I originally wrote this post way, way back in the first year of SaaStr and have updated it every 2 years or so, because it’s an important thing to think about as a founder. Especially now in 2023, when venture capital again is scarcer, and more expensive, and far harder to close than it was during the go-go times for SaaS of 2021 and late 2020.
Let’s take a look at 3 B2B acquisitions from a few years back as an example.
Let’s first start with the $35m acquisition of TokBox after 11 years and the $220m acquisition of SpringCM after 13 years. I know a little about both companies — and both are good products from good companies that well deserved their acquisition prices or even more:
But the outcomes for the founders after 11 and 13 years are probably tough. Both were sold for about 1.5x the amount raised. 1.5x means everyone makes a little bit of money, but no one really makes enough.
Does this make ventureevil or something because these deals probably didn’t make all the founders multi-millionaires? Of course not. Venture capital is risk capital, and the VCs here for the most partalso didn’t make much money either. But it’s important to understand how the math works here — and how it figures into how much to raise.
My simple advice when you raise capital: assume you have to return a liquidity event (sale or IPO) of at least 10x the amount you raise for raising venture capital to be worth it.
Valuations change from round to round. Later stage investors will expect lower ROI, seed investors will be looking for a lot more. How do you make sense of it all?
Just Multiply Amount of Venture Capital Raised Times 10. That is What You Must Sell or IPO For — For it All to Really Work Out.
Now take Cisco buying Duo Security for $2.35b? That was about 20x that $120m they’d raised. An incredible outcome:
So my advice: worry less about valuations and venture mechanics, and just stick with this simple math when you decide to raise $X of capital:
- Raise a $1m seed? You’ll need to sell for $10m to make everyone OK.More is better, but less is going to create issues. A $2m seed, you need a $20m+ exit for everyone to be OK. Probably $50m+ for everyone to be happy.
- Raise a $10m Series A? It’s going to have to be at least a $100m sale to get everyone around the table to say good job (or at least just to say yes). Ideally, $200m+.
- Raise $100m? That’s a billion+ IPO you’ve just committed to, sir.As it should be. Don’t raise this much if you aren’t convinced it will take you to $100m+ ARR.
We can stop there, but it gets more helpful to think about the types of potential exits, especially in SaaS.
First, you’ll notice a lot of BigCos. talking about “tuck-in” acquisitions that can attach to existing revenue streams. It makes sense — if you can add something to Office rather than building something in a new segment, it should be pretty high ROI. These “tuck-in” acquisitions though tend to top out at around $100m or so. That’s about all the Big Guys are willing to invest in their old products via M&A. So bear in mind, if you raise more than $10m, you’re probably giving up a good economic outcome in tuck-in opportunity. See, e.g, the TokBox example above. Giving this option up may well be fine, just be aware of it.
What’s between $100m and $1b in acquisition prices? New growth areas. E.g. Salesforce bought Datorama ($800m), Krux ($700m – the SaaStr story here and below), BuddyMedia and Radian6 all for healthy nine-figure sums to build out AI, Analytics and Marketing Cloud respectively in a hurry. These are the same spaces VCs want to invest tons of capital, too, so it’s all synergistic. But where I think you have to be careful is you can raise a lot of capital, but you aren’t really in a new growth area for the BigGuys, even if your ARR is solid. This can happen a lot in SaaS. PE may still buy you, but the M&A offers here are fewer. So be thoughtful about overfunding yourself here.
Which can leave you with nothing but an IPO or bust. Great work if you can get it. But it can be good to have options along the way.
T-Shirt Image from Zazzlehere.
If most founders knew that eventually, they’d have to get to $1B in ARR for the math to pencil out
Would they ever raise more than a few million in venture capital at all?
— Jason ✨Be Kind✨ Lemkin 🇮🇱 (@jasonlk) July 27, 2022
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But it's important to understand how the math works here — and how it figures into how much to raise. My simple advice when you raise capital: assume you have to return a liquidity event (sale or IPO) of at least 10x the amount you raise for raising venture capital to be worth it. Valuations change from round to round.
