The realistic entrepreneur's guide to venture capital
Optimism is a key to success, but it doesn't necessarily work so well when it comes to VC. Because this is a cottage industry with thousands of players, all with different objectives, it's very easy to keep knocking on doors, just waiting to find the right match. It's also easy to spend a year or more adjusting your business to what each VC asks for ("bring me the broomstick of the wicked witch!" while you could have been out there building a real organization.)
Here are a bunch of conditions that you ought to take seriously before you invest the time and the energy to track down outside money for your great idea:
- Investors like to invest in categories they've already invested in. If your business is so new that it's never been tested before, or is in a category VCs hate, think twice.
- Investors want you to sell out. As soon as possible. For as much as possible. They have no desire to own part of your company forever.
- Investors want to invest in a project that's tested. If you can't make it work in the 'small', why do you think it'll work when it's big?
- Being a little better than the market leader is worthless.
- Investors don't want you to use their money to cover your losses. They want you to build an asset (a patent, an audience, channel relationships) that's actually worth something.
- Investors want someone to run your company who has successfully run a company before.
- Investors want to be able to come to one of your board meetings and still make it home in time for dinner.
- VCs like curves more than they like cliffs.
- There are actually very very few business problems that can be solved with money.
- You will probably have to replace many of your employees if you raise money from someone.
- VCs understand that being the best in the world (#1) is the place with the biggest rewards, so it's unlikely they will settle for any performance (even a profitable one) that puts you in second or third place.
- VCs are very smart and very connected, but they're smart enough to know that their connections and their insights can't fix a broken business.
- Investors are very focused on the company, not you. They're not interested in having you take out your original investment or paying you a large salary as profits go up.
- Business plans are bogus. The act of writing one is critical, but no one is going to read more than three pages of what you write before they make a decision.
- The companies that VCs most want to invest in are the companies that don't need their investment to survive.
[For those keeping track (and I wasn't one of them) this is the #2,000th post since I started this blog a long time ago. Which goes to show you--you can build a really big wall if you start early enough and have enough little bricks].