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July 04, 2005
Real entrepreneurs don't raise venture capital
Real entrepreneurs don’t raise venture capital
I came across this post written in February 2005 by Jason Calacanis on one of his many popular blogs. His logic for why he wasn’t shopping for venture funding is well worth reading. — cgm
Why are my friends who are VCs telling me not to raise venture capital all the time?!?!? Very simple, it is the most expensive and explosive money you can raise. Of course, for those same reasons it is also the most powerful money you can raise.
Venture capital money is highly combustible, and it can either propel you to heights of unimaginable fame and glory (Google, EBAY, etc.)—or it can blow up in your face and destroy you (Kozmo, WebVan, etc.).
Now, there are some businesses that require investment, so you can exclude from my sweeping generalization that “real entrepreneurs” don’t raise venture capital. Folks who need $50-$250M to run a biotech or chip company need to raise money. You might even be able to leave out the folks who create enterprise software companies—although I’m not sure that is a market anymore—and the folks who have $10M+ revenue a year companies who are looking to “go big.” That requires capital, and capital has to come from somewhere. I get it, but startups can do better.
Why am I not raising venture capital for Weblogs, Inc? Let me count the reasons:
1. We don’t need the money. We are profitable, growing, and we have angel investors (myself, my partner Brian, and Mark) who are all highly committed to the business for the long term because we love it and we love working together. This is not just a business, it’s a passion.
2. VCs think their money is more important then you giving up your life. I know some VCs might take offense to this, but VC believe in preferred shares and liquidation preferences. What these terms mean is that the VCs get their investment out of the company before anyone else, and in some cases they get 2-4x their money out before anyone else. If they invest $5M in your company and you sell for $10M some day that means they are getting their $5M—or a multiple of that in many cases—out before you even start to split the money. Now, VCs are taking risk, but aren’t the entrepreneurs taking risk as well (at least the ones who don’t pay themselves $300k a year in VC money)? I’m a fan of everyone have the same stock, and everyone getting out at the same time—call me a communist if you will, but I like everyone aligned. How does your money get in front of my money/giving up my life?
3. VCs are betting with OPM 90% of the time. There are very few VCs who are actually betting their own money. Most of them raise money from limited partners (think CALPERS, University endowments, etc), and those limited partners have very specific goals when they invest. VCs live and die by the window and returns they set with their limited partners, if their investments don’t materialize according to those terms they can’t raise their next fund (at least not in the market).
4. VCs are hunting for one EBAY in 20 companies, not 20 respectable, medium-sized companies. OK, sure they will take respectable, medium sized business that get them back 2-3 their money, but the truth is every VC is in the game so they can hit a Geocities, EBAY, or Google. What does that mean for the other 99 business in the life of a VC? It means they are just spending time with you until that special 200x investment comes—if it ever does. Does that mean they don’t work hard for you or love you? Of course not, but it does mean that if the EBAY shows up you can be sure that they are going to focus their energy on that—even if they wont admit it—and who can blame them? They have an obligation to work this way, venture capital is a hits based business, much like the music or film business. If you look at those industries you’re as good as the sales of your last record or your last box office gross—do you want to live that way?
5. VCs have no problem shutting down your company. You know what the VCs most prized asset is? It’s not money and it’s not their network: it’s their bandwidth. If your company is going to do OK or good a VC isn’t going to waste the bandwidth on you—they can’t—because your slot could go to the next EBAY! An individual VC can only be involved with three to five companies before they are spread so thin that they can’t stay on top of their investments. In the boom years I remember VCs bragging about being on the boards of 12 companies! I’d say to them “Oh, so if you invest in my company I get you for, what, two days a month?” Some of them would say how valuable those two days a month were, but the truth is the human mind—no matter how brilliant—is limited to being able to juggle 7 +/- 2 items in short term memory. If you have a personal life you eat up half those slots, and what you have left is three to five slots for your companies. It’s as simple as that.
6. Most entrepreneurs get three swings, most VCs get 30. In relation to issue five, most entrepreneurs get three or four chances to swing the bat. Each company takes 3 to 5 years to play out, so you’re looking 20-30 years of your life if you start a couple of companies. An average VC might do a half-dozen or dozen deals in each fund, and do three to five funds in their life (funds take 5-7 years to play out, and they overlap). So, a VC has a bunch of swings they can warm up with, as an entrepreneur you have to make every swing count—but you’re swing at the same pitches! A VC might let your first or second business go by waiting for the right pitch (i.e. they shut your company down).
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Great story for entrepreneurs on all levels.
Posted by: Shawn Gunn at August 3, 2005 08:51 AM
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