How not to communicate with us.

by Tom Hedrick

Following are a few disguised excerpts of an email exchange with a representative of a company looking for capital. As context, the company had been in existence for roughly 10 years and had current revenue of less than $1.5 million per year.  They had a nice patent portfolio but did not have what would be considered commercial or business model success. It still had quite a bit of venture risk. This discussion centered on the company's valuation expectations that were (at least) triple the value we thought was reasonable.

Excerpt 1:  "There is no limit to the upside in future revenue and earnings"

Hmmm…no limit, really? Be excited, but don't over do it.

Excerpt 2: "Employing a worst case scenario they (the company) are estimating a five year revenue target of about X million" (around 25x current revenue)

Let's see, it took 10 years to reach about $1.5 million and the "worst case" is around 25x the current situation.  Be careful about use of the worst case…worst case in venture is no revenue. If you make such strident comments be able to back them up with comments such as the size of the sales pipeline or the value of an existing contract with a customer.  Both the pipeline and contracts can be easily tested in diligence.

Excerpt 3: "That would accord the company an exit value of more than $YYY million."

The company expectation on valuation would have made the exit equal to a 5X return for investors. That might be a good 5-year returns target for a larger, profitable or even breakeven business. But, this company was still burning over $100k per month.  We cannot speak for other VC's but we do not like portfolio companies doing our return math for us. That kind of exercise is one that we complete at the end of diligence when we thoroughly understand risk, markets, exits, etc.

The YYY valuation exceeded the top quartile value for all venture exits. When communicating exit values, do your research and gain some context, if you are presenting a case that we will make a 5x return on what has to be a top quartile exit valuation back that up with great facts. Our immediate reaction was 1) median venture exits are about 40% of that so, 2) our expected return is about 2x….and it still has a lot of venture risk.