Edison Ventures Community: Size doesn't (or shouldn't) matter... - Edison Ventures Community

I bet the title of our first blog entry wasn’t what you were expecting from me or Edison Ventures. You haven’t stumbled upon the latest edition of Cosmo or Marie Claire . How much money an early stage or private company has raised or how big the latest round was is way overhyped in the VC and growth equity industry. Below I share some thoughts on why size doesn’t (or shouldn’t) matter as much as it seems to.

Welcome to Edison Ventures’ foray into the blogosphere. Our entry into the arena is long overdue but not for lack of opinion. In upcoming posts we will share trends in our core industry sectors—financial services, interactive marketing, eCommerce/consumer Internet and healthcare IT. Our team will provide best practices on topics ranging from “Getting a VC’s Attention—and Keeping It” to “Running an Effective Board Meeting”. We will also share our views on the industry—the good, the bad and the ugly. We hope you will visit often and share your candid comments and opinions with us.

We recently launched the Edison Forum. The Forum is intended for portfolio companies, entrepreneurs and service providers to ask questions, share best practices or throw out a topic for discussion. Edison investment professionals will participate by providing feedback and, if it works the way we hope, lots of you will share your ideas. Please check it out and fire away with a question or topic.

Back to the size topic. I have been a VC for almost 10 years and I was venture-backed in two start-ups in the 8 years prior. I entered the venture business shortly after the tech bubble burst in early 2002 (good timing, I successfully missed the dot com IPO window). One of the reasons I joined Edison was the mantra we live and breathe every day—“Business models must be capital efficient!” We define capital efficiency by asking ourselves if a company can reach scale ($50-75M in revenue and 15-25% EBITDA) by raising less than $20M.

Why is this important? Simply put for entrepreneurs and investors—it’s not about how much you raise, it’s about how much you take home when you ultimately exit. My team at Edison hears me bitch about the top VC-backed lists all the time Inevitably these lists rank VC companies by capital raised, not by revenue or profits! Notice the average total capital raised on this list is $81M! The WSJ criteria has over 27% of the ranking attributable to capital raised. Financial performance was 0%. I don’t get it. The bottom line is that the vast majority of technology company exits are in the $60-110M range. Do the math before bragging about the $40M round you just closed? As one of my partners likes to say, “run the model”, where does the exit value have to be for you and your investors to consider the outcome a success? Raising $80M has real potential to be a train wreck for investors, founders and management.

Certainly many great opportunities require a ton of capital—cleantech and biotech come to mind. However, Internet and SaaS models should, and can be, capital efficient. Edison’s model is pretty simple, invest $5-10M initially add another $2-5M if needed, and get to $50-75M with strong operating leverage as quickly as possible. Don’t get me wrong – Edison definitely plays to win. We certainly have had our fair share of $100M+ homeruns (see Gain Captial and Cambridgesoft exits). However, the greatest companies grow quickly while being profitable. These metrics need not be mutually exclusive.

When we get to the initial goals we have set with the management team, we all ask ourselves if we have a $200-500M revenue opportunity on our hands. Oftentimes, these companies are meaningfully profitable and don’t need additional capital. But we also ask whether another round of capital and several more years are worth the risks of competition, technology change and economic cycle are worth it. Several VC’s were writing about this topic a few years ago, but as is always the case we seem doomed to repeat history. The cycle of high valuations and big rounds is back (don’t believe me, check out Bubblicious? in Fortune.com from May 3rd). Check out Josh Kopelman’s article from 2007 on the Unintentional Moonshot, where he aptly notes the unintended consequences of raising lots of capital at high valuations.

I take some solace in the fact that the secondary market is beginning to shed some light on the financials of private companies. I will comment on secondary markets at a later date. I love that we are reading about Facebook’s and GroupOn’s outstanding revenue and profit numbers or the fact that Twitter may be revenue-challenged, but certainly not buzz-challenged. One of the reasons I participate as a judge for the Ernst & Young Entrepreneur of the Year Awards is that revenue and profits are part of the judging criteria as well as the backers, the strategy and vision. (Congratulations to four of our CEO’s Mike Leo of Operative, Joe Mrak of Folio Dynamix, Flint Lane of BillTrust and Bob Farina of Cybershift for their nominations as finalists in the Awards in NYC and NJ this year.)



Edison CEO Summit 2011. This week we are hosting over 50 of our CEOs in Atlantic City, NJ for a two-day summit. The topic of this year’s Summit is “Dreaming Bigger”. We are excited to have three best selling authors speaking at the event, David Thomson, author of Blueprint To A Billion, Mark Feldman, Five Frogs on a Log, and Josh Linkner, Disciplined Dreaming. Follow the event on Twitter via hashtag #11EDISONCEO and come back next week for a recap of the event.