If you have what is hot, you are hot, at least in today's money market for venture capital.
When a founder understands the numbers VCs are seeking, better deals can be negotiated.
The VCs are in an intense race: they desperately seek the next Billion Dollar Valuation Startup. To miss the next Google, Facebook, or GroupOn is death to them. One miss of the next Gorilla will drop the ROI on a venture portfolio to bank deposit rates. Such a mistake will slide their fund down into the ranks of The Other VCs, to be forgotten by all but a few. When they try to raise fresh cash to invest, the institutions with the big money "will pass" on investing via their new venture fund. Thus the race is one of desperation for VCs.
Entrepreneurs can take advantage of that, negotiating more favorable terms (price, liquidation preferences, stock option pool, etc.), getting deals done swifter with the venture partners of choice.
But there is danger in all of this, the danger of over-reaching, of "too much greed". Critical observers are frequently objecting to the high valuations of private rounds of "the hot startup deals". Their concern is valid, namely that the basic business may not be able in the future to generate the revenue and profit that supports billion dollar valuations today. For instance, take a look at today's blog from TechCrunch on this issue.
So how aggressive should a founder be in when cutting a deal this market?
I suggest this market for hot VC money is looking for deals that can get a return on capital of 100 times each dollar invested. Those numbers correspond to data I've been looking at in recent private and IPO deals. Take a look at the high ROI multiple for LinkedIn VC rounds (as compared with my long term Standard ROI earned by VCs over decades of deals):
Then look at how those multiples translated to ROI measured as percent per year. Here you can see the VCs got ROIs all around 100% p.a. (interest equivalent of 100 percent per year in the bank).
In other words, today's VCs are seeking tiny startups that can become giants of tomorrow as measured by ultra high ROI ambitions. Their return on investment target is the equivalent of 100% per year interest rate. The corresponding multiple per year will decline as the IPO date arrives because the risk reduces over time as the company grows larger, generates profit and turns cash flow positive, but the price per share for each deal will be set to earn a very high percent per year ROI.
Yes, that sounds terribly high. But it is what happens during such feeding frenzies.
As I've blogged before, the startups that get early money have convinced investors that the business is "scalable" (huge market, open, growing, no dominant Gorilla blocking the way), has "traction" (showing rapid adoption by end users and customers) and has "WOW!" in its offering (highly compelling to end users). Lacking one of those will put your finance raising efforts far behind other startups.
BOTTOM LINE: Entrepreneurs can take advantage of the current flurry of VCs eager to finance the next great Gorilla. The numbers needed in your plan must convince the people with the money that your deal will generate for at least early investors the equivalent of a very high return on investment, in the order of a 100% interest rate. Those thin air, high altitude numbers are the result of a fresh wave that is heading toward the beach. VCs are determined to ride it to riches beyond measure. It's up to you to get them to pick your startup to ride. Serial entrepreneurs know how to do that. It's part of what made them skilled at building unfair advantages.
I wish you The Best on your Adventure!