Capital Raise Or Company Sale? There’s A Third Strategic Option

By Itay Sagie

So, you’ve successfully navigated your startup to a pivotal moment. You’ve secured some $10 million in funding, identified a product-market fit, and achieved an impressive $3 million in annual revenue with consistent year-over-year growth.

The clock is ticking: Projections point to profitability in 12 months, but your runway is drying up in nine. The pressure is on!

This scenario isn’t just hypothetical. Many of you might find it mirrors your own journey closely.

So, what are your options?

Option 1: Raise capital — difficult

Imagine your most recent raise, a Series A round, was $5 million, boosting your post-money valuation to $20 million.

With the market being what it is, a down round is off the table for your investors.

Your goal? To secure an additional $8 million, aiming for a $25 million pre-money valuation, which would mean you will reach a $33 million post-money valuation, letting go of another 24% stake of your company.

This is no small feat in a market where achieving an 11x revenue multiplier (your $33 million valuation against $3 million in revenue) is akin to reaching for the stars.

Yet, let’s say you’ve done it. Your new VC partners are eyeing a tenfold return on their investment, dreaming of transforming their $8 million into $80 million. This requires your exit valuation to breach the $300 million mark, demanding a sales figure of $60 million to align with the current 5x revenue multipliers.

That’s a Herculean task, undoubtedly, that could inadvertently handcuff you to unrealistic M&A expectations, potentially sidelining more attainable opportunities.

The upside about this option is that you are postponing the final valuation for exit in a few years, and by then perhaps revenue multipliers will soar once more.

Option 2: Sell — not a bad option

Opting to sell at a 5x multiplier could net you $15 million today.

However, considering your last funding round pegged the company’s worth at $20 million, a sale could activate a series of anti-dilution mechanisms, from full ratchets to liquidation preferences.

Despite these hurdles, this route saves you time, and may end up being favorable for the founder, versus raising additional funds through mechanisms like earn-outs and bonuses.

I would not disregard the time element. You get to save a few years of your life and, as an entrepreneur with exit history, you can start a new venture after your mandatory stay with the buyer.

Option 3: Sell a majority stake — let’s discuss

Here lies the uncharted path for many: Working with a private equity fund to acquire a majority stake.

This nuanced approach blends elements of selling while still holding onto a piece of the pie. Post-sale, you might retain 20% ownership, reaping the benefits of a capital boost aimed at turbocharging growth, with a potential “second bite at the apple” on the horizon when the PE fund flips the company.

While a PE fund’s valuation might be lower than that of a strategic, this strategy shifts the financial burden from your shoulders to usher in a new era of accelerated expansion, leaving you with a lucrative stake in a now well-oiled growth machine.

You also get to have a second bite from the apple at a different time when the company is bigger and multipliers may be higher.

There is no one clear path, and nobody knows what the future holds. Each company is its own unique universe of circumstances, agendas and personal and business goals. The decision rests in your hands, and whatever you do, make sure to enjoy the ride.

Itay Sagie, a guest contributor to Crunchbase News, is a seasoned lecturer and strategic adviser to startups and investors, specializing in strategy, growth and M&A. You can connect with him on LinkedIn for further insights and discussions.

Illustration: Dom Guzman