As an entrepreneur, my goal is to build successful companies. My assumption is that you’re reading this because you want to build a successful company too. So what’s the secret? Define what success means to you.
For the past 3 years I’ve had the opportunity to work in venture capital. I talk to entrepreneurs every day who are looking to raise early stage investment funding. The question that I lean on to learn how an entrepreneur views success is: Why are you building this company?
I hear all kinds of answers. Some “want to change the world”, some have felt the pain of the problem they’re trying to solve, some are looking to escape their current job, some think they have the next disruptive technology while others want to be the next Snapchat, Facebook, Amazon, etc. None of these answers are right or wrong. Rather, these answers are informative of what’s important to the entrepreneur and the potential choices they’ll make in the future.
In my opinion, all of these answers can be distilled into two categories: ego and money.
We live in a startup culture where we’re enraptured with on-paper success. We love reading about the latest fundraising announcement that floods our daily newsletters, blogs and twitter feeds. We can’t stop talking about “Unicorn” companies who have been valued at over $1B. We idolize the founders and investors who have built these iconic brands and go to conferences to learn more about how they built their “Unicorn”.
Indexing on big valuations as an indicator of success is the ego part of building a company. The larger the valuation and the more capital a company has raised leads to more publicity for the company’s brand, founders and investors. However, viewing fundraising as a measure of success misses the mark on what I would consider the most important metric: maximizing shareholder return. Otherwise known as... Money.
Every time an entrepreneur raises capital, at a higher valuation, the ability to generate liquidity for their shareholders becomes much more difficult. Shareholders (that includes founders, investors, employee option holders) are looking for a return on their investment (time spent working at the company and dollars invested). As a company’s valuation increases, the entrepreneur’s options for creating liquidity for their shareholders decreases as the number of acquirers able to pay for the company decreases.
Raising money and increasing one’s valuation is not necessarily a bad choice so long as the entrepreneur is cognizant of how they’re going to be able to create a considerable amount of additional value that they can ultimately return to their shareholders in the form of liquid capital.
When setting out to start a company, we all strive to build something successful. The real questions is, what do you consider success? My advice to entrepreneurs is, if you want to build a successful company, focus more on figuring out how you’ll ultimately create liquid value for yourself and the rest of your shareholders as opposed to boasting about that flashy fundraising valuation.