BUSINESS BLOGS
BUSINESS BLOGS
category: business
13 Apr 2009

Let me ask you something: why is it that raising venture capital means that suddenly companies that do raise money can allow themselves to show bad judgment?

Time Value of Money Suddenly Means Denial

Traditionally, a company raised financing from VCs, which bought them time to focus on long term payoffs.  But over time, this meant that founders and executives could remain “pre-revenue” for as long as they desired.  In turn, this basically camouflaged bad business models, woeful products and inept managers.

What Would Fred Say?

Don’t take it from an entrepreneur who’s never raised VC like me, however, take if from one of the best VCs in the game: Union Square Ventures’ Fred Wilson, who in this video from the Insite NY series (via Business Insider) talks about how money doesn’t solve problems.  I’ve embedded the video at the end of the post.

I tend to agree with Fred on this point.  We’ve never raised any VC.  Initially, this had to do (I think) because we faced litigation from a major media company (since settled).  Then, I think, VCs got all hot and heavy over social media and UGC (how’s that faring, gents?).  Eventually, I realized it actually had to do with my bad approach to fundraising altogether, which I’ve outlined here: Why salespeople make bad fundraisers.I think by focusing on sales, however, it forces management to take a candid approach to what works and what doesn’t.

Reporting From The Front Lines

For example, I was on a call with a potential “partner client”.  By partner client, I mean a company that pays WatchMojo.com either via

a) flat-fee licensing revenue or
b) ad-share syndication revenue

In both cases, we get branding and distribution.  It’s quite genius, if I daresay so, as we end up getting paid to promote our brand and add to distribution (we’re past 50,000,000 and counting), but this is because the demand and supply of content vs. distribution is in our favor, even though the so-called “smartest guys in the room” have yet to figure this out and are pouring more and more money into distribution (how are the results faring, gents?)

On this most recent call with my counterpart, she was arguing how they were doing us a favor and we should be happy about the incremental distribution.  I didn’t give in an inch, arguing that “it’s unfair to our other clients who do pay us”, which I think is a pretty fair argument to make.

Ultimately, she paused and asked: “are you VC-backed?”

“No, we fund our operations via actual client sales” was my response.

“Oh, you’re bootstrapped?  Ok, we’ll pay the minimum and work with you to build up the revenue we generate for you”.

It was odd.  Maybe she pitied us, who knows.  But the point is, when she assumed we were VC-funded, she took it for granted that we needed to show actual sales, even though VC-funded companies are expected to increase sales in a hockey stick pattern.  It was as if VC-funded companies were reckless, foolish, or worst: both.

What Does This All Mean

While VCs get a bad reputation, they are supposed to be an entrepreneur’s best friend.  Entrepreneurs need VCs to keep investing, and right now, that is not happening.  Just as VCs start to see a light at the end of the tunnel, the numbers come out and suggest that the light is in fact an incoming train.

One of the few IPOs, Current TV, is canning their public altogether.  Tech Crunch summarizes the data, and it doesn’t look good:

Number of U.S. Venture Funds Raising New Capital

1Q09: 40
4Q08: 47
3Q08: 62
2Q08: 78
1Q08: 71
4Q07: 85
3Q07: 77
2Q07: 85
1Q07: 81

Dollar Amount of New Funds Raised By U.S. Venture Capital Firms (in billions)

1Q09: $4.3B
4Q08: $3.5B
3Q08: $8.4B
2Q08: $9.3B
1Q08: $7.2B
1Q09: $4.3B
4Q07: $11.9B
3Q07: $8.6B
2Q07: $8.7B
1Q07: $6.5B

That doesn’t look like a hockey stick pattern if you ask me.

In fact, you start to see that the strongest funds will only grow stronger while the weak will die out.

“There’s pressure on the newer funds,” says David Pakman, a partner with Venrock, an established New York-based venture fund originally started by the Rockefeller family. “It’s not a great time to be investing if you are a new fund. It’s not because they are bad. It’s because their track record is not as long. ”

As a sign of the times, Intel Capital is now only going to focus on the bigger deals, those, in fact, that need VC less.

What is the silver lining?  Well, hate to be negative, but I am not sure there is one.

- If you are a VC and have burned millions - if not billions - and your investors (pension funds, endowments) start to ask some tough questions, you might start to have to answer to the feds, and no one wants that.

- If you are an entrepreneur, start a company where you know clearly who your clients are, or hit up angels that know you and will fund you.  Otherwise, you’re screwed.

Here’s the video with Fred Wilson of USV: