Thanks, I guess I was wrong on that count. It makes sense.
The first part continues to baffle me. If I have a proven profit of $X/year and I have the market captured (speaking on the order of 10% or 50%, doesn't matter), how does it make sense to seek investment in the order of 100*X? What's the goal? Why not just keep milking the proven cash cow and stop growing and risking?
* If you fail to grow, the investors lose their money. But the company still exists afterwards.
* If you succeed, you still get many benefits.
You're risking __someone else__'s money. And they're not even asking for the money back, just equity. In fact, a common scheme is to take the money, pay yourself, and do nothing. (Slightly fraudulent, but its really hard to tell the difference. Ex: all the yachts that
Adam Neumann bought when he got investment money for WeWork).
As the CEO, you still get the salary, and that salary comes out of the investment money. So at a minimum, you often give yourself a raise for convincing other people to give lots of money to your company.
--------
There's also something to be said about cashing out. If you're tired of the grind of building a company, you can sell out and make $100s millions or $Billions with a company like this.
Ex: Notch burned out and dropped off the grid after a few years of Minecraft development. He took the $5 Billion offer from Microsoft and then largely disappeared. I don't think anyone can blame him, indie developers at heart don't want to deal with the politics of leading a 10+ million video game players.
Seeking investors is the path towards cashing out and retiring. You need to find a new owner of the company, and selling your stake / equity to them is a major step towards retirement.
I guess the risk is going from possible 50%+ ownership of a a company worth a few millions or tens of millions to much less ownership of a company worth roughly the same amount if it fails to grow. Or the risk of being forced out of control, I guess.
I think that's a good illustration of why people do it. 10% of a $20 million dollar company is still worth something and even if you lost ten or twenty million or so from theoretically doing nothing, having 10% of a multi-billion dollar company is worth a whole lot, so people like that gamble.
> I guess the risk is going from possible 50%+ ownership of a a company worth a few millions or tens of millions to much less ownership of a company worth roughly the same amount if it fails to grow. Or the risk of being forced out of control, I guess.
If the company is worth $50 million, and you sell 10% of it, the company gets $5 million bucks.
Since the company is now $5-million richer, you'd expect the company to really be worth $55 million at least (since its the same company, except now with $5 million more bucks).
It is now on the onus of the CEO to ensure that the extra cash does indeed grow the company's value. Sure, the money could be pissed away in a party yacht. But ideally, a good CEO will do something reasonable with the money. (Though the party yacht is often then used to raise more money from other rich folk, raising the value of the company again, lol)
As long as the CEO doesn't fall into the trap of just grabbing money without purpose... as long as the CEO has a plan for what to do with the investment money... its probably a good thing. IMO, where a lot of CEOs make a mistake is that they go into full-tilt money raising mode and never stop to think if they have "enough money for now". But I doubt that OnlyFans is at this stage of the game, OnlyFans probably can grow much faster with a bit more investment money.
Yeah, I just meant to show what is probably a worst case (not really, worst case would be company goes under or loses a lot of value/market share I guess), where they accept money and it's spent in an effort to help the business but just doesn't. I guess in the example you put forth that would be a $50 million company that takes $5 million, spends it on a major advertising campaign, and sees zero difference. Now they've given away equity and gotten nothing in return other than that what they tried before doesn't work. The flip side is that it helps immensely and your lower equity might be worth more overall. Any anything in between.
At least that's how I understand it. I'm not trying to pretend I know a huge amount about this. It's mostly general knowledge accumulated from normal sources and discussions here, so if you think I'm totally missing something, I'm happy to hear it.
> What's the goal? Why not just keep milking the proven cash cow and stop growing and risking?
I'm going to ignore the whole "cashing out" and "hyper growth" answers because they've been covered to death.
Rather, I'll just say that this OnlyFans situation is a great example of why you'd want to do that. OnlyFans is a great case of what you described — they have definitely captured a significant chunk of the premium adult content market, and have nice steady revenue streams from there. They could just keep milking that and improving it incrementally.
Yet, that whole revenue stream comes with a huge risk attached (a risk of 'extinction event' proportions) in the form of payment providers refusing to do business with you. Near as I can tell, this whole situation is at least somewhat due to Mastercard pressuring OnlyFans to stop offering adult content (or, at least, to offer it under much more restrictive terms), so this is not some hypothetical risk, it's an actual credible threat. Investment gives them the resources to go find ways to work around that risk somehow.
It doesn't really make sense in my opinion, so maybe I'm the wrong person to answer, but I think it's a game of statistics.
OF has captured a certain market, and is making a certain amount of money. Of companies like that, a small but not insignificant number grows to super major size, the size that can do an IPO and exit for billions.
The current owners are OF are trying to capitalize on the value investors put on that possibility, and on the reduced risk of having so much money invested. With each investment round the risk of failure goes down a little, and the risk of major success goes up a little.
A major example of this is Facebook. It was profitable and well established, why would they need extra investment or an IPO? Then out of nowhere Facebook bought Instagram, and Whatsapp, and it is clear now that without those two acquisitions Facebook could have been in serious trouble. The absolute crapton of cash they got effectively took away risk.
So it's a chance to de-risk and cash out of OF, and let the big boys play on taking OF to an IPO.
That's a different strategy - you can be shooting for a sustainable medium size company, or try to become a tech behemoth.
Both choices are valids, but investors tend to push you towards growing forever. So if your board is already controlled by investors (as opposed to founders or employees), they'll encourage you to raise more to grow more.
You need to look at it slightly differently. The founders aren't looking at the money they can make from the cash cow. Revenue is a long-term earner and requires them to keep being successful for that long term. An exit (via a sale of the business) is the real short-term earner & lets them walk away (m/b)illionaires.
Therefore the game is to optimise valuation - the higher the investment round, the higher the company valuation, and the higher the sale value.
One aspect is that it's a way for the founders get to take some money off the table. It's not prudent to have 99% of your wealth tied up in a single "cash cow" no matter how proven it is, you do want to diversify.
The first part continues to baffle me. If I have a proven profit of $X/year and I have the market captured (speaking on the order of 10% or 50%, doesn't matter), how does it make sense to seek investment in the order of 100*X? What's the goal? Why not just keep milking the proven cash cow and stop growing and risking?