“It’s rough out there. Anyone who tries to say otherwise has never taken money from a venture capitalist or candy from a child” Anonymous.
Not long ago, out having a drink with some friends, I was treated to the unsolicited rants of a stranger at the bar. He was an entrepreneur and he was vocally unhappy with the direction his investors were trying to drive the company he helped found. He was just making conversation but listening to his unsolicited rant inspired this unsolicited reply.
VC’s aren’t saints (and some are indeed sharks) but they sometimes get a bad rap because, like movie studio executives, talent agents, and publishers, they sit in a position where their job requires them to evaluate an idea’s odds of success, and the decision they come to in that evaluation effectively positions them as a toll collector on one dreamer’s bridge to success. Effectively doing their job can also require them to retool an idea in a way that the originators don’t want to see. Any verdict or action these kinds of professionals make is bound to have dissenters who disagree and resent those who made them.
Today, I’m on a soapbox, playing at being an essayist, playing the role of Dear Abby. I offer five thoughts; unsolicited advice to be taken for whatever its worth: caveat emptor.
i. Be Self Aware
At every American Idol audition there are a few contestants who either can’t sing, or haven’t sufficiently taken the time to prepare. Take an honest look at your proposal and make sure you’re not one of those people before you go looking for money. Once you do go looking, be prepared. An ill-prepared pitch is like forgetting the words in a vocal competition. Your voice may be good enough to impress the judges, but most likely, if you don’t sing clearly, or know the words, you are not going to get another chance.
ii. Understand and Align Incentives
A venture capitalist and an entrepreneur don’t automatically have the same goals or needs. It’s more complicated than simply making money eventually or building a company together. If you want to get along, you need to understand what your investors are looking for and make sure those needs and goals match yours – before you take money. For instance, a VC is a money manager beholden to the investors it represents to provide a certain return on investment across their portfolio over a set period of time. To achieve that the VC may need your company to grow faster than you think it should; they may be motivated to push you to the point of failure to try. They may be willing to accept some failures if they can find a few great successes.
You have to make sure that your corporate goals and needs are as aligned as possible to the needs of your investors (initially and over time). Find investors who understand your market, find investors with similar goals, find investors with similar timelines. Look for investors whose industry focus, experience, reputation and track record suits your needs. It’s not unreasonable, in doing your due diligence, to look into references just as the VC’s will do for your management team. If you take money simple because it’s the only money available, without alignment of incentives, don’t be surprised or complain later how horrid the investors are for having an agenda different from your own. However desperate for capital you may be, you didn’t have to take their money. Do your homework and do it thoroughly.
iii. Avoid Science Projects
There’s a difference between a brilliant technology looking for a problem to solve and technology that solves a real problem customers are asking for help with. New businesses are invariably forward thinking and futuristic and the boundary line can be grey but you have to ask yourself: am I solving a real problem, or trying to find a market for a solution. There’s a difference, and there are investors interested in both (see point one and two above when seeking those investors) the thing is, science projects (technology seeking a problem) tend to cost a lot more and have greater risks. Often science projects are good learning experiences but don’t yield much in the way of financial return; even if they occasionally return a windfall.
A good alternate metaphor is to say your interest is cure, treat or heal a market’s pain. If that pain is a small paper-cut (it may not be much of a business) especially if you’re offering a full body cast, or even a heavy bandage. The remedy should meet the ailment and the ailment should be either so serious, or so common, that it needs treatment. If you have to convince potential customers that they must bandage that paper-cut for three days – marketing expenses are going to be outrageous.
iv. Know Your Entries and Exits
You have to think through both how you’re going to enter a market and how you’re going to allow your investors to cash out later. But sometimes there’s a tendency from entrepreneurs to over analyze the exit-plan; perhaps on the presumption that they believe it’s what investors want to hear about. But building a business for liquidity may not be a good idea. Focusing too much on an exit strategy isn’t healthy. It’s better to build for success (and have a good model of how you hope to achieve it and be fluid in adapting it as the marketplace evolves).
Along the way you have to be aware of how to exit; it just need not be a central focus. It tracks back to Point Number II: Incentives need to be aligned in the beginning, and ideally, evolve and stay aligned while you build a business. Investors are going to eventually need liquidity, so you can’t forget that and ignore their needs. It’s like being on a plane – it’s important to know where the emergency exits are but you don’t (and shouldn’t) spend much time during your flight thinking about using them.
v. Know Your Entries and Exits (Part 2)
The same logic of exits as part of the business strategy in Point IV also applies to seeking funding in general – there’s more than one pool of capital out there. If one investor’s doors are closed, that doesn’t mean there aren’t other doors into the metaphorical building of funding. Assuming you’ve kept in mind the other 4 pts here, don’t give up just because one investor or ten turn you down. (if more than ten, reread Point I).
The Famous Columbus Egg
Fitting Point Number V, and a good place to end, is a favorite anecdote about finding funding. The abridged version goes more or less like this:
An entrepreneur makes a presentation to a bunch of investors. One by one, the investors tell him his idea is impossible to realize, that what he is trying to do simply can’t be done. He hasn’t convinced them that he can do it. The entrepreneur asks the investors to humor him a moment longer and places a fresh egg on the table.
“Can you balance this egg on its end” he asks them,“Many say that that too can’t be done but I can show you it can.”
The investors try to balance the egg but one by one fail. Exasperated they say “this is nonsense. It can’t be done and you’ve wasted our time.”
“Yes it can,” say the entrepreneur. The entrepreneur takes the egg and gently smashes the shell until it’s standing on its edge. “See,” says the entrepreneur, “standing an egg on its edge is the simplest thing in the world. Anybody can do it, once they see how. What I want money for is the same thing. It may sound it impossible but once I do it, you’ll see how easy it really is.”
The entrepreneur got his funding and went on to make history. His influence on the world was dramatic, but in order to wield it, he had to first show some people that there was more than one way to look at things.
The entrepreneur in that story was Christopher Columbus and his start-up was the futuristic plan to sail to the “New World.”