely irrelevant one to ask at seed stage – even from a pure ROI standpoint.

    Even if the only thing you care about is returns, some assumptions about the exit value need to factor into your calculations when you come up with that 10x number.

    If you are a seed-stage investor, follow-on funding influences your returns: either you will continue to participate at later stages, and when you do, your effective ROI on all money invested will be effected. Or if all future funding rounds will be done by other investors, your initial investment will be diluted.

    Either way, your effective ROI will depend on both the amount of follow-on funding raised and the eventual exit value. As a seed stage investor, as the exit value increases, your chances of achieving >=10x returns will be influenced less and less by follow-on funding. In this context, when people are asking ‘how is this worth a billion dollars?’ it is really just a proxy to asking: “How am I going to guarantee I get at least 10x my money back irrespective of future investments?”

    But in any case, in order to come up with any sensible estimate of potential returns, you do need to reason about how big the company is going to get, and how much funding they will need to get there. And you need to somehow factor in uncertainties about these guesses.

    • http://www.feld.com bfeld

      All your logic in terms of follow on financing dynamics are correct. My meta point is that you really can’t answer the question with anything other than random guesses, and the random guesses don’t actually help with the analysis of whether you invest in the company.

      The long term financing strategy does can an impact, although it is a barbell effect. If you are very capital efficient, it’s easier to get 10x. If you have a huge absolute $ outcome, it generally doesn’t matter what you raise (as long as it is at ever increasing valuations. Life is often tough in the middle – lots of money raised “going for the huge outcome” and then not getting the huge outcome.

      Knowing what kind of entrepreneur (I’m going to consume a lot of capital, or I’m going to consume a little capital) is super helpful in this thought process.

      • Ferenc Huszar

        Yes, I agree, and I liked your final point that the way the entrepreneur answers this question tells a lot about their aspirations and probably also their personality. I agree that at seed stage unquantifiable things such as the quality of team and the idea are important.

        But I think sometimes one can be better than ‘random’ guesses. At least you can quantify your subjective probabilities that the company is going to be a certain size. Notice I wrote probabilities, that is from the beginning you have to assume that your guesses will not be exact. After all, if you can’t answer the question about exit value better than random guesses, how can you answer the question about 10x returns any more accurately?

        Again, I totally agree with your point: given the returns on individual investments and the amount invested in each, the size of exits or subsequent valuation of companies is completely irrelevant for the performance of the fund. So the investment decision should ultimately depend on your estimates of theese multiples – but these are at least as hard to argue about as absolute numbers.

  • Rob

    10x in how many years? The multiple ranges you provide are great to know, but without a timeframe attached to them it doesn’t translate into an IRR, which is really what you’re targeting, right? What kind of time frames do you attach to each of those multiples you gave?

    • http://www.feld.com bfeld

      Actually we are much more focused on cash on cash multiples instead of IRR.
      It’s likely worth a longer blog post given the amount of focus on IRR.
      Based on how VC funds work, including capital draws, recycling, and distribution mechanics I’ve found IRR to be a lagging indicator, easy to game, and largely irrelevant.

      • Rob

        That’s fair. The IRR isn’t a silver bullet. But still, isn’t there a time frame you have to fit that 10x into for it to fall into the “success zone”? In other words, I’m assuming that you wouldn’t consider 10x in 30 years a success, because it doesn’t fit into the funds lifecycle. Is this correct? If so, what’s your cutoff in terms of years for 10x to no longer be in the success zone?

        • http://www.feld.com bfeld

          It’s complicated. Like most VC funds, ours are 10 year funds. We have two one-year extensions, which makes them 12 year funds. But we are still managing funds from 1999 and 2000 making them 15 and 14 year old fund (and the 2000 one has at least three more years to go.)

          So the “10 year fund constraint” is generally artificial. Furthermore, if we do a seed investment in year three, we are in year 13 after 10 years, vs. if we do a mid-stage investment in year 1.

          At some intellectual level, it’s too hard to get your mind around this (it’s over-optimization) so we end up in a zone where the typical investment life for us is 5 – 10 years with some outliers on either side.
          I’ve always liked this particular chart – http://onematchventures.com/irr-analysis-years-invested-vs-return-multiple/ – as a way to get your mind around this. Even at 10 years, a 10x return is going to have an IRR of 26%. That’s just fine with me.

