BUSINESS BLOGS
BUSINESS BLOGS
category: business
19 Jul 2008

Explaining success is oftentimes simpler than recognizing why something failed. In that light, the following post by Roger Ehrenberg, an investor and founder of a company called Monitor 110 (not heard of them before) is a very good read for entrepreneurs and investors alike. Enjoy:

Writing a post mortem is hard, particularly when the result is failure: a failed deal; a failed investment; a failed concept. That said, without a post mortem, without deep reflection, honesty and introspection, how can we get better and do better the next time?

The Seven Deadly Sins

While we certainly made more than seven mistakes during the nearly four-year life of Monitor110, I think these top the list.

  1. The lack of a single, “the buck stops here” leader until too late in the game
  2. No separation between the technology organization and the product organization
  3. Too much PR, too early
  4. Too much money
  5. Not close enough to the customer
  6. Slow to adapt to market reality
  7. Disagreement on strategy both within the Company and with the Board

One problem WatchMojo.com doesn’t have, frankly:

Too Much Money

Too much money is like too much time; work expands to fill the time allotted, and ways to spend money multiply when abundant financial resources are available. By being simply too good at raising money, it enabled us to perpetuate poor organizational structure and suboptimal strategic decisions. Mistake #4. We weren’t forced early on to be scrappy and revenue focused. We wanted to build something that was so good from the get-go that the market would simply eat it up. Problem was, with all that money we hid from the market while we were building, almost ensuring that we would come up with something that the market wouldn’t accept. And then there were technology issues that came up along the way, very substantive issues, that because of so much money we simply didn’t face into nearly fast enough. And this drove a wedge in the company between those that were more plugged into the market (and felt we weren’t building the right thing or addressing the data issues the right way) and those who were building the product (and felt very convinced that what they were building was responsive to the market). I would almost argue that too much money enabled the other six mistakes to be made again and again and again. Seems counter-intuitive, right? It’s not. And believe me, I am super sensitive to this issue now as an investor. If a company wants to raise significantly more money than I think they need to get to revenue, I push back. Hard.

If you’re like me, you might have done a double take when you read “by being simply too good at raising money” (and “given my Wall Street and hedge fund rolodex” from another passage), but to be fair, indeed, fundraising did not seem to be a weakness, judge for yourself by Ehrenberg’s Linkedin profile.

Anyway, I can certainly agree that “Too Much Funding” is a deadly sin, both because it makes you slow and because you have to give investors a return that might be out of line with market realities.

Then again, having “Too Little Funding” is just as likely to be fatal than the opposite… but I digress, no need to get into that here.

Doing some digging, I realized that M110 shut down because it could not raise more money:

The company had raised over $20 million from DFJ, DFJ Gotham and Acadia, having last raised $11 million in late 2006. In May, Monitor110 went out for a new round but was unable to complete it, hence the closure.

If I could ask Roger a question, it would be this:

You shut down the company when the financial markets got rough and you could not raise an additional round, I get that. But, as an investor yourself, why did you not fund the company yourself at this juncture, or simply loan the company some money. Did you:

a) not believe in the company and product
or
b) you did but could not do so per the company’s shareholder agreement?

Obviously I understand why Roger won’t or can’t answer that… but as an entrepreneur, ask yourself how you would react (if you could fund the company) in that scenario.

If you no longer believe in a company or product, then sure, it just might be best to cut your losses and admit failure. However, if you do, then you have to be careful as an entrepreneur about what you agree to when you raise money.

When you raise institutional money from VCs or Private Equity, you generally give the investors the right to approve all subsequent funding, giving them the right to invest to maintain their proportional holdings. However, to protect themselves from undesired dilution, if a VC wants to cut off funding, they can do so by simply saying “no” when you want to go back for more money. That is a very dangerous proposition and one reason I’ve shunned VC (admittedly, that’s one reason… as such a matter is a double-sided coin).

