Babbling VC

Can't We All Just Get Along? (VC's & Entrepreneurs)

Fred Destin has an interesting post up today where he is asking his readership to let him know why VC's and entrepreneurs have become such enemies. I have to admit I too have been sensing an ever growing gap between VC's and entrepreneurs and oftentimes find it completely unfounded. At the same time, I've seen so much poor behavior from both sides of the coin that it doesn't surprise me. 

So what's going on? Well, I too am going to be anxiously awaiting Fred's post based on the feedback he gets. Yet, I can almost guarantee that two things will come up. First, on the VC side, you are going to hear that too many VC's have no idea how to grow companies and what is necessary to make a business successful. I couldn't agree more that there are VC's out there who don't know what they are doing yet this is the case in every industry (see my other post: VC's Are Full of Shit!) On the entrepreneur side you'll see that the expectations of entrepreneurs are hardly ever aligned with those of the VC, i.e. 10x returns and so forth (read: You Don't Have to Take a VC's Money). I also presume you'll see a lot more VC bashing in the responses than you will entrepreneur bashing. The entrepreneurs tend to be more vocal. :-)  

Will we learn from this? Well, it'll be interesting to see what kind of feedback Fred gets and how he puts it together. At the same time, there has been so much written about this. I think it all comes down to expectations and doing your homework. As a VC, if you don't understand how the business works and how to interact and succeed with entrepreneurs, you'll eventually be weeded out by the fundraising process. As an entrepreneur, if you don't understand a VC's expectations and what is coming at you when raising venture capital, you will ultimately fail (and probably blame it on the VC). 

I'll make sure to link to Fred's follow-up post when it's available. This should be a good one! 

You Hardly Ever Fail Because of Your CTO

This has been said many times before but I'll say it again. It's not about technology or innovation. It's all about customers and sales. I've noticed recently that you have lots of entrepreneurs always pitching their newest "mousetrap". Unfortunately, the discussion about how you're going to find customers for your product and sell it to them comes late or never. If you're going to send your business plan to a VC or pitch their partnership make sure you address this issue right up front. Convince them that you first know who your customer is. Second, make clear that you know how to address these customers. Finally, show that these customers will spend their hard-earned cash on your product. It's always sales that kill most early-stage businesses. I can't remember ever saying "shit, we're going to fail with this one because of the CTO!" 

I have to admit that when sitting in a pitch hearing endlessly about tech and how innovative a product is, if I don't hear the business case, it all becomes "blah, blah, blah". Of course I have to be convinced that you have a USP in regards to your product and this will most likely be technology related. There have simply been too many companies though that were far better technology-wise yet never made it.  

It's also the news in the press and blogs nowadays. You're often hearing about how innovative something is and there are new products here and there constantly. Yet, when I think which companies make it, it's hardly ever the technology which first comes to mind. I was just reminded of this when playing with Foursquare this morning. This is so not rocket-science yet people are using it and I have to admit it's addictive. Look at all the attempts out there to crack the LBS nut. I believe Foursquare is on to something. Sure, it's like Twitter in that it hasn't yet figured out it's business model but I can already see there's money there. Same is the case for Twitter. Give me this feeling when I am listening to your pitch. I don't need to see the break-even point. I need to see the huge exit down the road thereafter. 

Note: this is very VC related. If you aren't raising venture capital, you'll have different issues to address up front and this is necessary. 

It's Not About Paychecks. It's About Equity!

I've often made the dating reference when it comes to VC's and entrepreneurs. Well, there's one further point which I want to make clear, although to many it's obvious. After we invest, we want to eventually sell our stake. Be it via an IPO or a trade sale, we eventually want out. This means that our premise for investing is taking the money we initially invest and increasing it tenfold or better. You're scratching your head asking yourself why is Paul writing this? It's obvious! Well, not to everyone. We are not looking for businesses which get to break even and then flatline on their growth. We want the hockey stick. We want companies "swinging for the fences". We NEED companies looking to be market leaders. Otherwise, we simply can't generate the returns necessary to make our investors happy. 

Too many pitches I hear (most often in Germany) are too conservative in their thinking. Don't get me wrong. I am not saying go out and make wild claims to make me happy. What I am saying is that you need to have a business case which makes me want to get in on it no matter what. I am not happy investing my money so you can test the market to see which of three or four models gets you to a nice paycheck. It's not about paychecks. It's about equity. 

Equity is where it's at when it comes to venture. You want a piece of a big pie. I want a piece of a big pie. It's not about earning dividends for me. It's not about earning money for you (at least not short-term). What we together have to do is grow a business which sells itself. The buyer chases you and not vice verse. When this happens, we all generate the type of returns necessary for venture capital backed businesses. Everything else is otherwise just a series of bad dates. 

Why Are There Simply Deals We Won't Do

I'll keep this one short but it answers a question often asked. As is probably the case with most VC's and their LP contracts, there are industries we can't invest in. Very simply put, we won't invest in gambling, porn, first-person shooter games and anything having to do with alcohol, drugs or tobacco. All LP contracts vary but it's pretty clear why some of these areas are taboo for VC funds. 

Hence, if your company is in one of these industries, you will most likely have difficulty finding a venture fund to back your business. Note that I am not making any judgement on these industries and if you argue with me about this when asking to pitch me, it's a dead-end. I can't get around these rules in regards to my fund. Some VCs' contracts are a bit more lenient, i.e. they can invest in the gambling segment and have non qualms about first-person shooter games. This may change ever more in the future but they exist. 

Finally, a new area where we are having trouble putting our money to work is segments which reek of a scam. Arrington just went on a rant about the social gaming segment and I agree with many of his points. We are therefore ever more critical of business cases where a grey area exists and customers can be misled into contracts or payments without knowing. I have to admit I've been seeing more and more of these deals the past couple of months. I predict we'll be seeing ever more of this crap with the growth of Facebook, Twitter and other social networks and respective monetization attempts. Even if there are some legitimate business cases there, anything reeking of scam is going to get passed over by VC's.