The Dilution Dilemma: Sell at Seed over Series D?
My friend Erica Wenger of Park Rangers Capital posted an interesting thought sourced from a pretty epic Medium article from Bryce Roberts.
The article explores the financial dynamics of venture capital and its impact on startup founders, particularly focusing on what constitutes a "meaningful exit" for VCs versus founders.
1. VC Expectations for Exits:
- A "meaningful exit" for a VC fund should return at least 33% of the fund's size, while a "home run" exit would return the entire fund. For example, even for small funds, this requires a minimum exit valuation of $85 million.
2. Founder Dilution:
- Data from over 5,000 cap tables shows predictable founder ownership dilution as startups raise successive funding rounds. At seed, founders own 60-80% of a company. By Series D, founder ownership typically drops to 11–17%, with investors owning 66–68%. This means founders often make similar amounts at exit (e.g., $20M after a seed round vs. $200M at Series D) despite significantly increasing company valuation.
3. Challenges with VC Models:
- Founders frequently face misaligned incentives with VCs, as exits meaningful to founders may not meet the high-return thresholds required by VCs. Many founders regret passing up life-changing acquisition offers because they didn’t meet VC expectations.
The article concludes by urging founders to carefully evaluate the trade-offs between pursuing VC funding and retaining control over their company’s growth and exit strategy.
If you can achieve $1M in EBITDA, it would be wise to consider entertaining acquisition offers. At that profit level, you could service a $15M debt, and if you own the majority of the company, most of the proceeds would be yours. This could enable you to retire or reinvest in passive income opportunities, allowing your future work to align with your passions.
Many founders believe they must scale their business into a unicorn and take on significant risk to satisfy their venture capitalists. While this loyalty is admirable, it’s important to understand that pleasing a VC can be challenging. Unless you’ve delivered a 100x return on their investment and provided substantial cash returns, they may view their investment in you as a relative disappointment. Once you’re no longer valuable to them, your emails might quietly find their way to the spam folder.
Put yourself and your family first, because VCs won’t lose any sleep if your company goes under.
If you’ve bootstrapped a business to $1M EBITDA, first, let’s chat and I’m happy to point you in the direction of some founders I know who have exited the right way. Second, consider offers from firms. I’ve had conversations with major private equity firms that offer double-digit EBITDA multiples without significantly disrupting operations. This allows you to enjoy a substantial salary for years to come while building a nest egg that secures your retirement on your terms—all while continuing to run the business you created.
If you can see your path to success as achieving the $3,000 per day in profitability needed for $1M EBITDA, it’s far less daunting than trying to topple market leaders, force your way to unicorn status, endure massive cash burn, and risk losing ownership of your business along the way.