Entrepreneur Myths (28 page)

Brain Candy: questions to consider and ponder

(Q1)
Do you think venture capitalists are risk takers?

(Q2)
Do you know of VCs who actually invest into the seed stages of ventures?

(Q3)
Have you been in venture capital meetings where the VC had no fucking idea what you were talking about?

(Q4)
Have you ever been funded by a VC? If yes, at what stage of the company lifecycle: seed, Series A, Series B, etc.?

(Q5)
Should the VC industry change their name to: (1) Adventure Capital, (2) Vulture Capital, (3) Riskless Capital (4) Cheetah Capital or (5) any other name?

(Q6)
Do you waste time pitching VCs even though you know the odds are stacked against you? If so, why?

Entrepreneur
Myth 41
| Getting a venture capital meeting is easy because your idea is so great

Getting through the venture capital door is harder than most entrepreneurs realize. Despite the ease of making connections through social media, the old analog model of connecting through friends and business associates still dominates today.

Getting in to pitch a VC is like getting into a very hot nightclub. Having a great idea is not enough. You have to know someone, baby. It helps to get a referral, either from another entrepreneur who’s already been funded by the VC firm, from your attorney, or from anyone else who’s done business with the venture firm. It’s a process. People may be hesitant to introduce you into the VC vortex unless they know you, or believe in your idea.

Cold calling or just sending information over the internet directly to VC firms, is not optimal. It’s actually fucking stupid — especially these days. You
must
get a referral. It doesn’t matter how great you think your idea is — it’s likely they’ve run across a similar idea (see Myth 18). You need a referral because litigation and whackos cause VCs to tread with caution. A referral filters troublemakers who believe they are the only ones that could have possibly invented the idea.

Don’t even bother trying to get in the VC door if your venture’s in the seed stage of formation — unless the VC firm is a seed fund (see Myth 40). It’s just not going to happen or it will be a complete waste of time. During my younger entrepreneur days, I met with VCs while I was in the seed stages of my venture. It ended up being what I call “mental masturbation.” And, you don’t want to tell them what you’ve got because they might be looking at another company in the same sector that is further along than your venture.

You take valuable time out of your hectic day to hire a babysitter or dogsitter, dress up, and drive an hour each way to meet with some hotshot VC. You tell the VC all about your cool idea and how it’s going to be bigger than Apple, Google or Facebook, and after pitching your idea, the VC tells you they don’t fund seed stages. They tell you to come back when your idea is off the ground and has traction. Congratulations. You just wasted valuable time going to a meeting when you could have been working on your idea, or making love to your spouse or whomever. Sure, the VC gave you some advice on your concept. But advice is like an asshole - everyone has one.

Some entrepreneurs think getting a VC meeting means the money’s in the bag. Now, that’s what I call positive thinking — to the point of delusion. Just getting a VC meeting is difficult, but the process of raising funds from a venture firm can be laborious and long. VC decisions aren’t made quickly. Many times VCs will have you first meet with an associate just to weed through the idea. Don’t discard these meeting. The associate usually knows your space well and could be your biggest champion in the entire process. The associates are your gateway to meeting the partners (the decision makers) of the VC firm.

Cold calling generates a lot of rejection. I hate to admit it, but when I was younger, I actually succeeded in getting a few VC meetings from cold calling. But the odds of getting in on a cold call are stacked against you. I got in because I’d been in sales most of my life — I was good at selling myself over the phone and was accustomed to rejection. Getting through the VC door took persistence and stubbornness. Some of those VC meetings were worthwhile, but I never actually raised any money through cold calling. The capital I've raised over the years has been based on referrals.

Raising capital from venture capital is easier if your company is located in Silicon Valley. The reason is simple: there is a high concentration of VCs, clustered on Sand Hill Road. There are also many VCs in places like Massachusetts and New York, but in my experience, Silicon Valley is still the easiest place to raise money.

The bottom line: Unless your venture has a substantial amount of traction, don’t waste your time approaching VCs for capital. Focus your time on approaching other types of investors such as friends, family and angels

If you have a financial perversion for needing to get money from a VCs, it’s simple: build a product, get traction in the marketplace, find customers to pay you for your product, and generate revenues. Do this, and they might even knock on your door first. VCs love funding companies that already have market and financial traction. You just have to prove that your market is a billion dollar sector with lots of room to grow. This enables them to fund and then dump your ass on the IPO or Googlio train.