What is the 10X investment rule? ›
While it is true that angel investors (like our dragons) typically seek 10 times their money back over 3-5 years that isn't the source of the "10x rule". The 10x rule means that in order to gain market traction a product must be exponentially better. ie 10 x faster, 10x smaller, 10x cheaper, 10x more profitable.
What does it mean to 10X your money? ›
10X Represents MORE than Money
It means having ten times more than you, your family, or your business could ever consume.
What happens when you raise venture capital? ›
VC funding means ceding some control over your startup, and committing to hypergrowth, transparency, and accountability. Look beyond dilution; the board seats you cede could shape your company's direction and weaken your say in key decisions.
What is the 10X rule in short summary? ›
The 10X Rule says that 1) you should set targets for yourself that are 10X greater than what you believe you can achieve and 2) you should take actions that are 10X greater than what you believe are necessary to achieve your goals. The biggest mistake most people make in life is not setting goals high enough.
What is the 10X rule example? ›
Let's see how this example looks when applying the 10X Rule. Take the goal of 60 widgets and multiply it by 10. This is 600 widgets per year. This is now the goal—600 widgets.
What is the 10X strategy? ›
What does 10x Mean — At a Glance. The 10X Rule essentially revolves around what is considered that Principle of Massive Action — this concept that any time you put an exceedingly great amount of effort into anything you do, you're guaranteed to achieve exceedingly great results.
What is the lesson of the 10X rule? ›
The 10X Rule challenges us to set targets 10X larger than before and then take 10X the action we believe is necessary. Grant Cardone says achieving success always takes exponentially more effort, time and money than we think. We always set our goals too low and underestimate the challenges we'll face.
What is the 10X rule in finance? ›
Cordone's method is called the 10X Rule. The basic premise is this: think bigger, do more and never settle for average. Cordone says that by applying these principles to your finances, anything is possible in your financial life. Here are five ways to make Cardone's 10X Rule work for you.
What is 10X explained? ›
“There is nothing ordinary about The 10X Rule. It is simply what it says: 10 times the thoughts and 10 times the actions of other people… You never do what others do,” Cardone wrote in his book. “You must be willing to do what they won't do — and even take actions you might deem 'unreasonable'.”
This is a great book. I thought it was very well written and written in such a way you can read it in small chunks. Grant Cardone's 'The 10X Rule' is a compelling force in the realm of personal and professional development books.
What is the 10X rule for startups? ›
The 10X Rule is a simple but powerful concept that can help your startup grow exponentially. The basic idea is that you should aim to 10X your current situation, whether that means 10X your revenues, 10X your customer base, or 10X your team size. The 10X Rule is all about thinking big and setting ambitious goals.
How much venture capital should I raise? ›
Determine how much you want to raise.
Typically, you should raise enough capital to get you through 12-18 months. We always suggest raising a little more than you think you'll need. A little extra money is always better than not enough.
What are the disadvantages of venture capital? ›
Disadvantages
- Approaching a venture capitalist can be tedious.
- Venture capitalists usually take a long time to make a decision.
- Finding investors can distract a business owner from their business.
- The founder's ownership stake is reduced.
- Extensive due diligence is required.
- The company is expected to grow rapidly.
The sharks are venture capitalists, meaning they are "self-made" millionaires and billionaires seeking lucrative business investment opportunities. While they are paid cast members of the show, they do rely on their own wealth in order to invest in the entrepreneurs' products and services.
What is the 10X spending rule? ›
The 10X Investment Consumption Rule simply states that before you buy any product or service you don't need, you must first make an investment return equal to at least 10X the cost of such product or service.
What is the 100 10 1 rule for venture capital? ›
100/10/1 Rule - Investor screens 100 projects, finance 10 of them, and be lucky & able to enough to find the 1 successful one. Sudden Death Risk - Where the founder stops/loses capability to work on the idea. Investors usually choose the incubator strategy to avoid this risk.
