"I
have spoke with the tongue of angels
I have held the hand of a devil
It was warm in the night
I was cold as a stone
But I still haven't found what I'm looking for " -
U2, I Still Haven't Found What I'm Looking For
Here's the premise: You are an entrepreneur. You have
worked like a dog for months on end. You haven't slept.
You have your credit cards maxed (all 15 of them). Your
significant other is a) leaving you b) trying to get you
to see a shrink or c) sleeves rolled up and right beside
you. You have incredible faith in the possibility that
what you are doing, what you left your comfy job for,
will succeed. You have just launched the product on a
shoestring budget. Now, more than ever before, you need
money. And the smarmy, know-it-all, pin-striped,
shiny-shoed MBA sitting across from you is holding the
gold. If they ask one more question about your
distribution strategy, you will stick a pen in their
eye. But, you remain outwardly calm and try to pry the
money from their manicured hands. Sound familiar?
If you have ever tried to raise money for a new
venture, you have been in this situation or one similar
to it. As we all know it is tough to raise money for
early stage companies. Why? Simple economics. There are
a few with the money and many who need it. Michael Wolff
(entrepreneur and author of "Burn Rate")
described raising capital as a "beauty
contest" where the rules for success are defined by
perception, not reality. There are many cynics that are
much less polite about financiers and their methods of
picking investment opportunities. My personal favourite
is from Scott Adams of Dilbert fame. He was asked what
the best job in the Silicon Valley would be. He said,
"That's easy, I'd want to be a VC. Besides the fact
that it sounds great at parties, I could be wrong 9
times out of 10 and still be a success. A hamster with
Alzheimer's could be a VC."
VCs are like lawyers. We are the butt of many jokes. The
VC comic strip is my favourite location of VC humour.
It's easy to see why people are cynical about us. We
reject 98% of the people we talk to. I've heard that
suicide rates are extremely high amongst dentists. The
theory is that they have negative energy emanating from
everyone that they see in a day's work and this makes
them despondent. I don't think a similar study has been
done amongst VCs. But I am familiar with negative
energy...
For what it's worth, VCs (at least the ones that I
know) find little joy in saying NO all the time. In
fact, most VCs have euphemisms for NO, in order to not
have to say the word directly. Have you ever heard
"We are interested, but call me back when someone
else is leading the deal."?
And then there is the image that we really detest.
The one where we invest only to make sure that your
company stumbles a bit, so we can invoke all of our
nasty clauses and take over your company, leaving you
out in the cold. Hmmmm. Sounds like Fox Mulder got
venture capital once. That is actually quite a
compliment when you think about it. We are so smart that
we can predict when a company will stumble and why. Then
we can make the company fly as soon as we oust the
founders. We must be really good in order to screw the
entrepreneur so well. (You think I am making this up? If
you were at Ace Tech - Early Stage last week, you would
have heard this straight from the keynote speaker, a
prominent Vancouver technology ex-CEO). The source of
these stories is, you guessed it, from ex-CEOs who were
ousted by their boards or otherwise given a rough ride
when things got tough for their companies. Sour grapes
leading to more jokes. Again, for what it's worth, do
you think that we look forward to confrontations with
under performing management? I sure don't. But it's part
of the job and our job is to make sure the Company
succeeds. Last point on this digression. VCs must have
thick skin. I actually enjoy some of the more clever
insults and jokes. So please don't pity me. It's
embarrassing.
It has been well documented how venture backed
companies perform better than others. This is most
likely because VCs are trained to pick companies more
likely to succeed. And "pick" is the key word.
We have the luxury of choosing amongst many
opportunities. What if you, the entrepreneur, could have
your pick of investors? What if the roles were reversed
and the VCs had to grovel at your feet (insert any image
that gratuitously derides VCs here)? What would you look
for? What would the ideal investor do for you? Some
might say that the best investor is the one that gives
you the money, no strings attached, and never forces you
to pay them back. Well, let's try and keep at least one
foot planted in reality.
The real question here is what value can be added to
your firm along with the necessary injection of cash.
Value can be added by an investor in numerous ways. Here
is a handy checklist to go through when considering
possible equity financiers (in no particular order of
importance):
- Has direct industry experience
- Has been a senior manager in a start-up
- Has an enormous international network of contacts
- Has deep pockets (we're talking millions) to keep
investing in you
- Can identify and locate talent for recruitment
- Can locate further funding sources easily and is well
connected to investment bankers
- Has invested in runaway successes before (the
all-important "track record")
- Has integrity and knows what they don't know
- Has the time to devote to your venture
- Passes the Toledo test (you know, could you spend a
weekend stuck in Toledo with them and not stick a pen in
your own eye)
If you meet an investor that has all of these
qualities, do whatever you can to get them on your
Board. This investor may be a VC, but it could just as
easily be an angel investor. Indeed, this would be the
perfect investor. I was careful not to rank these
investor criteria. I would place significant weight on
the last one, however. Investing and growing a company
is a partnership. If you can't stand being in the
person's presence then all of the other criteria don't
amount to much value.
If the "beauty contest" is reversed and the
entrepreneur is choosing an investor from a pool of
possibilities, then it is vital that the entrepreneur
evaluate the choices on the value criteria laid out
above. We, the VCs and angels, should be selling as much
as you. Unfortunately, this mistake is made far too
often. Early stage CEOs don't spend enough time
(probably because they don't have it) researching the
backgrounds and track records of the investor.
