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Why consumer web startups should raise more money - now mathematically proven
Filed in archive Venture Capital by tj on March 30, 2007
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If you ever wondered why consumer startups raise extraordinary amounts of money again for rather simple looking services - check out Peter Rip's blog:

Imagine you have a low-burn consumer internet company and you think you can do your next build for $2M (offshore, open source, etc.) Imagine further that there is a 1 in 20 chance that you could be the next [insert fantasy outcome here]. Angels are lining up with $2M in hand. VCs are waving $5-20M checks at you. Everyone says this is a $10M pre-money company and you own 50% today.

Assume you have a 5% chance of Being Big on the $2M raise, and a 95% chance of nothing. The chance of Being Big if you raise $4M is 9.75% (1-.95*.95). This is because you can iterate twice at 5% probability each. The chance of Being Big after raising $20M is 40.1%.

....

This is how Munjal Shah described the move to Riya 2.0 in the WSJ article. It was the realization that the first experiment, while a success by many measures, wasn't enough of a success relative to other options.


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