Sunday, May 6, 2007

Real Entrepreneur Story #1 – What to do next?

Over the weekend, I met with a very hardworking and smart entrepreneur. He operates a business in the medical devices space. He is the founder, has over 20 patents to his name and yes, they are making money! The dogs are in fact eating the dog food. He has successfully raised over $5 million and has managed to put the company on the path to make close to $10 million in revenues this year. The company was in a terrible shape a year ago as he had hired a very ineffective CEO and was dealing with a weak Board of Directors (a story for another time!) – no questions asked the man can execute and deliver!

We spent a few hours together and he and his partner outlined their strategy of raising about $20 million from VC’s at a valuation of over $40 Million (because they thought it was worth that much!) – after discussions it became apparent that that they really did not need that much money to further increase revenues by over 5 fold and they just wanted to be safe! Not considering that this being safe is costing them valuable equity; besides because they were looking for so much money they had to increase the valuation so that they don’t give up the whole company.

Digging deeper, it became apparent that they can increase the revenues by close to 3 fold in a couple of three years without any more money !!! and can get the revenues to five fold and develop a few more innovative products with $5.0 million.

Quick calculation considering an exit in 3 years revealed that they would make more money as founders if they take the lesser amount and that they would not have to value the company at a point where a deal is difficult to make.

The moral of the story is that more money is not always better and a higher valuation is not always to the benefit of the founders. If you make bad assumptions you end up with bad deals; if you can consummate the deal in the first place!

7 comments:

Shekhar said...

Great post Sid! Congratulaions for stepping into the brave new world of blogs. I look forward to many more insightful posts -- SC

Hutch said...

Hi Sid - I just received your e-mail update. Good to know you are updating your blog. I need to do the same. I appreciate the insights, and the comedy (the dogs eating the dog food....I will use that one at some point). Thank you for your time on the phone and advice on Ego TV during our call a few weeks ago.
Jimmy Hutcheson
Ego TV / Hutch Media, LLC

www.hutcheson.blogspot.com

Tmiller said...

You have a very refreshing style and should build readership very quickly. I am adding you to my frequently read list and will send a message if I have any flashes of insight I think will be useful.



I like your choice of initial topics and especially liked the May 6 posting. And the entrepreneur categories are very insightful - something I can use a lot.

Bruce Crair said...

Hey, Sid…nice work! A couple of comments from a non-blogger (but avid reader of blogs)…



1. Try to keep the postings short and sweet…I find that the longer ones don’t get read because my attention span just isn’t there…

2. I googled your name, and your own site came up. I checked out your site, and you don’t have a link to your blog. Need to get a link to your blog from your site and vice versa.

3. Only one other comment, and that’s more an individual style issue…I found that you used exclamation points pretty liberally, and I think it tended to take away from your main point(s). I would pull some of those off.



Other than that, I like it, and I’m adding your blog to my regular read.

Kaveh said...

I am most impressed by your blog.



So far I have read the piece about entrepreneurs and enjoyed reading it very much.

So much truth and insight.



And yes you should develop a “Are you an entrepreneur test” ?

Rajat Khurana said...

I was just curious to see what your blog looks like, and I landed up reading every word you wrote.



You are a great writer and I think you write straight from the gut and the way you share them made a lot of sense for sure.



Look forward to getting more of your email with more of your writings



thanks

Jim Chamberlain said...

Enjoyed your posts.

I do financial workshops for SCORE and would like your inputs on valuations for an established growth company with trailing revenues and cash flow. Do any angel or VC investors pull out the DCF worksheet anymore to determine a range of value?