Month: September 2007
I think Bill makes some good points and clearly his interactive panel sounds like it was interesting, if nothing else.
Ah – the joys of having super smart entrepreneurs to do our writing for us. Dick Costolo has today’s post of the day up titled No Exit. In this post, he ponders the answer to the age old question “What is your exit strategy?”
I hope this – and the appropriate discussion – gets cross-posted on the AskTheMilitaryCommander blog. For the time being, however, I’ll stick with AskTheVC.
Dick had a very nice exit recently when Google acquired his company FeedBurner. And no – the question “what’s your exit strategy” never came up in a meeting that I can recall.
Will Herman has today’s excellent post up titled Prune and Upgrade as You Go. It starts out with a quote from one of the board members from one of his early companies:
“any day, any time, you can fire a canon through the company’s building and not miss the employees taken out in the blast.”
My similar quote – which I’ve used for a long time – is “you can fire 10% of your company anytime and not notice.” The point – while harsh – is an important one. Will covers it very eloquently (and less harshly) in his post.
One of the questions that we get most often is “why are VCs such jerks?” or some sort of derivation thereof. Specifically, people complain about:
– VCs not returning calls / being unresponsive
– VCs not understanding how good of an investment my company is
– VCs stringing along entrepreneurs when they know they aren’t going to fund a deal
– VCs being “know it all board members”
– VCs being unapproachable in general
I won’t try to defend all VCs. In fact, I’ve seen all of this behavior from other VCs and I don’t condone it in any way. How does one avoid these behaviors? The key is picking good VCs to work with, but also to be self aware of your particular situation. I’ll try to address the particular complaints above by illustrating some situations that I’ve seen and also try to give you some insight into what might be rattling around in your VC’s head.
Issue 1: VCs not returning calls / being unresponsive.
Why is this happening to me? It could be that your VC is just too busy. They may have a prior investment that is suddenly requiring a lot of time, they may be looking at a ton of new deals, they may be fundraising themselves, etc. It’s not uncommon for one deal to take 100% of a VCs time if it is going through a merger situation or complicated financing. In this case, don’t take it personally.
I’ve seen some cases where the entrepreneur’s actions have led to perceived unresponsiveness. If an entrepreneur cold-calls a VC looking for funding, I wouldn’t expect a call back normally. I answer all of the emails that I get, regardless if I know the person sending it, but 5 minute phone calls that go on forever from someone that I’ve never heard of usually don’t get returned.
I’ve seen other cases where the entrepreneur sends an email every day to the VC wanting an update. This can get annoying and doesn’t lead to someone wanting to respond quickly.
Also, I hate to say it, but maybe the VC just “isn’t into your deal” and it’s at the bottom of his or her list. Sometimes unresponsiveness is indicative of interest. We try very hard to let people know quickly whether or not we are interested, so that folks don’t end up in this “bucket” but many VCs don’t operate this way.
Finally, maybe your VC is just an unresponsive person and you don’t want to work with them.
Knowing which one of these fact patterns that you fall into is easier if you are self aware and also have a transparent line of communication with your VC.
Issue 2: VCs not understanding how good of an investment my company is
Why is this happening to me? “I have the greatest idea in the world and no VCs see this – are they all idiots?” This is a reoccurring theme. I think the biggest disconnect here between VCs and entrepreneurs are *why* VCs may decline to pursue a deal. It might not have anything to do with your idea at all.
You *may* have the greatest idea in the world. A VC may still decline if the deal is outside of his / her investment thesis, is located somewhere that they don’t want to invest, or if they think the management team is not the correct team for the company.
You also may NOT have the best idea in the world. Perhaps the VC has seen similar ideas fail, or has some knowledge of a better prepared competitor in your space. Maybe your idea is just not that compelling.
Or perhaps, all the VCs you’ve met are idiots. It’s happened before where good ideas have been turned down by numerous VCs, only to find one later that funds it to great success.
Issue 3: VCs stringing along entrepreneurs when they know they aren’t going to fund a deal
Why is this happening to me? It shouldn’t. This is one behavior that I’ve seen that I personally have no tolerance for. Yes, it isn’t fun to tell someone that you aren’t going to fund their deal, but the only honorable thing to do is tell an entrepreneur this as soon as you’ve made up your mind.
Issue 4: VCs being “know it all board members”
Why is this happening to me? This situation is rarely one-sided – it’s usually the fault of both VC and entrepreneur, but it’s usually between the following polar extremes:
1. The VC is a complete idiot, doesn’t pay attention to the company at all, only shows up for the board meetings and then sits there and espouses “wisdom for all to hear.”
