Entrepreneur Myths (29 page)

Make sure they are going to keep you, or be willing to step aside

If you want the money from a VC, make sure they’re going to keep you around after funding, or that your own team won’t sell you off or fuck you over. In my earlier entrepreneur years, I was part of a couple of ventures where the VC was willing to invest the money only if one of the founders or management team members was removed from a key management position.

Look, I can fully understand the VC’s point of view. I’ve been there. I’ve seen situations where a venture had three founders and one of the founders was fucking incompetent.

What do you expect a VC to do? Some will try to shake up the founder’s boat? Think about it. If one of the founders is incompetent, do you take the money and remove the founder from the particular position? What if you’re the CEO and they have someone else in mind to replace you after they fund your venture? Can you handle it? Will you step aside? What the hell are you going to do?

My advice: When a VC funds you, it is critical you have an employee contract with your company. Otherwise, you could get fucked down the road and removed from your startup too. But don’t make your employee contract stupid. I had a startup pitch me for money and they wanted a five-year contract, bonuses
and
sales commissions after I funded them. They wanted a better comp plan than the CEO of Exxon. Your employee contract, if any, should not be more than a year at the founding position. Obviously, you have stock and what I’m mostly addressing is the salary scenario. 

Watch where your info ends up

When you send written information to a VC, it may end up in the hands of other VCs or God knows where. Assume that whatever you send might end up in the competitor’s hands or on the front page of Tech Crunch (you wish). VCs, although you may not believe it, are human too. They gossip and talk with other VCs who might have invested into companies that compete in the same or similar market space.

Do not give away your critical candy. Keep it in the black box as long as possible, if not forever.

Brain Candy: questions to consider and ponder

(Q1)
Can you trust a VC?

(Q2)
Have you had any bad experiences with VCs?

(Q3)
Not all VCs are bad. Who are the VCs you like?

(Q4)
Assume you’re a VC. If you wanted to fund a venture, but one of the founders was a complete fucking nightmare — what would you do?

Entrepreneur
Myth 43
| Venture capital is the best way to fund your venture

Funding your venture through venture capital is an adventurous and tough process. The reality is that a small percentage of companies are funded through the venture capital process.

VCs just might fund you if (1) those same venture capitalists previously funded you and they made a lot of fucking money, (2) you were funded and failed, but came up with another great idea, or (3) you already raised FAF capital, angel capital, etc. and built a business that is venture fundable.

An alternate way of getting funding, which I call the Silicon Pimp method, is to go the accelerator route through companies such as Y Combinator, Angel Pad, 500Startups, Capital Factory, etc. And I use the term “Silicon Pimp” in the nicest way. It is because accelerators fund the earliest seed phases, train the entrepreneurs to launch businesses, dress them up and pimp them out to investors. Thanks to accelerators, there is
no
need for startup entrepreneurs to even consider venture capital in the early phases. Venture capital is not the best way to fund your venture anyway.

Y Combinator is the ultimate daddy of Silicon Pimps. Having invested in the seed stages, I learned to appreciate the difficult task predicting what company will become a hit. They have done a great job so far.

There’s no doubt the Great Recession of the late 2000s had an impact on startup entrepreneurs if their company funding strategy was Sand Hill Road. This is one reason for the success of Y Combinator and other accelerators. They filled a funding void. As a result, VC funding conditions have changed for the better for entrepreneurs — thanks to companies like Facebook, Groupon, Zynga and Twitter. Power shifted back to the entrepreneur side when Facebook dominated in the market. Venture capitalists and entrepreneurs realized that any kid out of a dorm, using intellectual capital and open source software, can bring down the establishment. Sean Parker may have started the entrepreneur revolution with Napster but it was Marc Zuckerberg who tipped the power back to the entrepreneurs. 

Zuckerberg may think he started the social media revolution. He is wrong. He did something even bigger. Zuckerberg is the tipping point of the entrepreneur revolution. Thanks to his “I don’t give a fuck attitude,” thousands of technologists (technopreneurs) are burning the midnight oil, developing their own tech innovations, and trying to become the next Facebook of their own sector. Sean Parker and Zuckerberg don't get enough credit for single-handedly transforming and escalating Silicon Valley into another hyper-growth. One started it, the other finished it off.

Entrepreneur revolutions no longer require seed funds. Besides, most VC money still goes into later rounds. If you’re really hard up for seed money from a VC, good fucking luck. You’re going to waste a lot of time unless you go talk to First Round Capital or True Ventures.

The odds of being funded by a venture capital fund are against you

Entrepreneurs who haven’t been through the venture capital funding process don’t know how difficult it is. Numbers tell the story. Let me give you some market stats that I hope will help.

In the first quarter of 2008, venture capital hit a new low in the number of companies funded.  According to The Wall Street Journal:

“Venture-backed companies raised $3.9 billion in the first quarter of this year down from $7.78 billion in the first period of 2008, according to VentureSource, an industry tracker owned by VentureWire publisher Dow Jones & Co. It was the lowest quarterly investment since 1998. The total fell significantly below the $5.95 billion invested in the fourth quarter of last year when the collapse of Lehman Brothers Holdings Inc. and other economic shocks took their toll on the venture business.

