Sunday, February 2, 2014

Refueling High Burn Startups: "2x @ 10%"

Refueling a high burn startup is extremely challenging, even when the startup is very hot.

I find this rule of thumb helpful:  Can you repeatedly (emphasizing repeatedly) raise the next round at >2x price/share of the current round for <10% dilution?  If you can, the high burn (high growth) strategy is fundable.  If not, the strategy will likely crash and burn.

Why >2x the current price/share?  It is tough to get a new investor to invest in this round, if the new investor does not believe that the next round will be at least 2x the price/share of this round. Otherwise, the new investor should wait until the next round, even if the new investor loves the company.

Why <10% dilution?  Dilution is a very emotional topic, and everyone wants to minimize dilution. But, I find that many consider dilution up to 10% as minimal.

By following this rule of thumb, one company raised $100m from the private markets in multiple rounds.

This blog post is a follow-up to my prior blog post: Valuation ChallengesFinancing Strategy and Growth/Profitability/Dilution.

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