When Price Matters
Originally posted on 3/4/20
Collin Gutman is a Co-Founder and Partner at SaaS Ventures, with over a decade of cumulative experience as both an investor and a startup founder. Prior to founding SaaS Ventures, Collin co-founded Acceleprise, the world’s first pure enterprise tech accelerator. Collin also has been an entrepreneur, having founded WorkAmerica, a social impact workforce development startup. Collin holds a BA cum laude from Yale University, and is an avid DC sports fan.
Sheryl Sandberg said “when you’re invited on a rocket ship, you don’t ask valuation questions.” Of course, she’s right. But of course, if it were evident that a business were a rocket ship, venture capital would be easy. No business ever looks like – or is – a foolproof home run for investors at the time at which it is raising. There are always questions about the anticipated risk-reward of a funding round, whether it’s pre-seed or Series G.
But lots of entrepreneurs (and some investors) take her quote to mean that price doesn’t matter at all. Entrepreneurs believe they’re on a rocket ship (you better, if you’re devoting your life to this business), so investors shouldn’t care about price at all. But most rational people realize that startups fail – even promising and well-funded ones, and that investors need to make appropriate returns off their successes to make up for their failures. If the price on their winners is too high (again, except for the rare exceptions where Uber and Facebook’s early investors would have done extremely well regardless of the price they paid), they won’t produce ample returns. So price matters.
But for some deals it matters more than others.
If you’ve got a consumer tech deal that is binary – it’s either going to become a multi-billion dollar public company or fail, price matters less. Whether an early investor pays $6M or $12M pre isn’t really operative when it’s a $2B exit. While you’d love to pay a lower price, you should do the deal if you believe it’s going to hit that watermark. This can also apply to binary B2B deals – if your autonomous driving platform wins it wins, if it loses it loses.
But many great deals are non-binary. They may not have a market that likely supports a multi-billion dollar exit – they may be headed toward a solid 9 figure exit. There’s nothing wrong with a solid 9 figure exit, and many VCs will back you with that as your ambition – provided the price of the round provides ample ability for them to make their target return. Paying $6M versus $12M matters a lot if the exit is likely to be $150M in the best case.
Similarly, good businesses often have many exit opportunities. If the business grows each year at a 2 or even 3x rate, each year will bring a different valuation for offers. In businesses that go this way (the vast majority of them), price matters, as the team may decide an offer is “too good to pass up.” If that happens, it should be a home run for the early investors as well as the company’s management – and this alignment only happens if early rounds were priced appropriately. Having a $100M exit having only sold 4% of the company would sound great to a management team, but investors are likely not going to be happy that their $2M on $48 was only allowed to run to $100M before the founders decided to sell.
So if you’re a high risk-high reward lottery ticket type of a company, you will find investors along for the ride. And they’ll pay up. And they’ll win big or lose big. But for most companies, founders need to realize that they want aligned investors, which means price matters.