Brain Candy: questions to consider and ponder

(Q1)
Have you been able to get a VC meeting? How did it go? Did you get funded? Or did you get the runaround?

(Q2)
If you’ve never been to a VC meeting, do you know how to present? If not, do you know   other entrepreneurs who can guide you?

(Q3)
Have you ever been funded by a VC in the seed stage?

(Q4)
Do you have friends who know VCs? Does your attorney know VCs? Does your accountant? Think about who can help you open the VC door.

(Q5)
If you have decided to get funded by VCs, what is your strategy? Are you even VC fundable?

Entrepreneur
Myth 42
| You can trust a venture capitalist

Do you want to show your amateur status to a VC? Then ask them to sign a nondisclosure agreement (NDA). You will look stupid. VCs don’t sign NDAs. So don’t ask them. And I don’t want you to look stupid after reading this book.

Asking a venture capitalist to sign an NDA is like a screenwriter asking a movie producer to sign an NDA.  It’s not going to happen. The reasons are simple: both the venture capitalist and the producer get hit up a thousand times a month with new ventures or scripts. Would you sign an NDA if you were in their position? No way. If you provide a VC with your business plan and they happen to fund a company in the same space, they could be exposed to legal liabilities if they signed an NDA. Simple. This is why VCs don’t bother with NDAs.

The unwillingness of VCs to sign NDAs leads to a critical question: if the VC won’t sign an NDA, then what can you safely share with them during the meeting, or in supporting documentation such as business plans, presentation, marketing plans, product development, etc.?

Do not give away all your juice, candy, key ideas or insights, upfront to a venture capitalist without getting to know them

Inexperienced entrepreneurs drop their pants as fast as they can and give away most, if not all of their secrets during their first venture capital meeting. There are VCs who’ll fuck you over, but that happens in any business. If the VC comes recommended from a friend, the likelihood of getting burned by them is reduced, but you must be cautious. No matter what, be careful of what you say until you feel comfortable. This could take a few meetings. There is an art to the VC dance, and it’s a two-way street. You must do as much due diligence on them as they do on you. Just because you need the money doesn’t mean any VC is the right one for you.

Keep the candy locked inside a “black box”

Sure, you have to tell the VC enough to get that second meeting or gain further interest in your venture. However, keep your key proprietary information safely inside the black box. If they ask you more about it, simply tell them you’re keeping it in the black box for now.

In my younger years, I pitched a VC on a venture and told him some of my key marketing ideas for launching the product line into the marketplace. I had more than a few meetings with this
scumbag
and then everything ended abruptly. Later I discovered that his firm had already invested into another company in the same space. When I found out, I felt intellectually raped. This motherfucker bitch was pumping me for information and pimping the information back to his portfolio company. But there was nothing I could do.

How can you prevent this? Looking at VC’s website probably won’t show you whether they have funded your competition because some funded startups remain in stealth mode until launch date.

Make sure they don’t strip the candy wrapper away from you too soon

You have to watch out for a VC trying to take part of your fucking candy and dump the rest. In my earlier entrepreneur years, I was part of a management team that developed a cool, kick-ass web technology. We met with a prominent VC in Silicon Valley. During the meeting, they had a CEO of one of their portfolio companies grilling our chief technical officer (CTO) about the technology and the black box.

Our CTO was smart enough to tell them nothing. He kept the candy (propriety information and know-how) inside the black box. There was strong interest from this particular VC. They were interested in investing $3 million. We were moving along in the process quite nicely — until we found out through the back door that the VC was trying to convince our CTO to jump ship and join their portfolio company. Unfortunately, I never had the pleasure of meeting that VC in a dark alley.

The CTO, who was one of the founders, happened to be a very greedy guy and was seriously considering the offer — despite the fact there was a founding team of four people. Needless to say, I dropped out of the venture quickly. If you can’t trust one of your founding members, then get the fuck out of the venture. The venture went bust because the CTO was not willing to work for anyone, but was not smart enough to raise the capital himself.

Now you may think VCs won’t fund entrepreneurs who don’t disclose their candy. Not true. I funded a startup for about $1.65 million in the software-hardware sector, and I didn’t know the candy contained in their black box. The founder refused to provide the information to anyone. He didn’t even patent the technology because he felt he would be exposing the secret ingredients. I didn’t mind funding his ass because Coca-Cola doesn’t disclose their formula either. The thing that mattered to me the most before investing was that his technology truly worked, and it was verifiable in terms of functionality and scalability. It worked. It scaled. It was kick-ass.