Valuing Your Startup

Valuing Your Startup with 10xU

It’s an amazing feeling to see $2 million show up in your company’s bank account! Here’s the playbook we used to raise our series A round for SlideRocket:

  1. Build an MVP and get traction
  2. Figure out how much money to raise
  3. Pitch a ton of investors (including strategic)
  4. Solve for % ownership rather than pre-money valuation

(And if you want more info then bring your questions to my free workshop on valuing your startup this Thursday, 6/22/2017 at 6p ET)

1. Build an MVP and get traction

SlideRocket was presentations in the cloud, originally targeted at business users.

I started the company with two other people and all three of us had income from other businesses. We were building the next generation of my presentation company, so I had customers we were planning to bring over to the new system when it was ready. My partners had months of severance from their last startup.

So we were able to self-finance the idea and prototype stages. We talked about raising money via a convertible note, but decided to wait until we had more traction in order to do a larger round and get better terms.

We had the advantage of starting with product market fit because I already had paying customers, so we focused on building what they wanted. We did a pre-announcement on TechCrunch in March 2008 and started getting signups to our waitlist.

We launched six months later in October, and we raised money in December. So our investors could clearly see how quickly users were adopting our service, and we took much of the guesswork — and risk — out of the equation.

2. Figure out how much money to raise

If you’re in the idea stage then shoot for $25k to $50k from friends and family. Or convince your first big customer to pre-pay. Or save up enough money that you can fund it yourself like we did.

At SlideRocket we had a waitlist of thousands of people, both free and paying users (although no real revenue yet), and customers from my previous company ready to migrate.

We built out five years of financial projections and decided to raise $2 million based on projected revenue and headcount.

For companies in our position, Sari Azout — partner at Level Ventures and Entrepreneur-in-residence at Rokk3r Labs — recommends budgeting $15k per person per month for 18 months to cover salary, office space, equipment, general costs like servers, and a margin of error.

So at that rate our $2 million would give us 7.5 people for 18 months, which is more or less what we did with the money. We had two founders at that point and we hired a VP of marketing, a lead developer, a head of QA, an inside sales rep, and a head of business development.

We did, in fact, go through the money in about 18 months.

3. Pitch a ton of investors (including strategic)

Fundraising is a lot like dating, and we had to kiss a lot of frogs (no offense to anyone we met with). The people we talked to fell into two categories: venture capital firms (VCs) and strategic investors.

Strategic investors are larger companies that invest in startups, and we had one big-time Web services firm who found us via our TechCrunch article. That led to a bunch of productive conversations and they ultimately offered to invest.

We were meeting with VCs and other potential strategic investors at the same time. Most of these meetings didn’t go anywhere, and sometimes people were interested but we could tell they weren’t the right fit. One VC wanted us to change both our business model and our behavior — which is a lot to ask of a startup!

We got many of our investor introductions through friends and colleagues. We also hired DLA Piper, a law firm with a big Silicon Valley presence, who helped us with our pitch deck and made a few intros through their startup pipeline program. They cut us a deal where they didn’t charge us until we raised money, at which point we cut them a (big) check plus some warrants that they made money on when we were acquired a few years later.

Sometimes the VCs would introduce us to other potential investors, either because they weren’t interested or because they didn’t want to lead the round. We met amazing people like Tim Draper and Fred Wilson, and we spent a bunch of time on Sand Hill Road.

4. You can solve for % ownership rather than pre-money valuation

When people talk about “valuation” they usually mean pre-money valuation — so how do you know what that is? If you were an established company you could use discounted cash flow — but that’s hard with pre-revenue startups.

The basic fundraising equation is:

Cash Invested + Pre-Money Valuation = Post-Money Valuation

So $2 million of cash invested into a company with a pre-money valuation of $4 million = $6 million post-money valuation.

The shortcut we used was that our VCs wanted to own about 1/3 of our company after the transaction. So that allowed them to solve for the pre-money valuation by dividing cash invested by ownership %.

Cash Invested ÷ Ownership = Post-Money Valuation

So $2M Cash Invested ÷ 1/3 Ownership = $6M Post-Money Valuation.

Now simply subtract the $2M Cash Invested from the $6M Post-Money Valuation to arrive at a $4M Pre-Money Valuation.

The offer the VCs made us was “2 on 4” — meaning a $2 million cash investment on a $4 million pre-money valuation.

We negotiated “2 on 5” — meaning a $2 million cash investment on a $5 million pre-money valuation, which gave our VC 28.57% ownership (their $2 million cash investment divided by the $7 million post-money valuation). So we saved almost 5% of equity.

We were okay with the VCs taking about 1/3 of the company because it gave us cash in the bank plus the social proof of taking money from a firm everyone recognized. One of their partners with operating experience joined our board of directors and was hugely valuable as we grew.

Getting the Best Deal

You’ll get the best deal when you have multiple offers on the table at the same time. We had two VC term sheets in hand plus a $1 million offer from the strategic investor.

Everyone wanted a board seat, so we had to decide between a three-person board (one of us, one investor, and one independent) vs. a five-person board (two of us, two investors, and one independent).

Having three options put us in a great position to negotiate. After some back and forth we ultimately decided to go with a single VC because we were concerned that the strategic investors might restrict our freedom by steering us away from working with their competitors.

