"Look
at them yo-yos
That's the way you do it,
Get your money for nothing..." - Dire
Straits, Money For Nothing
I've seen the look. The forced hint of a smile, the eyes
giving away more than intended and the small throbbing
vein in the vicinity of the temple. I've just said that
the opportunity is not big enough, or the market not
growing fast enough or the company not built enough. And
now I'm getting the look. Thank God we live in Canada,
because I'm sure that access to a handgun would be a
very bad thing for me right now. One of two things
happens next. The same ground will be covered again,
leading towards an infinite loop of persuasion and
rejection. Or the conversation reaches escape velocity
and the entrepreneur bolts up, curtly shakes hands and
then leaves with a tiny dark cloud appearing over their
heads.
I'm a VC and that's what I do a few hundred times a
year. That's the down side of the job, lest you think
I'm some kind of Machievellan weirdo thriving off others
pain. For the uninitiated, a quick review of the math:
In order to support enormous risk of investing early,
said VC needs to have the possibility of boffo returns
on their money (>100% per year, if you want a
number). Across a portfolio of companies, the returns
will be somewhat less because some fail. Therefore, a VC
needs to be picky. Which leads to the scene described
above...
This column is not about the ones we pick and it is
not about the reasons we choose not to pick. I want to
talk about the fantastic business opportunities that do
not get funded and what the options are for the
entrepreneur that doesn't get what they want on the
first try.
My timing for this coincides nicely with the sudden
propensity for the media in Canada to skewer the VC
community here and talk about the perceived nirvana of
capital raising for tech companies in the US (see more
in Random Thoughts below). Let me say with 110%
certainty that the one unassailable fact in money
raising for early stage companies is that no one gets
the money from who they want on the first try, anywhere.
And anyone that tells you that they can get it for you
in a snap has never done it before. Stories abound about
getting term sheets in the Valley by walking down Sand
Hill Road like some street hooker, saying, "come
get it, baby!" It's all urban legend. If it is
really easy to get money, there has to be a catch. If it
is hard, then there will most likely be some value in
actually getting it.
As an entrepreneur looking for capital you have to be
realistic and have a plan B. And a plan C. And a few
credit cards. First rule of money raising is that it
will always take twice as long as you think to actually
get the money. The second rule of money raising is to
never, ever burn a bridge. If you are turned away by a
prospective source of money, sending them a flaming
e-mail and telling them they are so stupid for not
investing is generally known as entrepreneurial suicide.
My personal favourite was the guy that attacked my
knowledge of the business (probably valid!) and then
said that he didn't need my money because he had raised
it from far more valuable investors in Nevada. I wanted
to send some wise crack back about which roulette wheel
was more valuable than me, but I held off. When he needs
more money, do you think I will pay attention?
You have to be persistent in getting the attention of
people with money, but once they give you a NO or even a
euphemism for NO, you need to focus your energy on the
next step. Understand what the issues are with your
company. Try and get meaningful feedback from your
rejectors. This will help you determine what happens
next. And here's a news flash for you: It may be
possible that the potential investor doesn't see the
opportunity that you do. Is the investor a) not used to
taking as much risk as you are asking for b) too busy to
pay attention c) not knowledgeable in your industry
space or d) in the middle of a divorce, on Prozac and
has had three straight losing investments or e) all or
some of the above? While it's nice and convenient to
rationalize that it is the investor's fault for not
seeing your opportunity, perhaps it wasn't communicated
properly. If you are rejected, take a good hard look at
your business plan and presentation before going to the
next meeting. Imperfect communication between
entrepreneur and investor is the single biggest reason
for 1) you not getting funded and 2) the investor
possibly missing a great deal.
Remember the point about VCs being picky? If the
opportunity is not presented well and/or the presenter
is unimpressive, the company does not get money. Seems
obvious. But it is amazing how many crappy business
plans and un-focused rambling presentations we see. If
you manage to get past the initial presentation with an
investor and diligence is being done on you and the
company, bend over backwards to give references,
documentation and industry metrics so that the decision
can be made faster. If the deal gets stale and
information slows or stops flowing, it will end and
valuable time will have been wasted.
Getting back to plan B and C after you have been
rejected the first time, here are a few hints on how
investors think. Firstly, they travel in packs. Just
because one turned you down, does not mean that they are
out if another that they respect greatly comes in
(that's the bridge burning part). Second, just because
one investor has a view of the technology marketplace
different from yours, doesn't mean that all investors
have the same point of view. For instance, there is
almost a 50/50 division of minds in the VC community
about the viability of open source software as a big
business. Similarly, some investors think that on-line
content is a giant cash sinkhole, while others believe
that its time has come. Do your homework on investors
and try and understand how they see the world. You will
save a lot of time if you avoid holy wars from vast
differences of opinion. Oh, and excuse me for not being
open-minded in some instances. I completely reserve the
right to be wrong!
