As a venture-backed Founder, you will constantly be encouraged and pressured to shoot for a billion dollar valuation versus an early exit - but many times a delayed exit with a higher valuation hurts founders by leaving them to take on dramatically higher risk in a zero sum game, and only serves the investors interests.
Recently, 100Plus, a company I founded and was running, made this exact choice. After raising our seed round, we had the choice to continue on the venture treadmill and raise our series A, or to exit the company; We chose the latter. Here are some of the major factors that Founders should consider if they have the option to sell early versus taking a Series A:
Post-Venture Capital: Losing Solo Decision Power to Sell
Let's say you close your Series A round and your company is worth $100M, and you own half of the company after the financing. Soon after, an acquirer comes forth an makes an offer for $110M for the business. You would make $55M from the sale - this would be life-changing, generational wealth for. Here's the problem: your Series A investor very likely has blocking rights, and in this scenario, they will not be making a meaningful return on your company - they will simply be getting their original investment back at the $100M sale price. So what are they going to do? They will exercise their blocking rights. That means the sale will note happen - you're going to be forced to keep running the business. You're effectively an indentured servant; Once you take venture capital, you're realistically committed for 5+years.
Your risk profile increases dramatically with each round of funding
As you raise subsequent venture rounds, a new investor board member will join your company at each of those rounds and your control over the business will be perpetually eroded. Half of all founders are fired after their series A and more than 90% do not make it through to the exit of their company. The fact is that the odds are against you during your tenure through your company’s exit, and they get incrementally worst for each round each board member that you bring on. and
If you are replaced, and the person who takes your place cannot execute or raise money, your ownership is left weathering the storm. This happened to me that the first company I founded, Practice Fusion. After I departed the company, the board installed a CEO who was unable to raise another outside round and therefore the insider investors did a down round, which more than halved the value of the common shareholders overnight, including myself.
Many Founders Make More on an Early Exit Versus an IPO
Most Founders understand that they will get diluted, but that will obviously be offset by their value jumping significantly at each round. However, most founders only own between 2-6% or their companies at exit, and the average IPO is ~$250M.
Pre-series A, Founders will generally still own half of their company, therefore if there is a solid offer on the table, many times it can be nearly as lucrative as an IPO event, which can take years longer and carries massive risk for Founders. Case in point: Box Founder Aaron Levie owned 4% and his co-founder owned <2% at the IPO of the business they started after a decade of working on it.
Lastly, you cannot always exit when you when to; Market conditions need to be right and there needs to be a suitor who wants your product, service, and/or team to catalyze their business. For us at 100Plus, the confluence of those factors came together serendipitously and the timing was right for the Founders.
Throughout your Founder journey, there will be many people in your ear telling you to swing for the fences and go for a billion dollar outcome - just make sure all of those people aren't the benefactors of you giving up years of your life and taking on the tremendous risk of a start-up just to ride your coattails to line their pockets with cash.
