Billions of dollars are spent annually on acquiring tech startups. However, it is fairly unknown by most entrepreneurs how to take their concept, grow it into a multi-million dollar company and ultimately exit with enough revenue to do whatever you want for the rest of your life.
In 1996, I was part of a tech startup in the travel space which was a wholesaler and re-seller of sightseeing & activity products all over the world. We grew the company from 1 employee generating $50,000 annually, to 25 employees generating 26 million dollars in annual revenue. This finally led to an exit with the Carlisle group in the reported amount of 40 million dollars as a cash & earnout deal. This sounds like every entrepreneur’s dream, however, the lessons I walked away with were far more valuable than anything else gained from the experience.
There is a pretty formulaic process in the startup to exit process that I’ve been exposed to. Generally, we see 3 rounds (there are funding & business milestones included in these) but for the most part it goes like this:
1. Startup – get some money, rich uncle, parents, bank loan, sell your car, a kidney, an eyeball, a testicle, work a side job, basically whatever it takes to get the initial $100K of startup capital and bring your idea to market. Plan on raising enough money to create the core team and free up the time to focus on your startup for at least 2 years. If you run out of money after 6 months you’ll be spending all your time fundraising and not working on your project.
2. Seed Money – Generally happens pre-beta, once you have a product you can show to potential investors. I like the term “touchable tech”, which can be a prototype, a demo or even a smoke test with some validation. Do your research and go after some of the well known accelerators or seed funding programs. These folks are very interested in $500K – $1M level investments, often as convertible notes rather than equity in your product. This should carry you through the next 18-24 months of solidification of your idea. During the seed money stage, you give up some equity but there are some really great programs out there that help you protect your position. One of my favorites is Forward Accelerator www.forwardaccelerator.com.
2a. Series A (“sort of exit”)– this is when you’ll start talking big bucks anywhere from $10M to $50M to help take your product to the “next level”, where you may have been localized or limited with human resources. Series A should remove all financial barriers to success. Generally, you willl be giving up a large percentage of your company when you take series A. A lot of companies I’ve worked with have experienced selling up to 80% of their company at this point, but that’s perfectly fine because of what comes next.
3. Exit – After you’ve gone through Series A with a major venture capital that firm will be responsible for the following round. Take a look at the investment path of the now famous ‘Waze’ mobile application. Each new investor wants to see an ROI on the money put in, so it ultimately finds itself selling for more than a billion dollars. You as the original founder may only retain a small percent at this point but 2% of a billion dollar exit is a nice windfall for most of us ($20,000,000).
Although each startup journey is different, this is the process I’ve seen happen most frequently. The thing to remember is that you started this company to exit / to retire / to have “whatever I want to do” money, so stop getting caught up in owning the majority stake in your startup through the long run. It’s all about the “next big thing”, not your last big thing.