If you have convinced a team of people that your idea
is a great one and you still haven't raised enough
money, don't give up. The real story of Glenn Ballman
and Rob Ayer at Onvia.com is the 14 month time frame
from when the first got rejected for money and the
closing of their first $10M VC investment in Seattle.
They persevered, but they also listened to feedback and
changed their plan to something a little more unique.
The investors then found it more compelling and backed
them. But it was hell. It was 14 months of shared
apartments, cancelled phones, huge credit card debt and
not much sleep.
In BC, there are alternatives to VC financing that
can make your company a success in some way. For you as
a start-up entrepreneur, the best source of money is a
customer. They don't take equity and they increase the
value of your company by many times over the value of
the revenue generated. If you have to build it first,
there are sources depending on what industry you are in.
Strategic partners or suppliers can give you cash.
Angels are almost as tough as VCs to find and convince
to invest, but they are out there too.
It would be nice if I could appease the rejected
entrepreneur with a concrete next step to get their
business off the ground. But there is no magic bullet,
no identified source of money for good, but not great
business opportunities and no endless supply of capital
to just throw money at it and see if it works. While you
may be frustrated with the process of financing your
dream, rest assured that the right combination of a well
presented plan and proper timing will get you where you
want to go... eventually.
Random Thoughts
- The Killing a Mosquito With A Sledgehammer award
goes to the Canadian media with their vast coverage
of Canadian entrepreneurs heading to the US for VC
money because they can't find it here. Yes, it's
true. It is a problem. But the coverage seems a
little funny when the same newspaper on the same day
touts the newest and biggest round of VC financing
in Canadian history, by, gasp, Canadian VCs. And
then the next day talks about the latest, newest,
largest VC fund in Canada being launched. A
politician once said that any press is good press
because people will remember you. In that vein, it
is excellent that technology VC is getting known,
but the story is old. Time to focus on underlying
issues and/or people offering solutions.
- The Ballard Power story this week about the
government claiming money owed for patents that it
financed is a scary, scary story for Canada. If you
missed it, it states that the federal government is
claiming that it should get some of Ballard's wealth
because five of its hundred or so patents were
claimed after lengthy research using federal
research grants. Is the story that Ballard agreed to
pay royalties for its Intellectual Property (IP)
commercialized after using federal money and hasn't?
Possibly. Or is it some ill-informed bureaucrat
deciding that the Canadian taxpayer deserves to get
the money back that it invested in Ballard. Probably
a bit of both. In either case, the feds just don't
get it! Ballard has huge market value, but not a lot
of positive cash flow these days. Paying the
royalties back would be a pain today. Imagine how
wealthy the taxpayer would be if they had a few
thousand shares of Ballard in lieu of royalties. In
a very early stage company, taking a few hundred
shares instead of royalty payments would generate
far more for the government. And the argument that
the taxpayer should be paid back is completely
flawed. How much has the government generated in tax
from the employees of Ballard in the years since the
grants were given? The goal should be to support
early stage R&D in order to give a few more
Ballards a chance to start. Payback is irrelevant. A
few Ballards will more than support all of the
research not commercialized. With arguments over who
owns the IP and who gets repaid, no wonder people
avoid the government money in many cases. They say
they want to help and they make it worse...
- I said it before and I'll say it again. Why is the
government in the business of giving money to big
business? Subsidization is wrong because there is no
way to dole it out fairly. Over-subsidization
creates mediocre industries reliant on the hand-outs
like heroine addicts at the methadone clinic. The
film production industry in Canada jumps to mind.
But now it's the NHL. Ugh. I grew up playing hockey.
I played junior and university hockey. Some years I
played 365 days a year. I love hockey as a fan and
as a player. The hair stands up on my neck whenever
I hear, "Henderson takes a wild stab at
it." I cried when Gretzky retired. But I don't
think you should bail out a money-losing industry.
It's the wrong tack. Don't increase their cash on
hand, decrease their expenses. They should be
cutting taxes across the board to level the playing
field. They should offer tax incentives to owners to
offset the Canadian dollar disadvantage and that's
about it. One thing this fiasco does prove, is that
the squeaky wheel gets the grease. We need to turn
up the volume on the governments as a tech industry
to get the playing field leveled in our world.
Responses From Last Week -
I had the typical three or four responses to my argument
about a lack of infrastructure here in Vancouver. Some
groups were only slightly offended and thought I was
implying that they were inferior. Most of their comments
were great advertising for them and I fear I would start
an infrastructure feature war if I printed them. So, I'm
not. But thanks for writing to express those views.
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