Friday, September 22, 2006

Of Angel Investors,and Venture Capitalists..

Angel Investors (Private Investors),Venture Capitalists, them whatever you want at the end of the day they bring in the much needed money to take that dream of yours and turn it into a reality, the question is at what cost?..A large percentage of startup companies In Silicon Valley have leveraged large amounts of "seed" money in order to achieve their main objectives, is this truly the way to go?..

I haven't had the opportunity to meet on a business level any potential venture capitalists in this region, but lately its been the buzz word on everybody's lips. I know of two people who made their money developing an application that in a nutshell gave you access to the laws of the land with a single click, needless to say it proved to be a hit with several big companies,right now they've decided to take on the "venture capitalist" tag, I think I need to have a serious talk with them and ask them how that's going.

Just this week the Villager informed me that he was in the process of acquiring funding from an investor over an idea him and I had, you have to give the guy marks for going out of his way to get things moving. My skepticism went into full throttle when he told me that this money would be a loan at a certain amount of interest yet to be decided, I kept getting visions of an overseer standing over my shoulder witha whip screamin and shouting Profits!!Profits!! makes me think of Amistad (excellent movie starring Djimon Honsou)..I doubt if that's dramatic but when it comes tomoney you can't really be sure the extremes people will go to ensure that they get back their investment and a profit on top of it.

I'm meeting the Villager this weekend on "Kahawa (coffee) Sunday" :-) seems we've coined a name for those brainstorming sessions we have on sunday's..let me see what he'll tell me about our venture capitalist and whether wil have to sign away our souls.

Let me close this post with the top 9 lies of venture capitalists :-) as told by Guy Kawasaki, am sure there is number ten out there, be good and post it as a comment :-)..

  1. “I liked your company, but my partners didn't.” In other words, “no.” What the sponsor is trying to get the entrepreneur to believe is that he's the good guy, the smart guy, the guy who gets it; the “others” didn't, so don't blame him. This is a cop out; it's not the other partners didn't like the deal as much as the sponsor wasn't a true believer. A true believer would get it done.
  2. “If you get a lead, we will follow.” In other words, “no.” As the old Japanese say, “If your aunt had balls, she'd be your uncle.” Well, she doesn't have balls, so it doesn't matter. The venture capitalist is saying, “ We don't really believe, but if you can get Sequoia to lead, we'll jump on the pile.” In other words, once the entrepreneur doesn't need the money, the venture capitalist would be happy to give him some more--this is like saying, “Once you've stopped Larry Csonka cold, we'll help you tackle him.” What entrepreneurs want to hear is, “If you can't get a lead, we will.” That's a believer.
  3. “Show us some traction, and we'll invest.” In other words, “no.” This lie translates to “I don't believe your story, but if you can prove it by achieving significant revenue, then you might convince me. However, I don't want to tell you 'no' because I might be wrong and by golly you may sign up a Fortune 500 customer and then I'd look like a total orifice.”
  4. “We love to co-invest with other venture capitalists.” Like the sun rising and Canadians playing hockey, you can depend on the greed of venture capitalists. Greed in this business translates to “If this is a good deal, I want it all.” What entrepreneurs want to hear is, “We want the whole round. We don't want any other investors.” Then it's the entrepreneur's job to convince them why other investors can make the pie bigger as opposed to re-configuring the slices.
  5. “We're investing in your team.” This is an incomplete statement. While it's true that they are investing in the team, entrepreneurs are hearing, “We won't fire you--why would we fire you if we invested because of you?” That's not what the venture capitalist is saying at all. What she is saying is, “We're investing in your team as long as things are going well, but if they go bad we will fire your ass because no one is indispensable.”
  6. “I have lots of bandwidth to dedicate to your company.” Maybe the venture capitalist is talking about the T3 line into his office, but he's not talking about his personal calendar because he's already on ten boards. Counting board meetings, an entrepreneur should assume that a venture capitalist will spend between five to ten hours a month on a company. That's it. Deal with it. And make board meetings short!
  7. “This is a vanilla term sheet.” There is no such thing as a vanilla term sheet. Do you think corporate finance attorneys are paid $400/hour to push out vanilla term sheets? If entrepreneurs insist on using a flavor of ice cream to describe term sheets, the only flavor that works is Rocky Road. This is why they need their own $400/hour attorney too--as opposed to Uncle Joe the divorce lawyer.
  8. “We can open up doors for you at our client companies.” This is a double whammy of lie. First, a venture capitalist can't always open up doors at client companies. Frankly, he might be hated by the client company. The worst thing in the world may be a referral from him. Second, even if the venture capitalist can open the door, entrepreneurs can't seriously expect the company to commit to your product--that is, something that isn't much more than a slick (10/20/30) PowerPoint presentation.
  9. “We like early-stage investing.” Venture capitalists fantasize about putting $1 million into a $2 million pre-money company and end up owning 33% of the next Google. That's early stage investing. Do you know why we all know about Google's amazing return on investment? The same reason we all know about Michael Jordan: Googles and Michael Jordans hardly ever happen. If they were common, no one would write about them. If you scratch beneath the surface, venture capitalists want to invest in proven teams (eg., the founders of Cisco) with proven technology (eg., the basis of a Nobel Prize) in a proven market (eg., ecommerce). We are remarkably risk averse considering it's not even our money.

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