BUSINESS BLOGS
BUSINESS BLOGS
category: business
15 Dec 2006

It’s somewhat fitting that the king of online transactions, Paypal’s Peter Thiel is trying to reinvent the VC game; a game all about transactions. 

Thiel is re-examining and might even be reinventing traditional venture capital. Paul Saffo, a tech industry forecaster who has tracked Silicon Valley for the past two decades, said long-standing investors, who once reigned supreme from their Sand Hill Road pedestals, are now getting squeezed by private equity firms on the high end, and wealthy angel investors on the low end of the investing scale. A bleak market for venture-backed initial public offerings has only increased the pressure.

“We will see more changes to the venture-capital model in the next five years than we have seen in the last 25,” Saffo said. “Peter is definitely tweaking the model. He has the luxury and flexibility to play around a bit.”

Entrepreneurs trying their hand at the venture capital game is nothing new, and it can be a winning combination for some. “You certainly pick up a lot of credibility as a venture capitalist if you have been an entrepreneur,” said Mark Heesen, president of the National Venture Capital Association.

So far, the combination is working for The Founders Fund, which raised its first $50 million fund in 2005 and has invested in a dozen companies. Now it is on the verge of raising a second fund in the $120 million to $150 million ballpark. While the first fund focused on raising money from like-minded entrepreneurs and investors, this time Thiel is casting a wider net to lure more institutional investors such as universities and endowments, the bread-and-butter of traditional venture firms.

Read more.

Not trying to be cynical or anything, but I wonder how long it will be until the Founders Fund turns out to be just like the VCs they are trying to displace.  If they can stick to their guns, great.  I hope that Sean Parker does not forget the sight and feeling of the knife being pulled out of his back.  I also hope that Peter Thiel does not forget that his greatest hit came on a gut instinct (his decision to invest in Paypal).

Lord knows that traditional VCs have created the very same threats they face: lack of imagination and lack of tact, frankly.  I’m not stupid enough to name names… I am also realistic to know that eventually, I’ll have to go down that path.

My two cents is to founders: hold out as long as you can, get some revenue coming in, reinvest as much as you can in growth, make sure you never run out of money, and then talk to financiers on the right terms.  I’m fortunate having sold my share in a company last year.  I see that.  But others have other means to raise something to start off.  A VC need not be the first path.

Sure, you never want to go hit the street looking for financing when you need to… but wasting your time chasing VCs is futile.  The only way to work with VCs is for them to come knocking. 

For every 1 minute you spend on fundraising, spend five building your business.  Sales is the cheapest form of financing.  Less headaches too.

When I started the company, I spoke to a couple of VCs.  I thought it was the natural thing to do.  Those I spoke to thought we were being too ambitious.  Mind you, I didn’t speak to too many, but it only took one to turn me off.

As our company has grown 2,500% in one year, a few now reach out to us.  Mind you, had I been able to secure financing, our company might be 25,000% larger… but I would also not have been able to chase the deals and opportunities that opened up to us.

I don’t want to paint everyone with the same brush, but the doubters are now believers.  What changed?

The business plan?  Nope.
The people?  Nope.
The fundamentals?  Nope.

We simply executed the plan and will continue to do so. 

That’s the only way to change VCs.  Entrepreneurs who think any differently are delusional and lack the one trait that makes an entrepreneur most successful: determination.

It’s because of this, that I doubt the Founders Fund will really achieve its goal.  Before long, they will get lazy and complacent like the very same VCs they are trying to put the kybosh on.

Are Parker, Thiel and company going to be as hungry as the hungriest of entrepreneurs to chase down every deal, talk to every entrepreneur and get the deal done on the right terms.  In theory, sure.  In practice, I don’t think so.

In business and in life, you don’t wait for others to make things happen, you make things happen yourself.  Then, and only then, will the money follow.

What’s that saying Russell Simmons used some time ago: “The arrogance of white men is why I’m here today. My independence is because they didn’t accept me. So I’ve made more money every step of the way.”

Replace “white men” with VCs and you get a good lesson in business and fundraising right there.  Oh, wait a minute…