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High Valuations are Suicide
Let's unpack why high valuations are killing your chance of winning + November box brand highlights
FirstLook
January 19, 2025
Welcome to our 34 new subscribers. I'll keep this fun, light, and informative. Did a friend forward you this? Subscribe here.
Dia dhuit! (“Hi” in Gaelic)
Welcome back. Let’s jump in by first covering FirstLook’s 2024, then onto why high valuations early on are basically suicide for founders. But first…
Funding Announcement 🤑
Congrats to Frönen on raising $100K from a FirstLook Investor. I love the simplicity of this ice cream which they proudly display front and center on their packaging. Transparency and simplicity of ingredients is so in with consumers right now.
FirstLook 2024 Recap
It was a wicked hard year for fundraising, worse than 2023, but the FirstLook Investor Community came through big with $1.3M invested across 11 brands. Founders grew their investor networks for future raises, and brands gained countless new (wealthy and super chatty) customers.
2024 also had solid balance between 81 brands per the below pie chart. Feels like too many folks think we only do F&B? Those two categories typically make up about 1/3 of total brands, but that’s because they’re massive industries with endless subcategories. Let it be known, we are open for ALL CONSUMER BRANDS. FirstLook Investors have requested to see more beauty, pet, home goods, wellness, tech, and supplements. Apply here.
I’m also happy our investor community grew. I worked hard to boost their experience which now includes all these perks. As a final cherry on top, we helped one investor meet others in the community so they could sell secondaries. In only two days 19 investors requested an intro as those secondaries were hot hot hot!
Biggest Win: I turned FirstLook more into an Investor Community. So far it’s paying dividends. Folks are expanding their networks, becoming smarter investors, and getting into deals they would have otherwise not had access to.
Biggest Mistake: Getting distraught when an investor passes on joining. This year I’m moving on faster than VCs abandoning web3 for AI. Like one investor told me, “If they get rattled over $99/month, they aren’t serious investors.” I agree.
Goal for 2025: Write more.
Overall FirstLook’s model is working great despite us keeping a relatively low profile in VC. I’m excited for this year as it will be a pivotal one. Let’s get this bread.
Let’s talk about how DUMB/ILL ADVISED/JUVENILE it is to raise early capital with a high valuation.
“But Brian, I thought you were one of us? A champion for founders! You don’t want us having more equity so when we exit it’s that much more lucrative for us?!?! SHAME.”
Of course I want us to stack bands when we exit. But trying to raising with a high valuation is what likely will be the biggest blocker to reaching an exit. Then we’ll have no ‘bands to make them dance’. And for those wondering, a "band" is a popular term used by rappers referring to a stack of cash held together by a paper or rubber band. One ‘band’ usually represents $1,000. Multiple bands is called a rack. Moving on.
Below are the Top 3 reasons why raising at a high valuation early on is a BAD move. Special thanks goes out to Ryan Brothers of Drumroll on providing the inspiration and some insights on this topic!
Cementing Your Rookie Status
A high val in comparison to your traction and potential instantly it tells an investor you’re new to the game. Not a good start in your quest to convince them you’re a prudent founder who understands the game. Even experienced founders with exits who could command higher vals usually don’t go overboard. Why? Because the math doesn’t math.
I reviewed a new energy drink brand recently. Novel product with some IP, and $600K in first year sales. Not bad. Valuation for new round…$25M. If an investor jumped in and they exited for $1B, that’s a 40X gain. When you factor in dilution, however, where investors typically lose 20% each round, you’re actually left with about a 20x return. 20x is cool, but not enough to account for the risk and lack of liquidity imo.
Early-stage Investors ideally want 50-100x baggers like the ones I covered here. If you’re a brand, be honest with how big an exit you can legitimately reach. Then reverse engineer the math to figure out what a respectable starting valuation should be.
The Next Round Will Be More Sucky
High val = high expectations. Founders should always shoot to double their last round’s valuation. With a high starting val, it’s a hard road ahead to reach the traction needed to 2x each round.
