Carey Lai's Corner

A former lemonade stand entrepreneur turned Venture Capitalist

If You Give A Mouse A Cookie – Part 2/4: Markets

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There is a well known children’s book called If You Give a Mouse a Cookie, which is a story about a chain reaction of events once you give a mouse a cookie, such as if you give a mouse a cookie, he’ll ask for a glass of milk.  When you give him a glass of milk, he’ll ask for a straw and so on.  So, let me start a chain reaction of why you need to play in a large market.  Let me first start off by saying that not every business is great for venture capital investment.  For example, coin-operated laundry businesses are not VC-backable businesses. They may throw off great cash flow, but it is not a growing business.  You add barriers to entry, capital requirements, scalability and there you have it, not a VC-backable business.  That’s not to say it’s a bad business, just not a VC-backable business.

If you talk to most VCs that invest in technology, VCs like big ideas that go after big markets.  Typically, that means finding your way into a market that’s at least a $1B in size.  What’s so magic about $1B?  Let’s start the chain reaction.  If you play in a large $1B market and penetrate 10% of the market, you’ve built a $100M revenue business.  When you build a $100M revenue business, people will take notice.  If those people take notice and pay between 3-5x revenues, you could get acquired for $300-$500M.  If you get acquired for $300-$500M and you own 10% as the CEO/Founder/Entrepreneur, you might find yourself $30-$50M wealthier.  If you’re $30-$50M wealthier, you don’t have to fly Southwest Airlines anymore.   That is, you don’t have to if you don’t want to.  J

Conversely, let’s say you play in a $100M market and you penetrate 10% of the market, you will have built yourself a $10M business.  If you get acquired, and that’s a pretty big “if” because the acquirer will not find the market itself very attractive, you might only get between 1-3x revenue multiples, which translates into a sale of $10-$30M.  If you own 10% of the business at the time of sale, you will be wealthier by $1-$3M.  If you’re $1-$3M wealthier, you’re probably still flying Southwest Airlines, but maybe you’d be more willing to upgrade to Business Select.

So, there you have it.  VCs back entrepreneurs with big ideas in big markets.  The math works out better for everyone!

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One comment on “If You Give A Mouse A Cookie – Part 2/4: Markets

  1. Kevin Chou
    February 21, 2013

    Good post!

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This entry was posted on January 16, 2013 by in Uncategorized.
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