If you’ve been watching the current wave of episodes about discredited firms (from Theranos to WeWork), you might think that company entrepreneurs lack accountability. However, in my experience, the contrary is far more common: entrepreneurs often feel guilty about things that are simply a part of running a business. Many founders, for example, feel uncomfortable about simply declaring that they wouldn’t say “no” to a strong enough takeover offer or informing their investors that they would.
Why does it matter if a company’s founders advise investors that they may depart before it reaches IPO scale? “What’s good enough for me might not be good enough for my supporters,” or “a life-changing amount of cash for a founder might be too little an investment multiple for an investor,” I believe the logic goes. And these worries might include not only shame, but also the fear that VCs would refuse to fund an acquisition if it occurs too early in a startup’s lifetime. There are numerous reasons to stay with your business, but if you’re concerned about losing your investors, here’s why you shouldn’t worry. A 3x multiple in six months is not the same as a 3x multiple in three years, which is another aspect of VC arithmetic that founders don’t often consider.
In VC land, one is more than ten. It’s never fun to let people down, but selling a business too soon might seem like that. Will investors be unhappy if your firm fails to achieve its goals? Yes, but only to a certain level, which is where portfolio math comes in handy. Investors spread their bets out over a large number of assets, while they still hope that each one pays off. They also understand that it will not happen. They’re in it knowing that some of their investments will have to be written off, and that a few others will fall somewhere in the between of success and failure.
Investing in startups, however, makes sense since outliers will return many times their original investment worth. Big home runs have become the norm in venture finance. They have a term as well: “fund makers,” which refers to an investment that produces more liquidity than the fund that backs it. VCs John Backus and Hemant Bhardwaj invented the moniker “dragons” for these fund managers in a 2014 piece on TechCrunch. They urged other investors to choose them to unicorns. “Unicorns exist solely for the sake of entertainment. They stated, “Dragons are for money.”