When you fail to hit that ridiculous traction, your next round will be a modest bump, flat, or even a down round. That doesn’t get investors jazzed up to share you with their network. “Omg check out this company that’s raising again at a barely higher valuation than their last round!” said no investor ever. Probably safe to say past round investors will feel kind of crummy for initially overpaying as well.
You may still be a strong company, but you’ve lost that “everything I’m seeing looks great” sheen. You’re now that brand that came up short of hitting or exceeding expectations. Investor convos will include unpacking your shortcomings instead of just chatter about what’s next. In other words, a distraction.
Also keep in mind between now and next round you’ll feel tremendous stress to hit that high growth bar. You lose sleep while health declines, you’ll become a monster to work with, and you’ll likely make mistakes that burn precious cash because “we gotta grow grow grow!”
You’re Actually Hurting Your Chances of Getting Rich an Exit
What founders fail to consider is the compounding effect of a high valuation in relation to time, our most precious asset. Let’s look at a scenario of two founders, Sylvia and Mike, building in the same category where acquisitions tend to happen when a startup reaches $30M annual revenue. Sylvia starts with a fair valuation. Mike starts with a high valuation. Assumptions:
Sylvia closes each round in an average of only 3 months while Mike takes an average of 9 months.
Each founder achieves 100% growth between rounds which is 12 months long.
Each founder raises the same amount of money in each round.
Each founder hits $4M revenue between pre-seed and seed (Build Time #1 in the graph below).
Both kick off their to raise on January 1st. 60 months later (5 years) Sylvia hits $32M in revenue. Mike, meanwhile, is only around $14M in annual revenue after 60 months because so much of his time was spent raising. He’s still 24 months away from hitting $32M rev, and that includes needing a Series B in there.
After 60 months, big strategics are r-r-r-r-ramming Sylvia’s phone. Everyone is gushing at what an incredible company she’s built. She’s famous in VC land! When she posts on social media, all the little guppies come engaging in an attempt to suckle at the teet of success. #iykyk
Mike on the other hand is constantly viewed as the second fiddle. The ‘good try, you were so close’ founder. Real Gs respect him for hitting $14M revenue as that’s not easy, but those in M&A land are interested in Sylvia at this point. She may even get a juicy offer given how fast she eclipsed $30M ARR and all the frothy buzz in her category.
A few months later, Sylvia exits with 15% equity on a $300M all-cash offer. After 63 months of work she can now blow her nose with crisp, uncirculated $100 bills till the end of time. Mike meanwhile is still building, still having to explain to investors the ups and downs of past rounds, and now he’s got a constant headache from dealing with all the new entrants and private label from retailers.
Hopefully in another 2 years or more he can exit, but who knows what economic climate and M&A appetite will look like then. Worse case, Mike may need to raise more money than what Sylvia raised (which further dilutes his equity) in an attempt to diversify his company to become attractive for an exit.
In Sum
Starting with a reasonable valuation totally greases the rails for a founder’s ascent to the top. It sets the founder, investors, and an acquirer up for success. Not every exit comes from a race between to similar companies like I portrayed in the example above. Nevertheless, every minute spent fundraising is a minute stolen from building, and building is all that matters.
Like you, I’d love to be rich enough one day to own a car that tells me someone is in my blind spot. The key is to ask yourself how rich do you actually need to be? Sylvia had less equity upon an exit but still earned $45M. Mike who let’s say holds 25% equity on paper still has $0 to his name because he hasn’t exited and statistically never will. If he did at $300M, that’d be $75M for him. $45M vs $75M….is there honestly a difference?
Be smart and start your fundraising journey at a fair valuation. Your family’s family’s family’s family will thank you later.
To officially wrap up, here is Bethenny Frankel’s favorite VC scoreboard:
Founder Pro Tip of the Month 💡
Building more to exit bigger doesn’t always mean more money in a founder’s pocket. Dilution is the enemy! Let’s do some math.
Your company gets an acquisition offer of $500M. You own 10% equity so that’s $50M. BUT for some f*cked up reason you really want $75M from an exit. How much bigger and longer must you build?
It’s not simply “I’ll grow my business from a $500M offer to $750M” To grow, you’ll likely need to raise more capital which further dilutes your equity. On the next raise you may go from 10% to 8% ownership. This means you’ll need an acquisition offer of $937,500,000!
