Entrepreneur Myths (25 page)

When you raise capital, remember everyone knows somebody with cash. Most people have a rich uncle or friend. In the U.S., there are 5.2 million high-net-worth individuals (HNW) with at least $1 million in personal assets. You have to play the six degrees of separation game through your network to get in front of the right investor.

You know you arrived when you’re turning down investors or they’re knocking on your door without any effort from you. They smell the candy and they want it. I’ve seen investors turn down an investment in the seed stage, but after the company took off — the same investors came knocking on the door begging to invest in the second stage. Do you know what happened? The entrepreneur told them politely to fuck off, because the current investors were deploying additional capital. The existing investors took the highest risk and they didn’t want anyone else to join the party after the company proved itself. Do you blame them?

Finding investors is not easy. Finding the right investor is even harder. As I said before, it’s a number game.

Brain Candy: questions to consider and ponder

(Q1)
Do you have problems finding investors or do they throw money at you because you already made them a ton of money?

(Q2)
Have you been turned down by an investor who later came back, wanting to invest after your company took off? Did you turn them down?

(Q3)
What is the best place to find investors: in a bar, church, restaurant, at conferences, the investor next door, Sand Hill Road or Wall Street?

Entrepreneur
Myth 37
| OPM is the best way to fund your venture

Put on your boxing gloves. We might fight over this one. I say other people’s money (OPM) is not the best way to fund your venture. Period. The reason is simple: when you use OPM, you have to answer to other motherfuckers like me, and your idea of being your own boss becomes fantasy.

Delay using OPM as long as possible, if at all. Michael Holthouse, founder of Paranet, is a perfect example. He never took OPM. He did much better. He figured out how to get his customers to finance his technology through sales. Years later, he sold his technology to Sprint for more than 100 million bucks. That’s how you do it. It’s not easy but it can be done.

I realize some ventures need investor funding. If you must go this route, hold off as long as you can. Self-funding helps keep your company valuation higher, so you won’t have to drop your pants down as much for investor money later. And it keeps you from losing control.

Hollywood has their financing shit down to a science

After extensive analysis, I must admit the Hollywood financing model is
genius
. They use OPM, but they don’t let the investor have any say on how the movie is made. Producing the film is entirely up to the producer and director. Can you imagine a bunch of money people telling you how to make your film? It would be one painful process.

The venture capitalist model is a brilliant finance and business model too. VCs use OPM but they don’t let their investors tell them how to make investment decisions or run their business. Sure, they have to generate reports, etc. for the limited partners, but there is no active involvement from the limited partners. Isn’t that wonderful?

On the other hand, the entrepreneur finance model
sucks
. Entrepreneurs take OPM, and then must report to investors, follow all kinds of legal guidelines, and kiss the investors’ little asses (including mine). Even worse, the entrepreneur must listen to the investor’s armchair quarterbacking at times. It’s not so bad if the investor is a smart motherfucker. But it’s painful when they’re not.

I have the formula for how to be your own boss, and take other people’s money, without having to kiss any investor’s ass. Here’s the secret formula: Create a new class of shares — the OPM shares. Currently, when you offer shares, the investor is issued either common stock or preferred stock. And there’s the new option of issuing founder stock. Fuck all that. Offer OPM shares.

OPM shares would be shares in the venture where the investor has no say, they can’t sue you for any reason, and they are not preferred anymore than you. Investors could sign a document stating they won’t try to overthrow your ass, nor bring in one of their cronies to run the company. OPM shares would eliminate investor bullshit and attract passive investors who have no desire to be backseat drivers. The bad news is you would eliminate a lot of investors with this offering — but you don’t want those bastards anyway. Sure, I’m being a smartass, but look at what happened to Mark Cuban before he won the 2011 NBA championship.

IPQ is critical for startups or sports teams

Cuban bought a majority share of the Dallas Mavericks basketball team from Ross Perot Jr. in 2000, leaving Ross Jr. and his Daddy Ross a 5% ownership. Winning an NBA Final is no easy task. It’s kind of like going IPO. It’s a tougher road and especially cumbersome when one of your investors or partners sues you. It’s never good news when a billionaire sues your ass — like in the case of Ross Jr. vs. Cuban. Ross just didn’t have a high investor patience quotient (IPQ).