Furthermore, while the adage is “always invest other people’s money” I’ve actually preferred to invest my own money for a few reasons, but two of note:

- in order not to lose control of the Board, be pushed out prematurely and avoid a splintered, cluttered management structure early on (which, by the way, is Roger’s #7 deadly sin). I am not saying we don’t discuss strategy and tactics, but decision-making is swift and sound due to this reality (no, unlike George Bush or Barry Diller, this does not mean “I’m the Decider, accept it” - it just means we decide quickly based on what’s best for the company, the clients, users, etc. in the short, mid and long term).

But more importantly:

- in order to be able to lend the company money if need be. Bear in mind, debtholders are always more senior than stockholders, even preferred ones (which is where VCs stand relative to the founding entrepreneur and management, who hold common shares). As a result of this hierarchy, VCs don’t want you to raise debt because that would place their interests behind that of the lender… be it a bank, or yourself.

Here is one more irony of the funding ecosystem:

- VCs want to see an entrepreneur put his money where his mouth his, but if you have done that in the past, then they don’t want to account for it, they want to wipe the slate clean… which I think is lunacy… and usually where talks with VCs end. For more on my belief why this is one of the biggest mistakes VCs make, read: “The Biggest Mistake VCs and Entrepreneurs Make: Bulls make money, Bears money, but Hogs get slaughtered“.

- VCs also want to see entrepreneurs make sacrifices in the future, but if you are willing to pony up money to the company (even only in the event they don’t want to keep funding it), then they start to panic and won’t allow it… meaning your company will die even if you believe in it.

As much as I hate to admit it, sometimes you have to say “enough, time to move on” - but if you really believe in what you are doing… then you have to get used to the idea that:

- the market is not always right in the short-term
- people always have a predisposition to think you and your idea is dumb
- the only way to avoid finding yourself on the outside looking in is to avoid signing an agreement that will come back to haunt you when the going gets rough.

So, What’s Worst: Too Much Funding or Not Enough of It

Of course, accepting VC money is akin to doing a deal with the devil. So, what’s worst: Too Much or Too Little Funding?

As counter-intuitive as it might be, with all due respect to Roger and others in the “Have” column, I’d say:

- when you succeed, having had too much money is certainly worst, because you realize you pissed away equity for no reason and suffered more friction from outsiders that frankly didn’t know or contribute all that much to the company’s success.

- when you fail, having too little money is certainly worst… because you think - despite what the truth might be - that a bit more money would have made a difference.

I won’t get into all of the sordid details… but we’re actually doing very well operationally, but it’s dawned on me that each year since we launched in 2006, I’ve only been able to spend 50% of my time on operations because I’ve always had to spend the remaining 50% on non-core aspects due to a lack of funding.

I sometimes wonder: “how strong could our place in the marketplace be if:

- I could overcome my reservations about VCs and raise proper funding?”

and in all honesty,

- VCs get their acts together with regards to funding video content businesses so that talking about financing would not be such a colossal loss of time”. After all, as a side note, let’s face it: VCs track record in video - let alone video content - can at best be described as questionable ($23M in Next New Networks seems a tad too much, too early, if you ask me) and at worst disastrous (hmm… Podtech anyone?). And don’t get me started on VCs continuing to fund the Crpstr’s of the world. What’s up with that?

So… with all due respect to Roger et al., I think that first and foremost, the “too much money/not enough money” is a bit of a red herring.

Indeed, “Too much funding” - while certainly not helpful - is far less likely to be fatal that too little funding (in other words: “no money” is OBVIOUSLY worst than “too much money” people… what are you smoking?).

The bottom line boils down to people. If as an investor you back someone who will use the funding to shield from the marketplace and not attack it head on with a sense of urgency, then both the investor and entrepreneur will find themselves in a mode of panic before long… and once that happens, it does not matter how much you have or don’t have in the bank, you are dead on arrival.

What do you think?