Growing a consumer goods business from $500M offer to a $937M offer is NOT EASY. It will likely take 2-3 more years, create more opportunity for competition to grow, and take years off your life via stress.
Is that extra $25M really worth it? Say it with me…”NO!” Like you, I’m still going to order the same chips, queso, and margs at my favorite mexican spot down the street regardless of how rich I am.
Did a friend forward you this and now you want to join? Hop a’board!
November Box Brands 🚀
Cali Sober
Founded by Flip Croft-Caderao |📍Dallas / Nashville — Homepage / Instagram / TikTok / Linkedin / Founder Video
How We Met Them: Via our bff and advisor, Marc Nathan!
One Liner ✍️ — We're the Totally Legal THC Infused Mocktail
Discount Code: “ILoveFirstLook” gets you 20% off sitewide
What made them stand out: I can’t imagine a better name for a THC drinks brand than Cali Sober. They nailed it, and only because Flip noticed the trademark ‘Cali Sober’ had just expired, and so he grabbed it! This move was huge as they basically have a built-in marketing line immediately. Great name aside, I really liked their drinks. All tasted great, and under 20 calories! The ‘vibe’ was smooth and relaxing as well. Given the continued relaxing of cannabis laws across the US, I think Cali Sober is well positioned to grow in leaps and bounds. They’re distributed in 8 states including Total Wine & More in Texas, Florida, Arizona and North Carolina and are already enjoying 40% MoM growth!
Request An Intro (Investors only)
Couplet Coffee
Founded by Gefen Skolnick |📍LA — Homepage / Instagram / TikTok / Linkedin
How We Met Them: Via being friends on X!
One Liner ✍️ — Gen-Z's favorite coffee brand, making coffee fun and approachable.
Discount Code: “FirstLookers” gets you 15% sitewide
What made them stand out: Gefen is a big personality on X which both helps her spread awareness on the brand, attract talent, and most importantly learn from others. Dare I say it pays to be a bit of a influencer! Gefen aside, I think Couplet is a beautiful brand that completely breaks the norm in the coffee space. It’s fun, brightest on shelves, and celebrates excitement which is a far deviation from the standard luxe vibe all other brands go for. In short, it’s doing the opposite of everyone else, and so far that is paying dividends. Gefen is also branching out and getting into the coffee shop biz. She recently opened Couplet’s first brick and mortar in LA at 1638 W Temple St! All in all, Couplet is a brand you invest in because this is Gefen at her best. She’s smart, hustles hard, and could not be more passionate. She’s has that X-Factor.
Request An Intro (Investors only)
Gleamin
Founded by Jordan Smyth |📍NYC — Homepage / Instagram / Linkedin / Brand Video
How We Met Them: Via their signup on the FirstLook.vc
One Liner ✍️ — Redefining hyperpigmentation skin care by building the #1 professional-grade skin system for people of color, targeting a $5B+ global market with clinically proven, affordable, and powered by our Vitamin C innovation.
Discount Code: “ILoveFirstLook” gets you 20% sitewide
What made them stand out: Gleamin is one of the most efficiently operated companies I’ve met in a while. They have strong metrics across the board (including first order profitability!) as they build hyperpigmentation solutions for the majority. Most brands in this segment are either super pricey, or cheap but sh!t quality. Gleamin is engulfing the entire middle (where the most consumers are at) with thoughtfully developed and effective products at a mass price point. The most wild part, however, is Gleamin surpassing 8-figure yearly revenue marks as a DTC only brand. Gtfo! And that includes their SokoGlam selling out 4X in 2024. Retail is in their future which will further fuel explosive growth. Gleamin is going places.
Request An Intro (Investors only)
Hot Jiang
Founded by Kelly Mi Li + Joey Ngoy |📍LA — Homepage / Instagram / TikTok / Linkedin / Founder Video
How We Met Them: Via an intro from our friend Edwin Ong
One Liner ✍️ — Founded by a mother-daughter duo, Hot Jiang is a healthy, ready-to-eat, spicy food brand that features generational recipes from Yunnan.
