Want a Good Deal? Have a Credible Alternative

First time entrepreneurs often ask me what they should do to maximize their chances of raising venture capital. To which I invariably answer: “Not need it.” Why? Because raising capital or selling your company is all about having a credible alternative. If you have a credible alternative you will arrive at a good deal — if you don’t, then bad things will happen. This is true for raising capital and it is true for exits. In both cases the best credible alternative is not needing the capital and not needing to sell. What about having multiple possible investors or buyers bidding each other up? By all means do, but having the ability to get that kind of multiple bidder process going depends crucially on the real alternative of not needing the transaction at all. And as it turns out when you have a credible alternative you don’t even need multiple bidders.

That’s why people who don’t want to quit their day job until they raise money rarely succeed in doing so. They are signaling that they have no alternative to raising the money. The investors feel that whether or not this startup happens depends on them. Who would want to invest in that? Instead investors need to feel that this startup will happen with or without them. The train is leaving the station. It’s also why having a burn rate so high that your existing investor(s) can’t easily fund you for another 15-18 months is dangerous. New investors conclude that the company doesn’t have an alternative and often won’t invest at all (rather than propose a low price). This also explains the expression that you want your company to be bought, not sold. Selling means you have no alternative. Being bought means you decide whether or not you like a deal.

So always keep having an alternative in mind. It applies incredibly broadly. Not just to deals with investors but also to hiring, suppliers, etc. If you have a sole supplier and your contract comes up you may find yourself on the wrong end of the deal. Or a customer who accounts for a large fraction of your revenues (or profits, or network). And so on.

Posted: 24th January 2013Comments
Tags:  fundraising exits strategy negotiations

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  1. campyspod reblogged this from continuations and added:
    This is great. And great advice for me now. We (Pathful.com) are starting to raise money. A good friend who is a...
  2. jamesriney reblogged this from continuations
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  4. continuations posted this

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