Recent data show that venture funding for startups has remained at all-time highs, even amid the pandemic-related chaos. When supply is plentiful, it’s critically important for teams to be discerning in how they raise: the amount, the investor, and the timing. Just because you can take a check doesn’t mean you should.
Much of the VC model is designed around investors chasing home runs. Funds need just a few companies in their portfolio to see a $1 billion or greater exit and place these bets accordingly, with the full expectation that nine out of 10 investments will fail. Great if you’re the one; not great if you’re the other nine left in the dust.
Elsewhere Partners does not fit this VC mold. We believe in a pragmatic approach to growth that gives founders a higher probability of realizing a meaningful outcome on their own terms. This especially resonates with promising but previously under-resourced software businesses located outside venture hubs.
Our approach is driven by three core tenets: transitional capital, transformational expertise, and exit readiness on your team’s timetable. Here’s what that looks like.
If you are raising external funding for the first time, or considering institutional capital for the first time, it all starts with raising the appropriate amount of capital for your business. Often venture capital firms scale check sizes based on their fund dynamics vs. what a company actually needs (and should realistically spend) over the next couple years. Begin with the end in mind and determine how much capital is needed to accelerate your business to the next growth milestone.
While we believe in investing behind growth once you’ve found product-market fit, the problem with taking on too much capital is that it can spur previously bootstrapped and capital efficient businesses to spend on things that aren’t actually adding value (cue every Silicon Valley company perks stereotype). It can also raise the bar for an exit and come with a slew of terms that are designed to protect the investor’s downside, sometimes at the expense of common stockholders like founders and employees.
Transitional capital is a concept centered on accurately modeling your business’s capital needs to drive sustainable growth and work towards an exit that is statistically achievable vs. a moonshot. For a growing software company, there will almost always be additional opportunities to raise more capital at higher valuations while providing liquidity along the way.
Just as important as the check size is the experience that comes with it. While most firms have formalized this sharing of expertise through venture and operating partners, founders should be wary about how those resources are offered. Are they available across the entire portfolio or are they focused on a firm’s relatively small number of “big winners”? Will you really get the time and resource commitment from that impressive operating partner or will you be fighting for time on her calendar?
We’ve designed our platform around a network of operating advisors (OAs)—seasoned executives who have scaled and exited SaaS companies and are ready to roll their sleeves up with the next generation of startups. Because the Elsewhere investment model is focused on producing lots of winners, our program has more than enough expertise to go around the entire portfolio, and is closely tailored to the type of help a company needs.
Elsewhere OAs span functional and domain expertise and can be engaged most often as board members, interim functional leadership, or even new executives as founders look to transition to the next thing.
The first two steps are designed to optimize portfolio companies for an outcome that is both meaningful and realistic. We believe it really can be a win-win for founders and investors alike, and not just for one out of ten portfolio companies. Critical here is ditching the narrative that the only worthy pursuit is the unicorn path. We recommend working towards an exit target that the financial ecosystem at large can easily absorb to maximize your odds of success.
Data show that the most common startup exit (for those who survive to sell at all) is in the $150 million range. We intentionally model our investment and engagement with a company to put them on this path—which in turn comes with the luxury of choice that doesn’t exist in a billion-or-bust world. There’s a healthy (and growing) number of investors at the $150 million price point, spanning PE buyout, strategic acquirer, and growth equity, each of which reflect a slightly different levels of liquidity and engagement for and from the founder. The choice is yours, and it wouldn’t be possible if you raised overvalued earlier rounds and could only entertain a massive acquisition or IPO as a result.
While the past few years have shown there is no shortage of capital, not all capital is the right capital for any single business. Our team has seen firsthand the pitfalls of the traditional VC model, which can introduce unnecessary risk for an individual company and eschew a number of options for meaningful outcomes in favor of a “growth at all costs” approach.
We recognize that so many founders get into the game for the love of building a company and solving an important need in the market, and we think taking a more measured approach can ensure this opportunity is available to a much higher number of them. It doesn’t have to be all or nothing.