The following is a stream of consciousness post on a lot of things I’ve picked up about VCs and funding in general, from the seven years I’ve been involved in consumer Internet startups in media, in the fields of search (2000), online publishing (2000-05) and video production, matching platforms and search (2006-present). I’ve also covered the industry ad infinitum, and have met a lot of really smart and less smart, cordial and less cordial VCs as a blogger and entrepreneur.
I’ve resisted posting such a post because we are always in talks to varying degrees to investors - be it angels, VCs or strategic investors - lenders as well as interested buyers. But as the company is becoming more and more of a successful and up-and-coming media company (and less of an expensive hobby), I am less inclined to raise financing and am hellbent on building this company via personal funds and good old fashion sales, so I am not too worried about posting this and offending anyone who might take anything personally… though I doubt there’s anything to be taken personally.
All right, enough of the disclaimer, let’s roll:
- The VC and financing world are full of cliches, cliches from advisors, entrepreneurs and VCs. Like cliches in sports and life in general, you can’t get around them, learn to live with them… but understand one thing: cliches exist for a reason.
- VCs, like all people, are good bad and ugly. Much the same way that each country produces good looking and ugly looking people (wow, what a nugget of wisdom right there), VCs come in all shape and sizes, and some are nicer and smarter than others. Don’t generalize what you hear and see from one onto others.
Those disclaimers out of the way…
Let me say that the bulk of these observations come from my discussions with VCs, reading about them, reading their work. Some of my dealings come from me a) the blogger to another VC as a VC blogger, and some come from b) me the entrepreneur. Admittedly where the line is drawn between a) and b) is always up for debate.
It would be a helluva lie to say that:
- I have not hit up any VCs. Like a ham, I had many biases and preconceived notions and once in a while when I saw a VC that I really liked and/or felt that would invest in what our companies would do, I might have been prone to fire off an email.
- Very few people hit up a VC and get financing. It’s normal to get turned down by VCs. I would be lying if I said “I have not been turned down from VCs.”
- When you get turned down, it could be for a myriad of reasons, including but not limited to area, market size, or, hmm… because your business sucks, and you just might not know it yet.
Of course, being a bona fide entrepreneur, you are sure that your business does not suck, in which case here are some tips and random thoughts you might want to keep nearby.
- You never want to seek financing when you need it, but you also don’t want to hit the pavement too early. My recommendation is don’t waste your time at all, wait for VCs to come to you. In fact, that is probably the best way to ever work with VCs, otherwise, you are wasting your time.
- Generally, any idea you have, others do too. Apparently, when Kevin Burton was planning Tailrank, Gabe Rivera was planning TechMeme. In fact, when Nikola Tesla was planning the radio, so was a bloke named Marconi. The point is, this has happened ever since mankind saw light, so get accustomed to the fact that no matter what you are doing, you’re not alone.
People ask me all the time, in web video, who is WatchMojo.com’s competition? I use that to boast that”we surely have competitors, but no one produces as much content, on as wide spectrum as we do, and even those who are niche content producers on select verticals are potential partners of ours in content exchange deals…”
- VCs need anchors, reference points. In Web video, it’s always “how are you relative to YouTube?” YouTube, I answer, “is a partner of ours, a distribution point.” In fact, with regards to YouTube in particular, I can’t say too much, but we’re the “torso content” that they are increasingly betting their chips on.
- VCs prefer visuals than text. You might laugh, but a simple graph like this does a far better job of explaining the market than anything else:
- First to market? Does not really apply to financing because if you are too early to the game, your vision will fly over investors’ heads. Don’t get me wrong, but investors are either really successful former entrepreneurs who were ahead of the game 5 or 10 years ago OR they hail from big corporations where the definition of innovation and invention is very different from yous.
Lifelock, for example, recently closed a round from Kleiner Perkins, a top notch VC. What did the press release say? “The start-up, which is said to be profitable is a competitor to TrustedID, Truston and Intersections.”
- It’s true: investors suffer from herd mentality, same way club goers and restaurant patrons do. If you and your buddies want to go to the most popular bar, why is it bad for VCs to want to invest in what “everyone else is doing.” Bashing them for doing so is like bashing mankind for basic psychology or sociology tenets. But the fact is that you have to be somewhere between “too eary” and “early enough.”
- The cheapest, simplest, cleanest and most rewarding form of financing is sales. I’ve said this at least dozens of times on this blog: for every hour of corporate development, spend 5 hours on business development and sales. What percentage you should allocate between sales and business development is a case by case prognosis, befitting another post.
I will say this, eBay sold 25% of the company for $5M from Benchmark, that is one sweet valuation.
- VCs get a lot of information by reading… the same sources you read. There’s no magical well of information. When you read a study by an agency, they do too. When you come across a report touting the growth of so and so, chances are, they have too. The point I am making here is: don’t assume the knowledge that VCs have is of a higher grade than yours, but also don’t assume that everything is common knowledge might be alien to them.