  • Adam Quinton

    Thanks for the great post Brad. Another point here is that if the person asking the $1bn question is taking the answer seriously then it can act as a gender screen – albeit likely based on unconscious bias. Be interested whether you agree based on your experience but generally speaking guys are, I think, more comfortable giving a strong affirmative answer (that may well be b/s) to this question. Whereas I sense many women entrepreneurs might be less comfortable doing so. If the listener interprets strong affirmative answers as showing more confidence, commitment, drive etc, and hence deems the business a more compelling investment, then the style of the answer is going to tilt them towards male founders. Yet the women founders may be just as confident, committed, driven etc. ie using the question as a decision criteria which the investor thinks is somehow objective is nothing of the kind. Rather they assessing style not substance.

    • http://about.me/kirsten.lambertsen Kirsten Lambertsen

      Really interesting and thoughtful take on this. I have to confess, I think I’ve learned to give bold (brash?) answers to these kinds of questions. On the other hand, I’ve learned to put the person who asks such a question on my ‘probably not for me’ list.

      • http://www.feld.com bfeld

        Bold and brash is good. Having the soft filter (e.g. “this person is probably not for me”) is even better.

    • http://www.insightxm.com Leonora Valvo

      I agree Adam. Women founders do tend to be more pragmatic. Perhaps the better question is – can this be a billion dollar company with you at the helm? I think women are more likely to answer that question honestly. Many, many founders, like Brad, are in it for the 5-10x exit with only a few truly aspiring to run a $1B company. Belies most entrepreneurs’ DNA.

      • Kathryn Minshew

        I don’t agree – I think this question would lead to the same result. In fact, three years ago I would have given a very different answer to today. I’d posit that the most successful founders may be those that grow and develop into the leader the company needs for the long haul, rather than those that simply have the ability to claim with conviction (especially those who are early 20s and at seed stage) that they are sticking around.

        • http://www.insightxm.com Leonora Valvo

          There’s long and then there’s long. There are definitely examples of $1B hockey stick unicorns. I am in complete agreement about leadership – a view you need to take to get a company to $100M – as very few are overnight successes.

    • Kathryn Minshew

      Agree with you, Adam.

      When I was getting The Muse off the ground, I believed the opportunity was massive but wasn’t always/often able to convince others we had a foolproof path to $1B in value. Obvious expressions of entrepreneurial bravado didn’t come easily at first, though as Kirsten notes, you learn (and there’s some really interesting research on male/female children & expressions of confidence here as well). But I’d wager the point about it being an unintentional gender screen is valid.

    • Gillian Morris

      An interesting point. One thing which doesn’t get talked about enough is the tremendous pressure on founders to inflate and/or outright lie about your apps’ success and potential: fake it till you make it. For whatever reason I do think men succumb to this temptation much more frequently than women. As a result, it looks like the men are “killing it” and the women who take a more realistic view are left behind. As a female founder, I’ve had to adjust my own rhetoric to only focus on our standout numbers and not necessarily always give the full picture.

      I remember one time being at a competition where there was an opportunity to pitch a VC from NEA. The VC was selecting the entrepreneur who got to pitch based on traction. She asked for someone who had a product in the market, who had over 1000 users, who had paying users, who had over $10,000 in revenue. It came down to one guy and me and I admitted that we had the first three criteria but didn’t yet have $10,000 in revenue, so he got to pitch. He began his presentation and it became quickly apparent that he hadn’t actually released his product into the marketplace, much less gained paying users or 10K in revenue. The VC didn’t bat an eye and no one in the audience seemed to think it was weird that this guy had just blatantly lied in order to get the pitch slot. But hey, he got the opportunity and I didn’t, so maybe I was the fool in that situation.

      I don’t know whether that was a gender thing or just me not yet knowing the unwritten rules of the game. It would be really refreshing if there were more VCs who would hear founders say “I don’t know if I’m building a billion-dollar company” and not judge them. But it really just is so unbelievably rare. VCs want to hear a certain thing and the founders that get ahead are often the ones that speak the language the VCs want to hear rather than ones who focus on reality.

