When to raise money and when to sell
Luke Janssen
Lets have a look at the Lyft IPO that happened recently as an example of a huge success. Business Insider breaks it down pretty well here.
What I want to focus on is the two founders. Logan Green made almost 700m, and John Zimmer almost $500m. When BI did these calculations they were using a company valuation of $29 billion. So Logan and John’s share of that was 2.4% and 1.7% respectively.
Seems small (as a percentage) doesn’t it?
It will likely be even smaller because they won’t be able to sell their stake for a while due to the lock up, and I suspect the stock will continue to go down. Now think about how many companies don’t smash it as Lyft has, but who still dilute a lot. Let's say Lyft didn’t make it big and had to sell for a measly $500m. (Not a bad outcome, selling your company for $500m!). In this case the founders would have got 12m and 8.5m. But actually, they probably wouldn’t because of the way the subsequent investments are structured means that unless they really smash it the founders don’t get anything.
If you do many rounds of funding you better smash it or you won’t make very much in the end if anything. And you will have to deal with those many investors.
Remember the playing field is tipped in favor of the investors not the founders.
I won’t go into a long article about it but from this example and the research that I have done, and my own experiences, if you want to maximize what you make from selling your company you should sell before you take on too many investors.
At Tigerspike we did 2 rounds of investment, which isn’t a lot, since we managed to bootstrap for 8 years (not sure I recommend this — actually I do!). I started out with 40% of the company and ended up with 25%, which is actually a fairly big stake for a founder.
Each round of investment not only dilutes what you own personally but also means that you lose a little bit more control over the company’s future. It also means you have other investors that you have to deal with / listen to. One of our investors was helpful-ish in the beginning then became pretty useless and the other was not at all helpful; if anything they hindered the company by not really understanding the business and being too focused on short term profit.
The more investors you take on the more you dilute and the more you increase the risk that those investors destroy company value.
Many (especially investors) will say “we will help you get sales, and give you our advice… which is invaluable!”. In my experience with Tigerspike and from talking to many other founders, some of whom had companies worth many billions, this is almost never the case. Investors are never as close to your company as you are, and they will always overestimate their ability to bring you business, and massively overestimate the value of their own advice. So if you are raising money think about the money only, not the extra things the investor says he/she will bring, because they are very unlikely to materialize.
I did a calculation and worked out that had we sold Tigerspike to Aegis who invested in Tigerspike in 2011, I would have made almost as much as when we sold to Synnex in 2017. I have seen research that shows a decreasing founder return line as you take on more and more investment.
Its the companies that don’t do well that you never hear about, so bear that in mind when you think about money raising.