Posted on Thursday, Mar 25th 2021
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Heidi Roizen, Partner at Threshold Ventures, discusses her important article, “
,” and imparts crucial lessons to entrepreneurs on how to look at terms in a venture financing situation. How to Build a Unicorn From Scratch – and Walk Away with Nothing Sramana Mitra: We have been living in world of unicorn mania. We have tried to put some perspective on this issue. There are good sides to the unicorn mania. There are bad sides to the unicorn mania. Let’s start with one particular piece that you wrote, which I thought was very well-analyzed. The piece was titled How to Build a Unicorn From Scratch – and Walk Away with Nothing. Heidi Roizen: I’ve been doing this for a long time, and I’ve seen cycles come and go. There are two things every entrepreneur should be aware of that they really aren’t aware of. One is, not everything goes well all the time. If you’re an entrepreneur, you fully believe that everything is going to go great for you. The reality is, that is almost never the case. The second thing is, our economy moves in cycles. The macroeconomic conditions will affect your ability to raise money and prosper.
If you take those two things in mind, what has happened and what created this unicorn problem is, entrepreneurs got very fixated on raising very large amounts of money on high valuation. First of all, money in a war chest seems like a good thing to have. Second of all, being able to talk about your billion-dollar valuation makes it feel like it’s a very solid company.
There’s a falseness under that because at the end of the day, venture capital is still debt. It is money you have to pay back in, pretty much, every circumstance. It’s preferred shares, and preferred shares, in essence, are debts that must be paid back first in any but a terrible outcome or an IPO where everything goes common. We can count the number of IPOs in the last year on not too many toes and fingers, so let’s not go that direction.
The reality is, the entrepreneurs have made this sort of deal with the devil. I guess I shouldn’t say that because it makes it sound like investors are devils. The entrepreneur says, “I want a really high valuation and I want to raise venture money. If I raise venture money at a high valuation, I don’t get diluted.” The investors says, “Okay but I want some downside protection. It’s hard for me to imagine your company is worth a billion dollars today. I’m going to put in preferred liquidation preferences and a bunch of terms.”
Entrepreneurs need to worry about that, because the terms are more important than the valuation. Here’s a fun example. I went to a party once and said, “I will make anyone a unicorn tonight. I will give anyone a billion-dollar valuation.” I had a term sheet and it was printed on my business card. It said, “I’m going to invest a dollar in you. I want a 100x on my money and I’ll give you a billion-dollar valuation.”
If you got to pay me $100 as return on my money, that’s not a very good deal for you. If you’re raising $200 million and there are ratchets and multiple guarantees on that money, you are in a very different place. This is why it’s taking me so long to answer the question. It’s actually very complicated. Particularly when there are multiple rounds of financing, everybody around the table starts to have different economics.
If your company sells for a billion versus half a billion, they’re still going to get double their money and then you have another person who doesn’t make a penny until after you sell for a billion. Those people are going to have very different economics. The one thing entrepreneurs should remember is, unless you are in a highly unusual situation, you sit at the bottom of the stack. You sit below everyone else who has invested money on whatever terms in your company. I just think entrepreneurs need to keep that in mind. I really believe that clean and simple terms at rational valuations are the best healthy hygiene for any normal company that is out there to raise money.
Our conversation continues
here. This segment is a part in the series : Best of Bootstrapping . Bootstrapping to an Exit . Why is Bootstrapping Important? . How Can You Play this Low-Probability Game Intelligently? . Do NOT Go to VCs as Beggars - Go as Kings . Excess is NOT Required for Success . Bootstrap First and Raise Money Later . Some Bootstrapping to Exit Case Studies . The Buy Side of Bootstrapping to an Exit . Blitzscaling vs. Bootstrapping . Bootstrapping to Unicorns More »» . Cinedigm Acquires Bootstrapped 1Mby1M Company Future Today for $60 Million . Mailchimp Bootstraps to $600M Revenue . Bootstrapping from Arizona to $10 Million . Bootstrapped Basecamp Executes a No Nonsense Strategy . How Under30Experiences Bootstrapped to $5 Million . Bootstrapping with a Paycheck . How Algo.ai CEO Amjad Hussain Bootstrapped using Services from Michigan . Seed Investors Who Like Bootstrapped Businesses . How iHeartRaves CEO Bootstrapped a Niche e-Commerce Company to $20 Million . Bootstrapping with Services . How The Intern Group CEO David Lloyd Bootstrapped to $13 Million . How Passageways CEO Paroon Chadha Bootstrapped from Indiana . How SmartBuyGlasses CEO David Menning Bootstrapped to $50 Million . Death by Overfunding . How RainmakerForce CEO Mack Sundaram Bootstrapped Decisively to $5 Million+ . How FormAssembly CEO Bootstrapped a Virtual Company with a Paycheck . TimeSlips CEO Mitch Russo Bootstrapped to Exit with Sage . The VC-Entrepreneur Compensation Disbalance . BioConnect CEO Bootstraps with Sophisticated Strategic Maneuvering . Tremend CEO Marius Hanganu Bootstraps from Romania . Gesture CEO Jim Alvarez Bootstraps to $10 Million . SproutLoud CEO Bootstraps to $30 Million from Florida . Tuft & Needle CEO Bootstraps to Over $100 Million . Co-founders Bootstrap Linguamatics to Over $10M from the UK . Ownership Matters . Vainu Co-founder Mikko Honkanen Bootstraps from Finland . Entrepreneur Couple Bootstraps to $10M from Colorado . 