BC Business
Boris Wertz | BCBusinessVancouver venture capitalist Boris Wertz.
Vancouver venture capitalist Boris Wertz was among the stand-out speakers on the first day of the GROW Conference at the Vancouver Convention Centre, promising to share with the stranding-room-only crowd the secret to building a $100-million company. Many among the assembled crush of entrepreneurs hoping for the inside track on VC funding found themselves swallowing a dose of tough medicine.
Wertz explained that he arrived at the $100-million figure by a process of what he calls “VC math.” Here’s the calculation: If a venture capitalist wants to be in the top tier of his class with a $20-million fund to invest, he must return three-to-four times that number to investors. If we assume that this hypothetical VC (or not-so-hypothetical, since Wertz’s fund closed in February at $19 million) aims to hold 5 per cent equity come exit time, that means focusing on businesses with very large upside potential. As Wertz explained, “that means [he has] to be part of $1.6 billion of exit, so that’s a large amount, and that’s across 20-25 businesses.”
That’s the why. If you want venture capital funding, you need to think big. Wertz then went on to describe how. If you want to build a $100-million company, he says, you’ve only got two options: you can make something very profitable or you can make something viral. He sees high-value software-as-a-service (SaaS) plays as exemplifying the former. By breaking down churn rate and the customer acquisition cost, he explained that a $3,500-lifetime-value customer is a good path to a $100-million valuation. If the business scales, that is.
The second model is the sexier one, and no doubt the model many of the GROW-goers in the room aspired to follow. As anyone whose eyes widened at the news of Instagram’s $1-billion exit, the prospect of a socially contagious product with a near-zero customer acquisition cost sounds like a lot of fun to pursue. And with a business like that, you don’t need to make much money per customer to get to $100 million. As Wertz pointed out, Facebook only makes about $7 per user per year.
Wertz had a simple message for the GROW audience: if your business is in one of these two categories, welcome to the $100-million club. But if your business is stuck somewhere in the middle—either not viral enough or not extracting enough value from each user—then forget about VC money. He might suggest you try crowd-funder Indiegogo, one of his portfolio companies.