Watch Your Exit Price

Also remember to keep an eye on your potential exit price. Your series A investors are looking to get at least 10x their money within 5 to 7 years. That means they’ll want you to sell your company that’s currently worth $7 million post-money for $70 million.

And if your company has a $20 million post-money valuation then you’ll need to sell it for closer to $200 million.

Crunchbase reports that the average acquisition price for startups since 2007 is $155.5 million, so it gets harder to find buyers the further you go beyond that. There are many more companies who can acquire you for $50 million vs. $500 million, so it doesn’t necessarily help you to raise more money.

Keep in mind that Michael Arrington reportedly made more money selling TechCrunch for $30 million than Arianna Huffington did selling Huffington Post for $315 million — because he had raised less money so he still owned 80% of his company.

Next Steps

There’s a lot more to discuss on startup valuations, so I’m hosting a free workshop on valuing your startup this Thursday, 6/22 at 6p ET. You can attend either online OR in our awesome new 10xU learning center in Wynwood, Miami.

I’ll cover additional considerations like:

  • Planning for the option pool
  • Where to find the market rates that investors are paying
  • Avoiding the mistake of self-selecting for mediocre talent
  • And more!

Free RSVP is here: bit.ly/Valuation10xU. Bring your questions!

Written by Mike Lingle — Find more practical suggestions for entrepreneurs at 10xU.com or connect with me on LinkedIn.

Why Didn’t You Buy from Us?

What can you learn when the customer says no thanks?

The key to a successful startup is understanding your customer. This sounds obvious, but for some reason it’s not.

Yesterday we talked to an entrepreneur who’s poured $90k into his beautifully-designed product — and he’s only just now starting to think about revenue.

So he’s asking investors for money to figure it out. But that’s not how it works.

Smart investors want you to already know how you’re going to make money AND they want you to already have some proof that your plan is going to work.

Otherwise you’re just taking a giant gamble with their investment that probably won’t pay off. You might not be able to see this, but they definitely can.

Finding Customers

We recommend spending as much time validating your sales and marketing as you do developing your product.

The toughest thing to understand is why people DON’T buy from you. They check out your website. They read the emails you send them. They scan your articles. They watch your videos.

And then they don’t buy.

Here at 10xU we recently ran a marketing campaign aimed at entrepreneurs who want to learn to build successful startups that scale. Some people bought a six week course — but many more didn’t buy.

Why not?

Everyone’s gut instinct is to assume it’s price: “They would have bought if only we were charging less money.”

Don’t Negotiate Against Yourself

This is called negotiating against yourself. Don’t do it. There’s no evidence that price is the issue.

The thing is that people who don’t buy from you usually don’t tell you why.

So we decided to try to find out.

After sales closed for our most recent course, we sent an email simply titled “Advice” that said:

Hi- Startups are hard! We’re always telling entrepreneurs to talk to customers, so now we’re practicing what we preach and I’d like your advice.

It looks like you’re interested in our Cobuild Course — but you didn’t pull the trigger. I’d like to offer you one of our awesome two-hour classes for free in order to learn why.

Here’s the deal:

1. Fill out this short survey.

2. Attend the first class of our next cohort for free (I’ll email you the info).

You’ll be doing me a huge favor! And I promise you’ll get a lot of great info from the class to help you with your startup.

(Feel free to copy both the language in the email + the survey with your own customers)

Growth Hacking

We sent the email in two waves. For the 25 hottest prospects we used one of our actual email accounts so that it was more personal. We waited a day, and then for the rest we did an email blast but also made sure it came from a personal email address.

We decided that giving away a spot in one of our two-hour classes was our best offer because it’s only interesting to our target customer AND it lets people experience our product — which is the main thing we’re trying to accomplish right now.

Customer Insights

People responded! We learned that the biggest barriers to sales are:

  1. Not ready yet
  2. Not enough info

These are very different than pricing, right? Now we know that we need to do more nurturing and free content (which means you’ll be seeing lots more free stuff from us).

People told us their main motivations for starting companies:

  • “Build a great product which customers use with simplicity.”
  • “I would like to build something significant and important, to solve real problems.”
  • “Take the next step forward in my career by building something successfully.”

We also learned what we’re offering that’s most important to people:

  • In-person mentoring
  • Intro to potential investors

We agree that the in-person mentoring is where the magic happens. The classes give entrepreneurs the roadmap to building a successful business — and the mentoring sessions allow us to deep dive to provide specific help for their individual situations.

Validating Our Pricing

Price did come up a few times, but it’s not the biggest factor.

We even hopped on a video chat with one of the people who showed up for the class to do a deeper dive on his experience with our brand.

Yep, that’s right, we got to talk to a stranger we found on the Internet about his impressions of 10xU and what he likes and doesn’t like about our offering. It’s pure marketing gold!

The good news for you is that 10xU is providing more free content, starting with these events over the next few days:

  • Finding customers: Free webinar on growth hacking: How to use low-cost marketing to find customers — with awesome growth hacker Marc Howard from Rokk3r Labs. Today 5/9 at 5:30p: bit.ly/GrowthHack10xU
  • Raising money: We are hosting the DECODING the Fundraising Process event in Wynwood Wed 5/10 at 6pm — Learn to plan for fundraising from the beginning so that you can make your entrepreneurial dream a reality: bit.ly/DecodeFundraising10xU

Written by Mike Lingle — Find more practical suggestions for entrepreneurs at 10xU.com.