Luckily for Cuban, it was a legal battle of one billionaire vs. another billionaire. Ross Jr. sued Cuban because he felt Cuban was not managing the Mavericks well as a business, and he wanted to put the team into receivership. Luckily for Cuban, the Mavs won their first NBA Championship during this bullshit legal battle. In life, timing can be everything. Now there was no luck in Cuban and the Mavericks winning it all in the 2011 NBA Finals, but Cuban’s timing was beautiful. And luckily for Ross Jr., Cuban didn’t shove the NBA trophy up his ass. Instead, he submitted the trophy as evidence in the lawsuit.

Investors can become impatient. You have to look for IPQ before you take their money. You can figure this out by evaluating some of their past investments. If the investor has lots of turn and burn, and few IPOs, they either have low IPQ or don’t know how to find the right IPO.

In my early angel investor days, I demanded preferred shares when I invested into a venture. I had no choice because it was in my agreement with my venture capital partner to ask for preferred shares. Today, I ask for common shares and the same exit strategy as the entrepreneur. Why? I want to be in the same boat as the entrepreneur and his team. Some investors might think it’s stupid to go this route, but it shows the entrepreneur I’m on their side of the equation and not taking advantage of them. I could never understand why the management team should have common shares while investors had preferred. If an investor wants
preferred
treatment by receiving preferred shares, tell them to fuck off — unless you are desperate for the money. Let’s start a counter-trend here and see if we can stop issuing preferred shares. All joking aside, when you go the venture capital route, you will have to deal with preferred shares. I just don’t think there should be preferred shares in startup investing.

Preferred shares can create problems for an entrepreneur. I funded a great entrepreneur in the high-tech sector who had lined up a huge investor for the subsequent rounds — but we weren’t able to close the funding because one of the preferred investors acted like a total ass by delaying the funding sequence. He drove the interested investor away. It was unfortunate, because the entrepreneur was a rock-star and a true visionary.

A lot of responsibility comes with taking other people’s money — unless you plan to finance and produce a low-budget film. In this case, the producers often get their money from a bunch of doctors, car dealers and dentists, who invest to feed their egos, fully knowing there is little probability of returns. This particular scenario primarily applies to low to lower-budget films, but it is all relative.

Remember, you must take OPM with caution. Exhaust all other options, such as debt financing, customer financing, and sweat equity financing, before you take anyone else’s money — including mine.

OPM is not necessarily bad, but it’s good to have the mentality that you want to build a business with the least amount of investment money from other people. You can do this being a frugalpreneur, as discussed in Myth 30: Money grows on trees. It’s easier to buy out OPM when you’re rolling in dough and have less OPM to buy out.

Brain Candy: questions to consider and ponder

(Q1)
Have you ever taken OPM? Was it a good experience? Was it a clusterfuck?

(Q2)
Do you think I’m a little jaded about taking OPM?

(Q3)
If you’re an investor, are you surprised at my suggestions about OPM? Do you want to kick my ass for discouraging entrepreneurs from taking OPM, including my OPM?

(Q4)
If you’ve taken other people’s money and the venture failed, did you have to deal with any bullshit? Was there a lawsuit? How did you escape the lawsuit?

(Q5)
Timing is critical in startups and sports teams — just ask Mark Cuban. What do you think about Ross Jr.’s low IPQ in suing Mark Cuban?

(Q6)
A little sneaky side note: IPQ + Capital + Luck + Vision + Passion + Team + Perseverance + Profit + Growth = IPO. Do you think this is the correct IPO formula? Did I miss anything?

Entrepreneur
Myth 38
| Angels are Angelic

“Angel” is a bullshit word despite the fact I still like using it myself. Angel investors are no more angelic than other types of investors. Your venture’s seed or early-stage money will likely come from angel investors, so it is extremely important you fully understand angels in order to avoid major clusterfucks down the road. Don’t confuse these angels with the supermodel Adriana Lima, who wears angel outfits for Victoria’s Secret.

Angels are not angelic

Not all angel investors are of heavenly behavior, but they are often a very nice and viable funding option. If you can’t fund the venture yourself, generally you should seek angels for early-stage funding or smaller amounts of money from FAF, before going the venture capital route. Turn to angels for OPM because VCs do not take seed risks.

I have worn the entrepreneur, angel and venture capital hats many times. My experience has allowed me to see all three sides of the investment spectrum, and what might surprise some is that angels are not angelic like Adriana Lima.

Angel capital is risk capital

Angel capital is seed capital. That’s the good news. The bad news is that angel capital is not all dumb or heavenly capital. Angel capital can be ruthless capital. Angel capital can be demonic capital. Angel capital might be some of the smartest money you’ll ever see or get. It is as smart, or smarter, than any VC money. However, it depends on what kind of angel comes to your financial rescue.