    • http://www.infomous.com/ Scarlett Sieber

      This is an interesting question and one I have heard before. As Gillian mentioned, there is a tremendous about of pressure to inflate numbers. However, when I go to events where investors are speaking they openly say that in early stages, most numbers are pulled from thin air. I do also agree that men are more confident “faking” the numbers (as studies have shown).

      I have also heard that investors trust the entrepreneurs that use a conservative number because they aren’t reaching and therefore trust them more. But, now that I think about it, both the investors that said this were women.

    • http://www.feld.com bfeld

      Yup – great example / explanation of the potential of unconscious bias.

    • Sharon R. Brown

      A great take on this one Adam. I made a comment above that “the $1b question is more superficial than substantive.” Now, I think there is also value in gauging whether the investor is measuring the founder’s capability, aspiration, or hem line.

  • http://www.lisaabeyta.com/ Lisa Abeyta

    My favorite chat with an investor (from Boulder, no less) began with, “Let’s not worry with projections we all know are a stab in the dark. Let’s talk about the problem you’re solving and why your solution is going to work.” We were too early for them, but they gained my deepest respect.

  • Lauren Flanagan

    I don’t know it about it being a gender filter, but it’s definitely a bullshit question for an early stage company in my book. At BELLE Capital USA, we look for companies that can get to $20+MM in 5 years or less and we ask the leadership team to walk us through detailed models of how they plan to achieve this growth, knowing full well such models are guesstimates at best. However, it gives us the opportunity to assess the management team. We are building our early stage portfolio with more of a “moneyball” eye. While 10-12x returns are great and the target of course, we do consider a portfolio of 3-5x returns a good one, especially if we have fewer losers than average, which so far has been the case. Big knocks on wood!!! :) Agree with Brad, cash on cash returns are much more important than IRR.

  • Sharon R. Brown

    Great Post Brad… You have highlighted a question that I always thought was more of a litmus test than anything else. It is good to have a VCs perspective that, in most cases, the $1b question is more superficial than substantive. I like the point that there may be some value in the investor gauging the founder’s response to the question. Given what you’ve shared, I am inclined to believe that there are other ways investors can test a founder’s aspiration.

    Since you shed light on a key issue on which I always a insight, I’m curious about how VCs view “good return.” As you noted, ‘VCs have different strategies’ when it comes to achieving a return; from my point-of-view, a higher return is always better. However, I would like your thoughts on why a return of 3x may be deemed unsuccessful, in most cases? My assumption is that this primarily has to do with the opportunity cost for the VC. Are there other considerations that a founder may not be aware?

    • http://www.feld.com bfeld

      The litmus test issue is that many people are now passing because “I don’t think this can be a $1b company” or “You didn’t prove to me how this could be a $1b company.” That’s a fail on the part of the VC in my book.

      Some VCs are happy with 3x. It depends on stage and entry point. As an early stage investor, we know we will have many failures, so for our fund dynamic to work, we need big winners. Our strategy is to invest a consistent amount of money in each company over it’s life ($5m – $15m) so the multiple math works in our strategy.

  • Luke J Fitzpatrick

    VC’s tend to invest in close-knit groups, follow the herd so to speak. One big name comes, others’ flock. 10x filter is a good measure and I can see why it decreases as time passes – whilst risk increases. Back to the question – VC’s follow over VC’s, which can lead to the overvaluation of a startup.

  • http://skaag.net Skaag Argonius

    We’re going to be a $2B company, and we know it.

  • http://lionsharp.com Shant Kirmizian

    AGREED! I feel the same way when asked, “How many sales are you going to have?” We’re going to bust our asses to get as many as possible, but I can’t give you a number, as we’re first-movers.

  • http://www.semilshah.com/ Semil Shah

    On this line (“Instead, we focus on whether or not we think we can make at least 10 times our money on our investment.”), I’m always surprised by how many people not only won’t admit this, but they’ll go to great lengths to convince others the opposite is true.

    • http://www.feld.com bfeld

      Yeah – it has never made sense to me. I know my job and am unambiguous about it. Everything else is HOW I do my job.

    • Sedikia Djilali

      Bonne chance

  • http://blog.trak.io/ Liam Gooding

    We’re currently raising a very conservative seed round at Trak.io, and I was asked this exact thing at one of the meetings I had a few weeks ago (I wont say which London firm) and it raised an immediate red flag for me!