In BC, there are less choices for equity investment
than in Ontario. This makes it hard for the entrepreneur
to choose. California is awash with investors compared
to here. But it is very difficult to get investors to
look too far from their home base. It takes them away
from their networks and results in less time spent on
the venture. Besides, it isn't like there aren't any
opportunities to invest down there, at least for the
investors that have most of the criteria laid out above.
Venture capital investing and investors have changed
over the years. It used to be much more un-structured
and the investors were cowboys that went largely on
hunches. Nowadays, the cowboys are wearing suits and
looking remarkably like bankers. Venture investing is
now big business. There was $1.2 billion invested in
Canadian technology companies in 1997. My image of the
MBA that deserves a pen in the eye is a self-deprecating
stereotype. Ha. Ha. Well, the joke will be on me when
more venture capital becomes available in BC if I don't
convince you, the next successful entrepreneur, that I
have most of those value-added capabilities. So, rest
easy. I'm working on it.
Random Thoughts
- Ace Tech Early Stage was quite successful. It
attracted 85 nascent technology CEOs and they learned
much more than "VCs in Vancouver are
incompetent." I hope they make it bigger and better
next year, because the early stage CEO needs all the
coaching and mentoring they can get from the veterans
that set up and ran this event. And that is exactly the
point. As the tech community grows here, we need less
knife throwing and more collective action. Yes, you
sensed it. I am disappointed that some of these veterans
pilloried us. I refuse to air dirty laundry. It won't
help. Just remember that there are always two sides to
every story. Next year, save your snivelling and focus
on the positives.
- An excellent article appears in the
November-December Harvard Business Review on "How
Venture Capital Works". It will add a lot to this
article in helping you understand VC motivations.
- I now get to use the by-line: Something Ventured,
quoted by leading publications in Canada like the Globe
and Mail. I had a section of my article on the VC Road
Trip lifted and inserted into the Globe two Mondays ago.
They didn't ask, but they did give a reference to the
URL. I received a few inquiries from people in Ontario
about the subject. Cool, huh? OK. I'm done the
self-congratulatory tone.
- Internet Insanity Revisited: Well, wouldn't
you know that 2 days after I finish my article on the
Icarus-like Internet stocks, AOL decides to buy Netscape
in the most important acquisition to date in this new
industry. This deal makes sense for a lot of reasons.
Even the "rear view mirror" types acknowledged
that this was a deal that they liked. Finally, something
their spreadsheets could crunch that didn't get a
"divide by zero" error.
Of all of the pundits that summarized the deal, once
again I tip my hat to Mark Anderson for pointing out
something that no one else did. Most of the reviewers
puzzled over the small point that AOL would keep using
the Microsoft Internet Explorer for its 14 million users
until the end of 1999. Mark surmised that the real
reason that AOL made the statement was that if they
converted to Netscape (instantly tilting the browser
market share way in the favour of Netscape) then the
DOJ's anti-trust case against Microsoft is hurt badly.
Why? Bill, Steve and company start jumping up and down
pointing to the browser market as proof that they are
not a monopoly. AOL does have a contract with Microsoft,
but don't you think that Microsoft would rip it up in a
Seattle second?
So, this week in Internet la-la land, we have the
Canadian companies Bid.com and Gaming Lottery Corp.
Bid.com has received a lot of press as the Canadian
e-Bay, an on-line auctioneer. Once again, look at the
key metrics. E-Bay is actually trading at a lower price
to sales than Bid.com. And e-Bay is profitable, Bid.com
is nowhere near. Bid.com is the latest of what is best
described as the "greater fool theory" of
investing. It isn't a new concept. Have you ever heard
of Amway or any multi-level marketing type scam? The
theory is that as long as there is a greater fool than
you out there, you will make money. The risk is that you
will be the last fool. Speaking of utter fools, Gaming
Lottery lost 2/3 of its market value yesterday after a
short 7 minute TV appearance by their CFO. They just
listed on the NASDAQ on Monday and coincidentally
launched their on-line casino the same day. The CFO was
absolutely roasted by the CNBC guys, getting him to
admit that U.S. people cannot gamble on-line by law and
that someone invested for 10,000,000 shares at $0.40
about 3 months prior to their NASDAQ listing, which shot
from $7 to $25 on the first day. The real kicker was
that the CFO was forced to admit on international TV
that he, himself, had just unloaded 1 million shares
this week. Seems the VSE doesn't have the market
cornered on these types of companies.
Response From Last Week's Column:
Brent - This week's piece in T-Net was quite
excellent, as usual. Keep up the good work.
Further to your screed, I thought you might enjoy this
item. I'm not sure we can simply nail the day-traders
for this situation ....
Judy Bishop
- Thanks Judy. The article is
from thestreet.com and for copyright reasons I include a
link. It's called the Internet
Suckers Index and it is indeed a good read. Of
course you need a membership to read it. But they do
allow a 30 day trial.
Hi Brent, We met once on a helicopter back from the
Island (you were with Multiactive).
I get the T-Net email and have often been intrigued by
the subject of your sections. However, prior to this
evening, I had never read it (I seldom visit the web
site).
I thouroughly enjoyed your article. It is nice to read
from somebody who gets it! Your article will be filed.
Kudos,
B.J. Broitman
- Don't tell Terry I was on the
helicopter! Thanks for the encouragement. Nice to know
that the BC Tel Interactive guys are on top of things.
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