- Which takes us to the next point: not every nook and cranny of your business model is obvious to outsiders. Case in point: I am sure many people who visit WatchMojo.com assume that we feature user generated content, I almost want to have a banner with flashing lightbulbs stressing: “we produce all of this video.” So some of the major and not so obvious things about your business do need to be clarified, simplified or simply stressed and emphasized.
- The obvious: if you can’t explain what you do to your mom, don’t bother explaining it to a VC. Moms know best, after all.
- You can choose to tell your story, or let the market do it for you. Last year I did not spend a lot of time chasing money, even though what we were doing was obviously about to create a lot of value. Last year, online video was all about the technology and the content was all about user-generated. This year, people are starting to see the value of so-called torso content and the tech platforms are doomed if their name is not YouTube or a select few others.
- Sure, a lot of VCs offer a lot, they add value, and this is not a representation of them all, but apart from money, some administrative support, don’t count on a lot from VCs.
This is actually more about case studies and questions I have asked other entrepreneurs who have gotten VC. I welcome any and all to list examples otherwise, but before you do, read my next point…
- When you initially talk to a VC, they’ll spend
* 50% of the call or meeting talking about your company and yourself,
* 25% selling themselves to you (even if they are not interested, I presume, because psychology states that successful and driven people like to sell themselves, even if sub-consciously) and
* 25% talking about other companies that you should talk to. Of these, half are companies that they have funded, half are companies they are thinking about funding. I would presume, once they do fund you, they will probably return the favor and push you to others, but they will double up their efforts to hound you. Since I am not funded by a VC, I am guessing the last part… but if the trend maintains… you see where I am going.
- Some cover my ass-age here: Not all VCs are created equally.
- Some great VC bloggers are great VCs, some are not. I won’t name names, since I don’t really know many VCs, but I am sure this applies.
- Be nice to all VCs, it’s a small world and many talk to one another. If you insult one VC, you technically are bashing an entire segment of the financing sphere, so it will come around to hound you.
- In my humble opinion, VCs overwhelmingly invest in people they have worked with or people who have many hits under their belt (more on this in next point). That’s a bastardly catch 22 but I do not blame them for it, I would probably do the same, but some of the best case studies in terms of absolute returns come from first time entrepreneurs (Yahoo!, Google, eBay etc. and soon, Facebook)
- You could have been a senior level executive type with more accomplishments than Benjamin Franklin, a founder or President/CEO gets a very different level of “benefit of the doubt” than an executive would. I have no tangible proof of this, other what I see in terms of who gets funded. Jeremy Allaire is no doubt the mack daddy, but come on, he’s raised $80M without breaking a sweat for Brightcove whereas the executives who helped him build Allaire probably don’t get the same props. Of course, when Macromedia bought Allaire, he became their CTO… and of course, Macromedia eventually got bought out by Adobe for $3.4B. This is in no way a knock on Mr. Allaire. It’s a testament to the fact that you have to be the boss in life to really get what you deserve. Sad, but true. So if you are reading and work for a fool for a boss, quit and strike out on your own, it will be the best decision of your life.
- I am getting ahead of myself, but do not raise too much money, and do not price yourself out of an M&A by setting too high a valuation. In one instance, we had a range for a valuation that would have been very interesting, but that meant that within a few months, if someone made us an offer to acquire us, it would be compelling to me but not to the VC, meaning friction for nothing… so my advice is take less money for lower valuation if need be, because then you can align your interests with those of the VCs, especially since…
- Between liquidity preferences and other so-called vulture capitalist clauses, the VCs own you. So excessive dilution is never a smart move, especially since…
- VCs write the bylaws and appoint the Board of Directors, who elect the CEO. You might find yourself out of a job quickly.
- Try avoid having one investor, have a couple. Too many is a headache, too little is a potential handcuff.
- VCs talk to one another, don’t be stupid and tell them so and so is interested if they are not. And if a VC is interested, you might want to keep that under wraps as well.
- East Coast and West Coast? Yes, while there are some cultural nuances in terms of business lifestyle, it’s all in the same country, one built on capitalism from coast to coast.
- It’s demand meets supply, the new institutional imperative nowadays, coming from VCs themselves, is that the VC model is being attacked etc., but the truth is there is now a lot of money out there but even more ideas and companies thanks to cheap hardware, open source software, “open” APIs, ad networks and what not.
- To be a successful entrepreneur, you have to learn to balance between good feedback and your gut. Stick to your guns all you want, but only a fool will never listen to good advice.
If a VC sends you a Term Sheet, it’s still no slam dunk, and when a VC says “no thanks,” they are neither crazy nor stupid, it’s just that you and your company is not their cup of coffee, Bessemer knows a thing or two about that in this hilarious round up of things they did not agree to invest in. Of course, it does make things that much sweeter when you make them regret their inaction when you cash out. At the risk of paraphrasing a famous blogger VC, ignorance ain’t bliss, but sometimes, ignoring is.
Any that I missed? I am sure I did, already working on an M&A Myths, Tips and Advice.
Marc Andreessen, who needs no intro, has a good post on VCs here.
Related: What is the Anti-VC?
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