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Ask YC: What to do when VCs think opportunity/market is too small?
Hi all, I've been a reader here since the beginning but never posted. Anyway, my question:
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&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.
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!
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".
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.
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?
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.
Any comments ?
- rms 19y agoYou have revenue coming in! This makes you eligible for loans, especially once your business is two years old.
- theyoungceo 19y agoBanks 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.
- dhouston 19y agohow 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 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.
- optimal 19y agoI 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 19y agooptimal -- 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 19y agoI'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!
- theyoungceo 19y agore: business plan money --> Customer base is growing fast. This business has a big hardware component to it -- one that requires remote devices at customer sites and lots of servers. (Think 100's of remote devices communicating 24x7) I spent most of the money buying up enterprise-ready servers to deal with a wave of business that is on the verge of closing, and backup devices to be ready for the wave.
- theyoungceo 19y ago-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.
- theyoungceo 19y agothe.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.
- mrtron 19y agoAngels 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.
- theyoungceo 19y agoBingo - dead on; I couldn't agree more. Now where do I find these guys ? :) I think that is the root of the problem.
- mrtron 19y agoIf I was offering that service, I would be charging for it. :)
- shayan 19y agoNot 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 http://news.ycombinator.com/item?id=77608
- marcus 19y agoThat 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.
- shayan 19y agoof 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!)
- shayan 19y ago@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)
- rms 19y agoAlso -- 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.