Discount Code: “FIRSTLOOK20” gets you 20% off sitewide
What made them stand out: First off, Kelly is kind of a big deal. She’s been in the film industry for a bit, both as an actress and producer, and even has her own IMDB profile! Big screen skills aside, I love Kelly’s passion for Hot Jiang which she founded alongside her mother as a healthy, ready-to-eat, spicy food brand featuring family secret generational recipes from Yunnan. Their launch product, Chili Oil Crisp, tastes great and has been a hit so far. What I’m most excited for is the upcoming launch of their new hero product, Instant rice noodle cups and plain rice noodles. I, along with FirstLook Investors, were blessed to try these out before anyone else. Very tasty! I think these will be a huge hit, and I’m excited to watch Hot Jiang take over.
Request An Intro (Investors only)
NightOwl
Founded by Charlie Grace |📍NYC — Homepage / Instagram / Linkedin
How We Met Them: Via Charlie also being a FirstLook Investor
One Liner ✍️ — We have mastered the art of the espresso martini with a ready-to-drink canned cocktail called NightOwl.
Discount Code: “NIGHTOWL20” gets you 20% off sitewide
What made them stand out: NightOwl was founded by Charlie Grace who is also a FirstLook investor. He and his family bring expertise from the hospitality space, as well as work in beverage. This has helped them quickly secure best-in-class distributors in 10 major markets up and down the east coast (RNDC, Breaktrhu, Martignetti) with major retail partners (Total Wine, ABC Liquors, BevMax, Bottle King, etc). The espresso martini space is a tad noisy, but the crown for best in class is still up for grabs. Whoever does officially claim that will likely get acquired.
Request An Intro (Investors only)
Rahoo Baby
Founded by Matt Breen + Ellen Morello |📍Boston — Homepage / Instagram / Linkedin
How We Met Them: Via our bff and FirstLook Investor Sumeet Shah!
One Liner ✍️ — Rahoo is a pediatric developmental health startup making the benefits of pediatric therapy available to the 94% of United States families who never receive access to this type of care for their child’s developmental health.
Discount Code: “ILOVEFIRSTLOOK” gets you 20% off sitewide
What made them stand out: This product WORKS. Matt sent us a Rahoo which was perfect timing as we just had a baby. Compared to other lounge pillows we had (which lay flat), Rahoo immediately had an impact. Little Brian would get settled in much quicker and didn’t puke up his milk as often. That’s a big win-win for parents as colic is a big driver for babies staying fussy and thus not sleeping. I also like how Rahoo holds patents on their design to create a moat. I think they are very well positioned as thought leaders and first movers in the about-to-pop pediatric digital health space. Given my Instagram feed has been all baby stuff the past 12 months, I feel Rahoo is one of those products where once the mommy influencer community gets on board, which they will, Rahoo will explode. It’s simply a far superior product, and parents are relentless in finding solutions.
Request An Intro (Investors only)
Torch & Crown Brewing Company
Founded by John Dantzler + Joe Correia |📍NYC — Homepage / Instagram / Linkedin
T&C Union Square!!
How We Met Them: Via John and I becoming friends when I was living in NYC
One Liner ✍️ — A distressed rollup within the craft beverage space - vertically integrated with production, distribution, DTC, and hospitality channels.
Discount Code: “ILoveFirstLook” gets you 20% off sitewide
What made them stand out: Mark my words, Torch & Crown will become the most dominate brewery in all of NYC within the next 7 years. Maybe even in 5 or less. To start, it’s nothing short of a miracle that John was able to build a brewery in Manhattan. If I’m remembering right, John told me they’re the first to do this in decades. That’s largely driven by regulations and lack of space. John is crazy smart, and he’s also a specialist in all things distressed debt. This skillset will lend well for T&C as growth via acquisition becomes a useful tool in an industry ladened with regulations. If you’re an investor in alc, John and team are a must talk-to. Beer is tough, but it also creates beautiful moats which T&C is taking advantage of in every way possible.
Request An Intro (Investors only)
That's all she wrote folks. December box highlights are next. Keep on building my friends.
This email was proofread by my lovely wife, Michele. Please buy her stuff here and here so we can buy more diapers for our sweet sweet little baby boy :)