Looking for angel or venture capital? Go big or go home

By: Peter Adams Monday January 12, 2015 2 comments

By Peter Adams

The first "go/no-go" decision that investors make when looking at your deal may be "how big can this get?"

There are a lot of great small businesses that can make good returns for their owners, but which don't have the potential to get big enough to return money to investors. How do you know if your company is a "venture company" or just another small business?

Venture companies have the ability to scale big and fast. If you have a super-profitable lawn care business that needs more money for equipment and expansion, it doesn't have the kind of growth that venture investors are looking for because it's not likely to be able to scale beyond a regional scope.

There are always exceptions who can go big, like Starbucks did with moving coffee houses from local enterprises to international chains, but these big scale plays are risky and need to be accompanied by a rock solid rapid expansion strategy. As a rule of thumb, fast growth companies need to grow by at least 100% every year until exit.

Big companies need bigger companies who can acquire them when it comes time to execute the exit strategy. Sure, you can pursue the IPO (initial public offering/going public) option, but this is only realistic for a small percentage of high growth companies.

In most cases, a company will look for an acquisition to continue their growth and return capital to investors. If your plan is to be acquired, you need to be in a market that has plenty of large companies who can compete to acquire your business. If you're in a $100 million market, that means there aren't likely public companies big enough to acquire you.

Some VCs look only at companies that can be acquired for $1 billion or more. Angel investors can make good returns with exits at $25 - $250 million. To find out if your market is big enough, take a look at who is acquiring whom in your market and for how much.

Companies that grow fast and are attractive to acquirers have an "unfair advantage" that lets them grow fast and take over new markets. These companies aren't "me, too" offerings, like yet another coffee house chain, they have something unique and hard to replicate, so that competitors can be kept at bay and incumbents cannot easily copy your strategy.

Your unfair competitive advantage is what makes you attractive to acquirers who are willing to pay large multiples for your company.

Thinking Big is important for early stage companies seeking funding. Angel and venture capital investors are not there to buy you a job and investments that offer a royalty or percentage of profits can almost never return the kind of profits that these investors need to offset the huge risk that they are taking in investing in your business.

The risk to invest in a fast-growing company with an unfair competitive advantage is not much higher than investing in a local or regional small business, but the potential for high investor returns in big growth businesses are much higher. When you consider that as many as half of the businesses that an investor may invest in will return less than 1X on each dollar invested, investors need to target for a return of 10X or more within five years to be able to survive.

If your company can't return 10X in five years, take a look at your strategy and ask yourself if you're thinking big enough, or look to more appropriate sources for small business funding like SBA or other loan programs that support small businesses that are likely to stay that way.

Peter Adams

About the Author: Peter Adams

Peter Adams is co-author of Venture Capital for Dummies (John Wiley & Sons. 2013) and serves as the Executive Director of the Rockies Venture Club, America’s oldest angel investing group.  RVC is a non-profit organization furthering economic development in Colorado whose companies raised over $23 million in the past year.  RVC’s connects investors and entrepreneurs through conferences (Angel Capital Summit and Colorado Capital Conference), networking events, angel investing educational offerings and facilitation of Colorado’s largest angel investor groups.  Peter is the founder of the Biz Girls CEO Development Program for high school age girls and is an Adjunct Professor in the Colorado State University EMBA program. Peter holds a BA Degree from Colorado College, PhD/ABD from University of Colorado and an MBA from Regis University.

How big is too big? I guarantee that people roll their eyes when I propose that Payback will be a company more valuable than Google and Facebook combined... So, is that too big? Am I crazy crazy? Or crazy smart? It is going to be fun making it happen with RVC and Colorado help.
All the best,
Dave G.

- Dave Gottschalk

Hi Peter,
Excellent topic and suggestions. Yeah Dave's comment was relevant in that the last several years, entrepreneur pitch suggestions largely were to stay realistic, manageable. I go back to the days when a great idea could be scribbled on a napkin at a restaurant and by the second beer . And yes, with a few exceptions, many stood up as good to great as they moved through refinements. We also hear the day of the 80 page business plan is over and while most support - in theory - Lean practices - some investors still insist on the 80 page plan.
I prefer and usually coach my clients to create a personalized short journey that does the following:
A. Why - Create empathy and understanding for the need and problem you will solve. How it hits all of us or just a segment - either way.
B. Imagine....and go through the impact a solution can have immediately and then over time.
C. Stages - this has to infer how prepared you are and immediate priorities. This should help an investor to realize if you are at a foundational stage, or at that MVP stage popularized by Steven Blank of Lean, but listening to you and others plus my own experience, the idea has to scale, be seen as addressing something people can embrace and both inspire great teams and market engagement.
Love to see examples of how you apply it. Great topic. I think this gets lost somehow as entrepreneurs work with traditional incubators and risk averse investors.

- Bill Van Eron