What Game Are You Playing?

There are essentially two endgames for a company in the start-up world: 1) VC investment leading to hypergrowth and a $100MM+ exit via acquisition or IPO, or 2) raising a modest amount of capital ($1.5 - $3MM) and experience organic growth leading to a smaller exit via acquisition. The lure that is often highlighted in the media is the VC route. It is what Silicon Valley dreams are made of and it is that shiny object everyone chases. But bigger is not always better … or smarter. As a founder, you have to ask yourself which of these two games you want to play.

The two games are dramatically different.

Game 1 - VC Investment and hypergrowth.

• The name of the game is to build something huge and fast.

• Involves a series of large investments (which VCs prefer as a way to deploy more capital in their fund).

• Longer time to exit (7+ years).

• Founder’s shares are greatly diluted.

• Founders lose control of the company as early as Round 1 investment.

• Company can be successful, but the founders may not see any financial return personally.

  • Common Shareholders are often highly diluted. The terms on which Preferred Shareholders get paid often result in little or no returns to Common Shareholders. (e.g. Liquidation preference and Participating Preferred stock)

• An exit at a high price looks financially significant on paper, but founders may not reap the rewards.

Game 2 - Organic growth.

• Involves smaller investment – usually a few million dollars (One or two smaller rounds of financing).

• Focus is on generating revenue and organic growth.

• Shorter time to exit (3-5 years).

• Common Shareholders get less diluted (with $1.5-$2MM raised, total dilution is about 20-35%)

• Founders have a say in the company for a longer period of time.

• Exit price looks modest, but founders and Common Shareholders do see 10X returns.

Can you imagine how different your life would be as a founder in Game 1 vs. Game 2? Do you understand all the variables that affect your role in the company based on which of the games you choose? Do you understand how Board composition and dynamics would be different? Or which game makes you more disposable as a team member? Have you even thought about which endgame matters more to you? Do you prefer to take money off the table during a smaller exit, or be a part of a larger growth story but with no personal financial gain?

It is important for founders to be clear from the beginning about their answers to these questions. Unfortunately, many founders never have these conversations, which causes significant problems for them down the road. Understanding which game you are playing, and being in agreement with your co-founders about the path to success, ensures that you see eye-to-eye regarding how much you need to raise, when you need to raise it, which Board structure to advocate for with investors, and which valuation range is acceptable.

Imagine what would happen if you start your company, work hard for two years, and then realize in year three that you were playing Game 1 while your co-founder(s) were playing Game 2. At a minimum, the misunderstanding will cause some heartache. At a maximum, it could become the cause of the dissolution of your company.