Size Matters

Time is the entrepreneur's most precious commodity.  For most entrepreneurs, the VC fundraising process is very time-consuming.  Bad combination.

In an attempt to help, I have previously offered tips to entrepreneurs on navigating the VC process -- "The Ten Commandments for Entrepreneurs", as well as some follow-on posts in this blog.

Here's another one.

There are many kinds of VC's.  Some focus on IT, some on healthcare, some on energy, cleantech, etc.  Some focus on early stage investing, some on later stage.  There are, no doubt, other important dimensions on which VC firms also vary.

But, regardless of other differences, one thing almost all VC's look for as the gating item in their investment decisions is market size.  Size matters; bigger is better.

Why is this?

A baseball metaphor is usually employed.  VC's, especially early-stage VC's, get paid to hit grand-slam homeruns (achieve out-sized investment returns).  In order to do this, VC's must "swing for the fences" each time they "step to the plate" (invest).  The bad news: in early-stage VC, as in baseball, if one swings for the fences every at-bat, one strikes out a lot.

One might reasonably ask: why don't VC's just "play it safe" by attempting to hit "singles" and "doubles", with fewer strike-outs?  The reason is perhaps not obvious.  Early-stage VC's don't use the "home-run every time" strategy just because they like high-stakes gambling (though some are high-stakes gamblers outside of work).  They operate this way because, in early-stage investing, it is damn near impossible to tell (with any consistency) which startups will succeed and which will fail.  One strikes out just as often hitting for a single as for a home-run -- so one is better off trying to hit a grand-slam every time.

In the VC business, it is received wisdom that no company can become large and successful unless it's addressing a large market.  In VC land, it's not unusual to hear something like: "Even good teams fail in bad markets; even bad teams have a shot in good markets."  Obviously, there are many other factors that determine success or failure of a startup, but addressing a large market is a necessary (but not sufficient) one.

Finally, most VC's (at least in the good firms, which tend to have the best deal flow) can't pay close attention to more than a small percentage of the deals that come across their desks.  So, like all human beings, VC's use triage strategies to cope.  Given that addressing a large market is a necessary condition of success for any startup, VCs ask the size-of-market question early on as a way to narrow the field of startups to a size they can manage. 

Together, these two factors, (1) necessity of large markets for success and (2) necessity for VC's to efficiently triage their deal flow, show why many VC's use market size (and structure -- see Postscript below) as an important initial filter to decide which startups they spend time on.

A first step on the path to VC funding, therefore, entails making clear to the VC's the size of the market one is addressing.

Postscript:  A useful nuance is probably worth noting here.  Sometimes, the largest opportunities lie with startups that attempt to create new markets (whether through "disrupting" existing markets or otherwise), rather than those who (merely) participate in existing markets by introducing new/improved products and/or services.  Valuable companies can be built in both situations.

Comments

[Alex Tegov]

"Time is the entrepreneur's most precious commodity. For most entrepreneurs, the VC fundraising process is very time-consuming. Bad combination."

I could not have put it better myself. If you look at the track records for companies trying to obtain funding each year to those that actually do obtain it, over the last several years I think that you too will agree the results are just saddening. Fortunately enough for me I was able to stumble across Services4Stock.com, prior to their advertisements in the New York Times. I had an idea composed on every pages to resemble an executive summary, along with a short excel chart full of " guesstimations " if you will. Although the idea was bound to work and I had a small amount of capital saved up to get the wheels turning, I was far from being able to launch the company the way it really should have.

Like with all new ideas time plays a major role which could easily make or break even the best of ideas. I simply did not have time to run around looking for someone to invest money into a project which was simply starting up, let alone ask for a marketing budget which is what I needed most. However at services4stock I was able to trade stock in a company which would be worth nothing to me if the company went out of business, for what I truly believe to priceless advertising. Without a dollar from my pocket I was able to sign stock away in exchange advertising. Not only was my company advertised for me by a team of professional, they were actually able to acquire Miss Miami as the spokesperson for my company.

I cannot explain how much it is that this website was able to do for me. Simply look at the press release below and listen to the clip on their site. The way of marketing and VC has truly been revolutionized.

Services4Stock Injects Emerging Businesses with New Growth Potential

Trading Stock for Media Exposure Expands Business without Financing and Promotes Marketplace Efficiency

NEW YORK, N.Y.—Emerging businesses now have the power to expand and increase their customer base without the hassle of traditional financing thanks to a new firm facilitating the trade of business stock for needed services.

Services4Stock, Inc., (www.services4stock.com) has set out to help emerging businesses succeed and grow without the need to acquire additional financing to cover the costs of media exposure and other needed services. Services4Stock markets the stock of new and growing companies to publishers, media groups and other service providers offering the stock in exchange for advertising and services that would otherwise go unsold.

The advantage for businesses under the Services4Stock model is that the company doesn't even have to realize costs of media exposure until it has already paid off through growth and expansion.

"Emerging companies will be able to make their products known nationwide without any cash expenditure," says Alex Konanykhin, CEO of Services4Stock.com.

For service providers, the model means services and ad space don't go unsold and can potentially be more valuable than the selling price since stock value increases as the business expands.

"Our company lets many types of service providers leverage their excess capacity by exchanging it for valuable equity in emerging companies," Konanykhin says. In addition to advertising services, services available through the Services4Stock exchange include nationwide publicity by Publicity Guaranteed, Inc., interactive production services by KMGI, and legal services.

Ultimately, the Services4Stock model provides a needed shot in the arm to the U.S. economy—more jobs are created through the growth of emerging businesses and market efficiency is created since service providers, who invest trillions of dollars in the stock market as part of their own profit strategy, don't have to sell services for cash first in order to make those investments.

"It's a mutually beneficial situation for everyone," says Konanykhin.

Services4Stock already has many publishers and other service providers ready to invest in growing businesses by trading services. Several major publishers, including The Wall Street Journal and USA Today are considering participating in the Services4Stock exchange. Since the cost of a one-page ad is well into six figures for many of these publications, growing businesses stand to gain a great advantage by purchasing this marketing power with their business equity. Application to purchase services through Services4Stock is simple and fast, with a minimal monthly fee to cover marketing services. Registration is free for service providers, who can search Services4Stock's database of small cap public companies and promising start-ups to find equity opportunities they want to help grow.

Services4Stock is a privately owned company based in Manhattan. For more information on Services4Stock, visit the web site at www.services4stock.com or contact the company directly by email at inquiry@services4stock.com or by phone at (954) 920-6185.