I believe that when people choose to not take on outside investment in a high growth market, the reasoning has more to do with control than with maximizing return. I just don't see anyone thinking "I'll make more if the company stays small".
Andrea - the reason VCs are looking for the 1000x payout is because startups are extremely risky. The NASDAQ Composite Index (very little effort) averages about 13% ROI year on year.
now 90% of all startups fail. So if you were going to invest in startups blindly you would need each startup you invest in have a business planthat returns 126% year on year JUST TO MEET the NASDAQ. and of course VC investing is much harder than the NASDAQ and riskier so you necessarily increase the cost.
The realty is that 70% of the companies the VCs invest in basically disappear in a puff of smoke. No meaningful assets left behind
An addition 20% perform below NASDAQ market ROI.
And additional 5% perform basically at NASDAQ ROI
So you have (0.05 x 13%) + (0.2 x 7%) + (0.7 x 0) ==> 95% of your portfolio will contribute a weighted ROI of 2.05% to your overall ROI. Now using hedging and options and other strategems - that take about as much work as running a VC probably gets you to 20%. So that means your REAL target ROI has to be 20%.
so that means your remaining 5% have to provide aweighted contribution of 17.95% ROI.
That means they have to on average produce an ROI of 360%.!!
Now if we dive into this remaining 5%, about 1/2 of them make their 10x in 3 years growth targets which gives you a weighted ROI of 8.325%. added to the above 2.05% and we are now at 10.33%
So the remaining 2.5% by itself has to generate some 10%-15% of your total ROI. That means they have to have roughly 500%-600% ROI year on year.
So what the VCs look for is a 10x growth in 3 years as a viable business plan. The assume 95% of their investments will not return this. The assume 2%-3% will and they assume 2% will exceed this
If they are very good, they exceed this by a significant amount. But if you want OTHER PEOPLE'S MONEY to take the risk in your company, you need to compensate that risk above and beyond what they can get simply by buying an index fund
And the reason many entrepreneurs want to sell is.. well they are ideas people. The notion of slogging it out day in and day out doing incremental growth in sales - sure making good money - is exactly what they sought to avoid by not taking that corporate gig and instead taking the riskier path of startup world
Great points. I would add one more. If you look at sales funnels a lot of times the largest opportunities are given the most resources in terms of pre-sales headcount and mgmt. support. This is true even if there are 10x the opportunity in a bunch of smaller accounts. The reason? The effort to close a small opportunity (aka a small size startup being successful) is the same effort to close a large scale opportunity (aka a unicorn startup). Given the success rates of startups, even fully capitalized and staffed with the best minds, is still 1 in 10 in most VCs playbooks, it just doesn't make sense to go after small opportunities. You would have to dramatically close many more small ones to have the same ROI, in the end, as one large one.
The smaller ones are more suitable for ff&f financing, where Uncle Bob is thrilled to get $10k back on his $5k investment...and if not, still gives you a hug at the family reunion :)
>>The real problem, in my opinion, is that most founders and VCs think that they will go viral sooner rather than later and that is a total delusion. <<
I think you misunderstand the process. VCs KNOW that 90% of the companies will NOT go viral. OTOH 100% of the founders do. That's the mismatch. So VCs base their assumptions on the data they have of industry success rates. And again the track record of failure is what it is. And if you want VCs to invest in your company in the face of that, you have to offer a payoff to the VC that will beat the market.
And no I'm not saying that from day 1 you "need the whole structure in place" . Frankly I didn't address structure at all. So please don't put words into my mouth. All I am saying is that if you restrict VC investment to less than $1 million, you restrict the sorts of projects that can be accomplished. Developing something like a Tesla requires quite a bit more than $1 million, or a DNS address and a website.
The market force are what drive VC behavior... and if you don't understand why, then I suggest look to understanding the market forces