Remember when you were in college and everyone told you – “enjoy it while you can, these will be the best years of your life.” It was a simple, but important message – don’t be in a rush to grow up. Turns out what was a seemingly annoying aphorism actually turned out to be great advice. In fact, it was such great advice, some startups might learn a thing or two from the wisdom of mom and dad.
The process of turning a startup into a grownup is a process that works best when not rushed. Building a great company is a lot like building a great person – it takes time, it is a bumpy ride, and inevitably things can and will go wrong.
As I have watched some startups become grownups, I see the maturation process happening too fast. To some degree, everyone in the ecosystem is to blame. There is a lot of capital chasing too few great deals which results in a rising valuation tide that lifts far too many boats. And, of course, you cannot blame an entrepreneur for taking capital at a steep valuation even if his/her company is not ready to “grow up.” Because the golden rule of building a business is Do Not Run Out Of Money, entrepreneurs are supposed to take money when it is available and cheap.
Part of growing up is learning to take the hard right over an easy wrong. So, if capital is cheap and available – do you take it? Sometimes yes, sometimes no. There are a lot of reasons to take capital, but the least important is “because it’s cheap and there.” There are plenty of things you shouldn’t do even though they are cheap and available (note: the Revolution blog is family friendly, so we won’t go into those). Price should be an arbiter of deciding to sell your business, but only a moderate factor in how you decide to finance it. The decision to take capital should be based upon finding an investor who can be your partner in helping to build a great business. Once that relationship is solidified, price generally falls into place (it is market based after all…).
It would seem to me a far better decision to take money from a great investor at a lower price than any investor at a great price. Valuations are dynamic things – they move up and down. When the bad times come (and they will) wouldn’t you rather have a great partner focused on fixing problems (who priced the potential for these issues into their value assessment), than an investor worried about the impact of a problem on their rate of return? Growing your valuation too quickly ensures that at some point, your relationship with your investor will become contentious because their relationship with their investors will be under similar strain. That is bad pressure and easily avoidable. Part of growing up is learning to make decisions today that keep you out of harm’s way tomorrow.
At the Revolution Growth fund, we invest in speed-ups. These are companies that have reached a level of maturity that warrants more capital and a higher valuation. We are happy to invest in companies at higher prices when those prices are justified by the underlying metrics driving a business. We avoid sped-up valuations; we love speed-up companies. There is a subtle but important difference. Take the time to build a speed-up company and avoid the urge to achieve a sped-up valuation. It’s like the voice from the cornfield told Kevin Costner in the movie Field of Dreams – “If you build it, they will come.” And pay.
Don’t be in a rush to grow up. Take your time. Allocate your capital wisely and avoid temptation for cheap and easy money. Find partners you like to work with that can help you make your 80 percent worth more through their ability to drive positive change in your business.