The number of deals also fell sharply to a level not seen since 1996. Only 477 venture-backed companies closed equity financings in the first quarter compared with 706 a year ago and 601 in the fourth period of 2008.

— “Venture Investing Hits a Low,” by Russ Garland, The Wall Street Journal, April 18, 2009

If you study this article, only 477 companies were funded in the first quarter of 2009. What the Wall Street Journal article doesn’t mention is the stage of the companies, their revenue status, or the background of the entrepreneurs and sector. Someone might read that article and think those 477 companies getting funded by VCs were startups (seed, pre-revenue stage). Think again. I seriously doubt more than 5% (if that) were startup, pre-revenue ventures.

If we do the kinder math, 10% x 477 venture-funded companies equates to about 48 when you realize there are more than 500,000 startups every year and at least 40,000 to 50,000 of them in the early stages are potentially venture-fundable. When you analyze the startup or seed scenario, the odds of your startup getting venture funded are even lower.

Worse, you could have a terrific idea in a market sector that isn’t being funded. If that’s the case, you’ll really need some luck in getting funded — and don’t count on the VCs to do it. It might be easier for you to play the lotto. Besides, the cost involved in pitching venture capitalists isn’t cheap either since it’s unlikely (by 99.99%) that they will come to your office for a meeting. You’ll have to pay for your own travel expenses if you don’t live the close proximity. Been there, done that. Now, this is not a big deal if your company is based in Northern California. But what if you’re based in Texas or Florida?

As of 2010-11, market conditions have improved somewhat in Silicon Valley. Companies are getting funded in the seed stage, but not by VC firms. They're being funded by prominent angels, angel organizations like Keiretsu Forum, accelerators like Y Combinator, and seed venture funds like First Round Capital and True Ventures.

Most venture funds are not startup funds

Don’t let the word “venture” fool you. Most venture capital funds are not in the
ad
venture business. No matter how great your idea, if you're in the startup phase, the odds are against you raising startup seed capital. Despite all the media talk about the venture community investing into deals, venture capitalists are still extremely risk-averse. Just look at the flow of money currently. Most venture capital money is chasing deals in the later stages of the lifecycle game where there has already been a substantial amount of capital invested by other VCs from earlier stages. I mean, who doesn’t want to invest into Twitter right now?

Mark Suster, a brilliant venture capitalist, GRP Partner coined the term “collecting logos to describe when VCs invest money into later rounds at extremely high valuations of high-flyer companies simply in order to put their corporate logo on the website.  VCs do this in hopes that entrepreneurs will be impressed enough to talk to them, thinking they had something to do with the success of flyers like Twitter, Facebook, Xunga, etc.

In reality, VCs might be more skilled than other types of investors at analyzing early-stage ventures, but they’re not just going to throw money behind an idea — without certain metrics being met such as the venture having (1) a completed product and/or service, (2) some proof of market acceptance (I don’t mean some bullshit sales pipeline), and (3) revenues, revenues and more revenues. To some extent, do you blame them?

Few venture capitalists are true gunslingers willing to risk their capital just on the thought of an idea. Overall, as the VC industry has contracted from ~2,500 firms in 2000 to 750 firms in 2010, the remaining venture capitalists have seen more than their share of the ups and downs of investing. They’re not morons with money coming out of their ass. They are not gamblers either.

What most entrepreneurs forget is that venture capitalists are not their own bosses either. They have limited partners, such as large pension funds or institutions, who provide capital to them. Their asses are on the line with these limited partners and their aversion to risk is understandable.

The entrepreneur “Venture Capital Funding Paradox” (VCFP)

Sure, you can raise money from a venture fund if you’re a startup entrepreneur. You can do it if your name is Eric Schmidt, Elon Musk, Marc Andreesen, Ted Turner, Steve Jobs, etc. That’s the entrepreneur funding paradox. If you’re a successful entrepreneur and you had a major exit with your previous company, then you could get funded by a venture capitalist over lunch, sipping on California red wine (I prefer Silver Oak or Jordan) and scribbling your exciting, fantastic and humongous venture idea on a paper napkin.

But those established, napkin-pitch entrepreneurs, really don’t need venture capital, or anyone else’s money, to start their startup. If you have your own money to fund a venture, then you have what I call the “Entrepreneur Venture Capital Funding Paradox”
:
do you fund the startup yourself or take the venture capital money in the early stages of the game?

As I mentioned in Myth 33: Take the money, take the money and take the money, I have one friend who lives by this rule. I fluctuate on this matter. Most of the time, my advice to the entrepreneur is
not
to take the early venture capital money. Why? If the venture flops, you have to deal with all the bullshit that comes along with the failure. Trust me. There’s a lot of crap you deal with when there is a failure, including upset investors. Nobody likes to lose money — especially venture capitalists.