Entrepreneurs are bombarded with information about capitalization. In the popular press, there seems to be a fixation on what it takes to attract funding from venture capitalists or angel investors (who in reality only provide 6% of all business capitalization). The authors, many of which are experienced investors, pontificate about the importance of a startup being able to achieve $30 to $100 million or more in revenue within 5 years in order to attract venture or angel capital. Thus informed, entrepreneurs in startup mode (no revenue yet) develop business plans showing how they will become a $100+ million company in 5 years, and calculate their capitalization needs on this basis. Later, after a protracted and painful series of rejections from investors who didn’t have the vision to put $10 million or more into the startup, entrepreneurs retreat and move on to other endeavors – such as looking for the next grand slam home run that will fund their retirement.
I understand. I’ve been there myself. I’ve worked with many clients on a similar path, and have seen hundreds of business plans in much the same vein – one which ultimately yields little gold. I’ve also worked with many companies in the process of “doing it right.” In other words, they approach the business and its capitalization on the basis of staged development. These companies are born with a focus on economical proof of concept. They learn to crawl through the early stages of customer acquisition, revenue generation, product or service improvement, and support infrastructure build out. Then they demonstrate their ability to walk by successfully scaling both revenue and production capacity. Lastly, using their proven approach and infrastructure, they run hard to keep up with the demands of significant growth. These businesses have a much higher probability of success, and represent greater financial returns for investors of all kinds.
Here are some statistics from U.S. Census data that reveal the near myth of the hundred million dollar startup, and some of its smaller kin.
- There are typically more than 500,000 new companies founded each year in the United States.
- Approximately 80,000 new companies founded each year project annual sales of $10 million or more within five years.
- The number of new companies founded each year that achieve $100 million or more in annual sales within six years is 175.
- The number of new companies founded each year that achieve $50 million or more in annual sales within six years is 474.
- The number of new companies founded each year that achieve $10 million or more in annual sales within six years is 3,608.
- The odds of starting a company that achieves $100 million or more within six years are 3.5 in 10,000.
- The odds of starting a company that achieves $50 million or more within six years are 9.5 in 10,000.
- The odds of starting a company that achieves $10 million or more within six years are 72 in 10,000.
These odds are not well known, though many investors suspect something like this to be the case. This is a major, justifiable reason why experienced investors are reluctant to believe massive projections from a startup company. If you want to learn more about reality versus myth in the arena of business capitalization, I recommend The Illusions of Entrepreneurship and Fools Gold? The Truth Behind Angel Investing in America, both by Scott A. Shane.
The truth is you don’t become a $10 million or a $50 million or a $100+ million company by getting fully funded in the startup phase. Instead, you raise enough capital to support you from one development stage to the next, and earn your way up the revenue ladder. This is reality. The exceptions to this rule are few in number. As Mr. Spock of Star Trek would say, it is not logical to assume that your business is the exception. Are you willing to gamble millions of dollars of your own money and several years of your life on these odds? There is a better way, and that’s what we specialize in.