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Discussing the Evolution of the Indian Startup Industry with Sasha Mirchandani, Kae Capital . Lean Company Bootstraps to $7M . Saatva Co-founder Bootstrapped a $25M E-Commerce Company . Looking at Terms with Heidi Roizen of Threshold Ventures . ADDA Co-founder CEO Bootstrapped with a Paycheck in India . Duda Co-founders Bootstrap with Paychecks . The Importance of Building Value with Shomit Ghose, Onset Ventures . Get Real Health Founder Bootstrapped Using Services . Bootstrapping Unique Vintage Using a Paycheck . Discussing E-commerce Startup Trends with Daniel Gulati, Forecast Fund . Bootstrapping a Digital Startup with a Paycheck . Discussing Seed Stages with Amir Banifatemi of K5 Ventures . Bootstrapping Avelead Using Services from Atlanta . Founder Bootstrapped a Big Data Company Using Services . Discussing Future Unicorns with Warren Weiss, Foundation Capital . Founder Bootstrapped Axosoft with a Paycheck . Raised a Series A with $10 Million in the Bank . 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Bootstrapping LittleThings First, Raising Money Later . Bootstrapping eMazzanti Technologies Using Services . Reltio Founder Bootstrapped Using Services . Co-founders Bootstrapped Ateb Using Services from North Carolina . Bootstrapped HireVue While in School, Raised Money Later, All in Utah . Bootstrapping the First Venture, Raising Money for the Second . Co-founders Bootstrapped BeenVerified with Angel Money . Bootstrapping a Significant Software Company from Australia . Bootstrapping Meltwater to $200 Million . Bootstrapping Casewise from London and Scaling in the US . Bootstrapping Lessons Learned by FairWarning Founder Kurt Long . Abacus Group Founder Bootstrapped a Virtualization Services Company . Seismic Audio CEO Bootstrapped a $10 Million E-Commerce Business . PhishMe was Bootstrapped Using Services First, Raised Money Later . Firmex Scaled with Angel Money in Canada . Wrike Founder Bootstrapped First, Raised Money Later . Bay Dynamics Co-founders Bootstrapped Using Services . Building an AI Software Company from Dallas . RJMetrics Co-founders Bootstrapped First, Raised $22M Later . Bootstrapping Niche E-Commerce Business BuyAutoParts to Exit . TemplateMonster was Bootstrapped to $15 Million . Bootstrapping Edge Hosting to $18 Million . Bootstrapping, Fund Raising and Exiting with Sefaira . Bootstrapping IdeaScale to $5M from Scratch . Bootstrapping to $10M from Finland . Happy Grasshopper CEO Dan Stewart Bootstrapped to Inflection . Bootstrapping Gravity Pro Using Services . Founder Builds Multiple Bootstrapped Education Software Companies . Bootstrapping to $10M from Australia, Raising $25M from the US . Bootstrapped Y Soft to $30M from the Czech Republic . Bootstrapped from Belarus, Raised Money from Silicon Valley . Bootstrapped SproutLoud to $30M from Florida . Bootstrapped 2600Hz Using Services . A Serial Bootstrapping Entrepreneur’s Journey . 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Bootstrapped and Later Raised Money from Oregon . Bootstrapping Evenica by Piggybacking . Bootstrapping a Vertical CRM Product using Services . Bootstrapping Using Services from Helsinki, Finland . Solo Entrepreneur Bootstraps First, Raises Money Later in Utah . Art.com Co-founder on Bootstrapping First, Raising $30M Later . Bootstrapping to Exit . Why is Bootstrapping So Important? . How Can You Play the Low-Probability Game of Start-up Funding Intelligently? . Don’t Go to VCs as Beggars – Go as Kings! . Excess is NOT a Requirement for Success . Bootstrap First, Raise Money Later . More Bootstrapping to Exit Case Studies . The Buy Side of Bootstrap to Exit Startups . Blitzscaling versus Bootstrapping . Bootstrapped Unicorns . Bootstrapped from Arizona to $10M . Bootstrapping Under30Experiences to $5M . Bootstrapping Algo.ai with Services from Michigan . Seed Investors Who Like Bootstrapped Startups . Bootstrapping a Niche E-commerce Company to $20M . Bootstrap Using Services . 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Master Bootstrappers with $1+ Billion in Exits . Bootstrapped Ultra Mobile to Over $100 Million . Bootstrapping a 2-Sided Marketplace to $10M . Bootstrapping a Virtual Company to Over $5M . Capital Efficient Entrepreneurs Turned $1M into $80M . The Journey Through Failure to Success . Bootstrapping TrendHim from a Small Town to $12M . Bootstrapped to Y Combinator and $10M Series A . Bootstrapped a Marketplace to Over $10M . Bootstrapping Freightwise to $33M . Bootstrapped First to $5M, Raised $10M Later . Bootstrapped in Europe, Raised Money and Went Global in the US . An English Major who Bootstrapped a Tech Company . Bootstrapped with Paycheck to $15M from Tennessee . Queue-It Bootstrapped from Denmark to the US . Bootstrapped a Virtual Company to $25M . Bootstrapped Using Services to $40M First . Bootstrapped Using Services to a Public Unicorn . Bootstrapped Using Services to an Awesome Business Model . Bootstrapped Wiredrive Using Services to $10M . 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