    It went something like this:

    The investor in question said about midway through the meeting “I don’t think this could become a billion dollar company. I can see it’s a great product, growing market, but don’t think it’s a billion dollar company which is what we need to invest in”

    My reply was “No one sitting around this table has ever built a billion dollar company, invested in a billion dollar company, or being an early employee at a billion dollar company. So respectfully, how would you even know what a billion dollar company looked like at this stage? With that said, the one thing I can promise you is that I have every intention of making myself and my cofounder very, very wealthy from this company, and that means a very, very large exit. It might not be a billion dollar exit, but I can promise it will make you much more than a 10x return on the money I’m asking for today…”

    …. they seemed to hate that answer… ! :-/

    But as I say, that told me a lot about what they’d be like to work with and obviously we wouldn’t have been compatible!

    • http://www.feld.com bfeld

      I LOVED your response.

      • http://blog.trak.io/ Liam Gooding

        Thanks. Maybe I’m speaking to the wrong investors ;-)

  • allenrobinson6135

    I’m definitely a power user – would be great to test the product. Hit me on twitter if you like

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  • charlyjenseniks

    Shepherd Book quote / case closed!

  • nime76

    good

  • http://pornhero.org Hazza Jay

    Hello Brad, this might be a little bit off topic. I had an experience the other day that changed my perspective about VCs and angels. I’d like to hear your opinion on it.

    We have a cricket league here in Melbourne that has an auction system for selecting players. As a captain of one of the teams, I am the decision maker when it comes to selecting players for the team. When I looked at the list, the skill/talent of the players varied. Hence, I began cutting out those that I believed wouldn’t contribute results during games.

    After a while, it came down to a group of players that had similar skills/talents. Some of the players I personally knew, others were complete strangers. It was difficult to select from this group of players. But then I came to the conclusion: “who will I have fun playing with over the next few months?” And then it kind of clicked in my head, that hey maybe this is how investors think when they’re looking for startups & founders to invest in.

    If its going to be a journey, who am I going to have fun with?

    Is this true?

    • http://www.feld.com bfeld

      It is a big part of my decision making process.

      • http://pornhero.org Hazza Jay

        Thanks for responding, Brad.

    • http://heyter.net hey!™ Terra-network

      VC fun should be enjoying a Cuban cigar, authentic Tequila and a money counting machine.

      The journey should be tenacious and arduous with a smile from time to time as a team member randomly nails another financial “hell yea!”

      b

  • EllenMalloy

    Folks on my side of the table can look at this question as a reason to punch the other person or a reason to think harder. For my startup, the billion dollar question became the grist for us to keep digging in and figuring things out.

    Everything in life is best viewed through the Chinese parable of the Farmer and His Horse: could be good, could be bad, don’t know.

    • http://www.feld.com bfeld

      Thinking harder is good!

  • http://www.brainbender.org alexander Lee Silva

    You must be talking about me and what I am doing. I’m in the process of trying to purposely build a
    billion dollar startup. I modeled my company after Uber. I have been setting up for a few years. I don’t know how long it will take but I will do it. I built the infrastructure for my company to have
    315 positions of a global corporation. This is a module in Drupal to allow me to create new corporations from each product with the same infrastructure system. That way I can segment my company into a bunch of companies. That’s already finished and built on openpublic. I have a guy that
    can handle the hiring already for the first corp. I have 4 different software products near complete (1 is for defense DOD intelligence community) and 10 more early to mid stage development. I also
    just starting to work on several robotic software products and soon health
    hardware products to try to bring my company to this stage. I have a
    few technology breakthroughs for intelligence and defense as well as game design and I am
    trying to find the right solicitation to get a couple projects into. It may be a dream to be a
    unicorn and I do have no fucking idea how I will get it done in the end but I have a good idea of the direction I need to go what what I need to build in software to make it happen. I
    know my company is going to become one sooner or later with all my
    breakthrough products, software and hardware ideas. I just need a big team under me listening to my ideas to make it happen faster. I may be a creative genius and idiot savant but you can call me fearless leader because I am going after the dream. I will be a billion dollar startup someday.

  • http://adolic.com Adolic Media Enterprise

    How it is possible?

  • Nadia

    Great post!

  • legalitastoksin

    nothing impossible in life..i think it’s work..thanks for share

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