2. The Entrepreneur always thinks he/she is correct and that “no one could possibly know more about my company than me” and completely ignores the VC who has experience across many different companies.
In reality, most times I see this dynamic of “my VC is a jerk on my board” the truth is that it lies somewhere between these two extremes. I’ve seen situations that were very clearly biased towards each sides of the spectrum, however.
Issue 5: VCs being unapproachable in general
Why is this happening to me? This one is strange to me, because it would seem the whole VC community has become much more open and transparent over the years. From blogs, to speaking panels, VCs are more “out there” than they’ve ever been. Hopefully from this blog, folks at least think a few VCs out in Boulder, CO are completely approachable.
In summary, I think it’s hard to brand all VCs as “jerks.” I think some of the “poor” behavior is simply poor behavior, but some of it is perceived through rose-colored glasses of some entrepreneurs. You should also check our Bill Burnham’s post on “Why your VC is Acting Crazy.”
Q: We’ve developed a web-based security product whose primary application was intended for the financial industry. Since inception we’ve since began pursuing two other business lines, also based on the software, that can be considered conceptually different from the product we initially brought to market.
We’re debating whether we should pursue these product lines under the same LLC or create two separate LLCs and license the software to them, while being majority shareholders in each of the companies. Our concern is that this might be a bit too convoluted a structure for VCs to consider once we go for funding in a couple of months. Alternatively, there’s the liability perspective with regards to having three separate businesses under the same umbrella. I would appreciate your thoughts on this issue.
A: (Jason) Your instincts are correct – don’t divide your business among product lines. Any venture capitalist that invests in your company is going to want to invest in “everything,” not just a product line or two and the complexity and legal costs of setting up all of these entities and having proper licenses for property and people is prohibitive.
From a liability standpoint, one could argue that you are better off dividing up all of your lines of business (if one gets in trouble, it doesn’t hurt the others), but this is mostly a theoretical legal argument. This argument only holds water if you truly run each business separately, capitalized separately, etc. It’s not worth the bother. As a startup, you have more important things to worry about.
Finally, per our prior post, realize that that VCs don’t normally invest in LLCs.
Question: As a start-up with no history and no customers (we haven’t launched yet) how do I figure out how much equity to assign to myself as the founder? I have spent the last one year developing and writing the business plan. I hired two consultants both MBA’s with real world experience to help in polishing the business model and writing the plan. They agreed to do the work on contingency basis to the tune 0f $18,000 so far. I haven’t issued any shares yet. Is it paramount that I issue shares before approaching funding sources. How do I value the company? A company in similar business sold recently for over $300 million and another sold for $1.5 billion. Of course these are mature companies, but still in the same business.
Answer (Brad): If you are the only founder, the answer is simple – 100%. If there are multiple founders it’s a lot more complex and you may need to resort to arm wrestling or coin tossing. Based on your question above, it sounds like you are the only founder, so you’ll own the company until the funding event.
The actual number of shares are irrelevant – you can issue 1 (and own the 1 share – hence 100%), or issue 100 (and own 100 for the 100%), or issue 1,000,000,000 (and own 1,000,000,000 yourself – although I’d suggest this is both unnecessary and can cost you corporate taxes you don’t want in certain cases.)
Regarding valuation – there is no easy and short answer. We’ve written about this before in How Do VC’s Determine Company Valuations? – I recommend you start there although every case will vary.
Question: I am the CEO of a company my board is looking to hire a new CEO, for fund raising purposes, and has identified a candidate. The candidate was in fact referred by a VC, I was asked to interview the candidate and provide feedback. I did this and the interview went fine however I also have a couple of mutual acquaintances and when I followed up with them the feedback was extremely unfavorable. The CEO of the last company he was with cannot speak about it as he agreed as a condition of this person leaving that he would not provide anything other than hire and leave dates. My situation is that I cannot provide any detail to my Board on this as I committed to my friend not to and at the same time I am now very concerned that we might make a poor selection since my Board members are very high on him. As a VC how would you want this handled.
Answer (Brad): I would want you to explain this to me exactly the way you have above. Be clear, direct, and transparent without compromising your friend. Since you are involved in recruiting for a person to replace you as CEO, you should be clear with your board that you are not trying to torpedo a potential candidate, but you are uncomfortable based on the data that you’ve received. A rational board will ask for more details and you should be willing to provide substantiation of “the bad behavior” (whatever it is) – again you should be able to do this without compromising your friend.
The ultimate way this will be handled has to do with your relationship with your board. If it’s a respectful relationship where you have real influence on the outcome of this hire, your direct perspective will be valued. If you are already in a rocky situation with the board and/or the VC who is advocating this person, you will likely come across as defensive. The more data you have, the better.