When raising VC doesn’t make enough difference to be worth it

Over the weekend my former colleague Cedric Latessa emailed me a link to a blog post by Rand Fishkin, CEO and founder of SEOmoz, where he talks about his decision whether or not to raise VC (warning: I two of my laptops have thrown up malware warnings before letting me through to Rand’s blog).  I like the way he thinks about the decision, weighing up the pros of faster revenue growth and a bigger exit against the cons of more dilution, the impact of the preference, the risks that come with bringing a new director onto your board, and the way that raising a venture round rules out some lower value exits (at least in the short term).  His emerging conclusion is that it would be a mistake to raise another VC round.

This graphic from Rand’s post shows the key facts:

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Looking at this it is pretty easy to follow Rand’s logic and see that all the work of raising $10m venture capital and getting to a $240m rather than a $168m exit is barely worth it for the existing shareholders who only get an extra 15% or so in their pocket as the lions share of the increased value goes to the new investor.  The maths comes out this way because raising the $10m doesn’t bring enough extra growth – the chance of being 42% bigger in revenue terms in three years ($60m revenue with funding vs $42m without) isn’t really enough to compensate for 20% dilution and all the additional risk and hassle.

From the information presented it feels like Rand is reaching the right conclusion.  I have a couple of caveats though:

  1. Key to this analysis is the revenue growth assumption, and one of the reasons Rand wrote the post is to explore whether he is being sufficiently ambitious in this regard.  Right now he can’t see where the extra might come from/it feels kind of risky, but that doesn’t mean it isn’t there.
  2. There is no consideration of the competition.  Solid growth from $12.5m to $42m is a lot less exciting if a competitor has hit $60m over the same period and will go on to be 2x your size the following year and maybe 4x the year after.  Customers coalesce around industry leaders.

I am always saying that venture capital is only right for a small percentage of companies and SEOmoz is an interesting case study because it is on the margin.  For many companies the decision whether or not to raise venture is more straightforward – the money makes a big difference or it makes little difference, but either way they should go through the same thought process as Rand. 

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