Here is a slice of startup news from VentureWire Alert on Monday, July 2, 2007:
The median amount raised by IT companies before going public was $93 million and the median valuation prior to the offering was $452 million. The median time it took IT companies to achieve an IPO was 6.5 years, down only slightly from the first quarter.
That is data for the second quarter of 2007. It says to me that venture capitalists are eagerly seeking startups whose eventual IPOs are likely to be valued at around half a billion dollars. That is five times what they sought a ten years ago. Clearly big thinking arrived with the Internet era. It is still with us.
To get valued at $500 million at IPO time, a startup will need at least $125 million of sales. You can be confident that NASDAQ will give your startup at least 4 dollars of stock value for each dollar of annual sales (the historical, prior twelve months). Some industries that are hot entice investors to raise the valuation to 8 and even 16 times trailing sales. Since 16 is rare, and 8 is great, you should have a business plan that projects sales in year 5 to be at least $65 million ($65 x 8 = $500) and better yet, $125 million.
Yes, those are large numbers, yet they are tied to real people doing real IPOs.
Note also the $93 million of cash raised before going IPO. That is ten times what the expected average was a decade or so ago. That also is a large number.
Now let me put this into perspective before you sharp entrepreneurs there flood me with emails about distortions and so on.
First, you do want to aim for huge markets. Huge lets a lot of competitors pick different slices to fight it out over. There is room for many. That makes your job of growing to become the gorilla much easier.
Also, you should work on a bplan that requires as little capital as possible, with one caveat: do not try to raise less than $1-2 million per round for early financing from VCs. Too small and they will pass on your bplan. Just the right initial capital amount saves percentages of the company for sale in later rounds. And like a good diet it keeps your startup healthy.
You will be expected to need more capital after the first round or two. So plan on raising money until you are financially cash flow positive. Forecast your balance sheet and look at when cash flow positive happens. Try to do it in year 4. Then plan two or three rounds of prior venture financing. One round each year. Price each round so its ROI at IPO time makes the investors in that round very happy. Then you are ready to set off on your campaign to raise the cash you need to fuel your startup to IPO day.
If your bplan is smaller than this, examine how to alter your plan to make it larger. Or be realistic and accept that if a VC does fund it, the most likely liquidity event is not the gold medal (IPO), but the lesser bronze medal (sell the company). That is not bad, but who ever remembers the guy who was second or third in the big race. If your ego says that is okay, then give it a try. There may be family, friends and fools money out there who will place a bet on you and your bplan. Chances of booming success are low, but what the heck, others have succeeded that way before, including that thing called YouTube (who eventually raised real VC capital).
BOTTOM LINE: Managing this larger size startup is very demanding on the talent of a CEO and his core team. This morning I reviewed progress with a CEO leading a startup that is six months old. I was impressed. He did the hiring and technical milestones and spent less cash than planned. The launch plan is on schedule (with few adjustments). He is preparing to price the B Round for later this year at a significant increase in the price per share. He and his core team understand that the name of the game is global and very large. He has the right mindset for this new era of startup managing. When you understand how to do this, you will be kilometers ahead of your competition because this large mindset is central to building an unfair competitive advantage in this new era of global startup competition and huge markets.