How Not to Approach Venture Capitalists and Angel Investors
If you are a marketing specialist looking for a marketing job would you send your resume in response to job postings for high school science teachers or airline pilots? You probably wouldn't. Just imagine what people would think if you did.
Through this site I receive about ten unsolicited pitches each and every week. One call was from someone two thousand miles away who needed to raise tens of millions of dollars to build an amusement park. The fact that he contacted me demonstrates that he didn't take any time to read this site beyond the words "venture capital" or find out what my background is.
Using this shotgun strategy to look for investors is a complete waste of everyone's time. It makes a bad first impression. There is no better way to say, "Hey look at me, I can't be bothered to do my homework first." The person on the receiving end will automatically conclude that you 1) have no idea what you are doing and, therefore, 2) are a waste of his or her time.
In the interests of helping you to become more effective in your search for venture capital or angel capital, here are three easy rules to remember.
1. Investing is a local face-to-face game. There are two reasons for this fact. First, investors like to know who they are dealing with. This means that a series of in-person meetings usually has to take place before they start to warm up to the entrepreneur. Second, if something starts going wrong at a company, the investor wants to be able to drive to its office in under an hour for a meeting with the person in charge. Investors do not want to have to drive all day or hop aboard an airplane for an emergency meeting. They have better things to do with their time.
2. Both venture capitalist and angel investors specialize by industry. These are industries in which they have in-depth experience. Once you find a local investor do some further digging through their website or with a quick telephone call to see if they invest in your type of project. If an investor's focus is on software it makes no sense to contact them about funding for your new fishing lure.
3. Finally, both venture capital firms and angel investors have a preferred deal size. For some venture capital firms the minimum investment size may be $3 million and the maximum may be $10 million. Venture capital firms can also be broken down into early stage and later stage investors with the vast majority being in the latter group. This means they do not invest in startups (recall the Funding Catch-22). For angel investors the minimum may be $50,000 and the maximum may be $200,000. So, it's really important to find out before you send an executive summary.
In most cases, you can find the answers to all three questions on the venture capital firm's website. With a private investor you will have to ask him or , better, people who know him before proceeding with your pitch.
The man who contacted me about the amusement park ignored all three rules. He offered a deal an airplane ride away, in an industry I know nothing about, and in a size outside of my range.
-
If you are a marketing specialist looking for a marketing job would you send your resume in response to job postings for high school science teachers or airline pilots? You probably wouldn't. Just imagine what people would think if you did.
Through this site I receive about ten unsolicited pitches each and every week. One call was from someone two thousand miles away who needed to raise tens of millions of dollars to build an amusement park. The fact that he contacted me demonstrates that he didn't take any time to read this site beyond the words "venture capital" or find out what my background is.
Using this shotgun strategy to look for investors is a complete waste of everyone's time. It makes a bad first impression. There is no better way to say, "Hey look at me, I can't be bothered to do my homework first." The person on the receiving end will automatically conclude that you 1) have no idea what you are doing and, therefore, 2) are a waste of his or her time.
In the interests of helping you to become more effective in your search for venture capital or angel capital, here are three easy rules to remember.
1. Investing is a local face-to-face game. There are two reasons for this fact. First, investors like to know who they are dealing with. This means that a series of in-person meetings usually has to take place before they start to warm up to the entrepreneur. Second, if something starts going wrong at a company, the investor wants to be able to drive to its office in under an hour for a meeting with the person in charge. Investors do not want to have to drive all day or hop aboard an airplane for an emergency meeting. They have better things to do with their time.
2. Both venture capitalist and angel investors specialize by industry. These are industries in which they have in-depth experience. Once you find a local investor do some further digging through their website or with a quick telephone call to see if they invest in your type of project. If an investor's focus is on software it makes no sense to contact them about funding for your new fishing lure.
3. Finally, both venture capital firms and angel investors have a preferred deal size. For some venture capital firms the minimum investment size may be $3 million and the maximum may be $10 million. Venture capital firms can also be broken down into early stage and later stage investors with the vast majority being in the latter group. This means they do not invest in startups (recall the Funding Catch-22). For angel investors the minimum may be $50,000 and the maximum may be $200,000. So, it's really important to find out before you send an executive summary.
In most cases, you can find the answers to all three questions on the venture capital firm's website. With a private investor you will have to ask him or , better, people who know him before proceeding with your pitch.
The man who contacted me about the amusement park ignored all three rules. He offered a deal an airplane ride away, in an industry I know nothing about, and in a size outside of my range.
-
Looking for a payday loan to get your company started? Go online for great information on the best ways to get help. But remember, before you get a loan, always investigate the fine print before you commit.
Venture Capital
You have to ask yourself if venture capital is a realistic financing option for you. Most entrepreneurs who pursue venture capital don't qualify and merely end up wasting a lot of time (on average from 6 to 18 months) and energy in a futile pursuit.
There are problems associated with attracting venture capital as well. A venture capital firm will in most cases fire the founder and founding team within months of a financing round. The Wall Street Journal pointed this out in a article by Barnaby Federer from September 30th, 2002:
"If you ask a VC what value they add, and you get them after a few drinks, they'll say, 'We replace the CEO' ", he said. And that, he indicated, does not vary with the economic climate."
Article: 10 Reasons to Shy Away from Venture Capital:
Venture Capital a Faustian Bargain
We're going to raise venture capital!
Rookie Entrepreneur
Rookie Entrepreneur
This declaration is heard daily across the land from first-time entrepreneurs. To the uninitiated it sounds impressive and even glamorous to embark on such a path. However, to veteran entrepreneurs it's a strong indication of the rookie’s naivety and lack of understanding of the consequences of accepting money from outsiders.
While venture capital can be a tremendous boon to a tiny fraction of the companies pursuing it, in the vast majority of cases it presents the entrepreneur with a “Faustian Bargain”. Venture capital brings with it tremendous meddling and pressure from venture capitalists who in this day and age typically lack both the operating and industry depth of their predecessors. The effect of this on fledgling ventures is loss of control by the entrepreneur which then frequently leads to bad--and sometimes fatal--business decisions being made.
Here are ten drawbacks of venture capital for the entrepreneur to mull over before making a decision to pursue it.
* The decision to chase venture capital is often a tempting distraction from the much more complex and important entrepreneurial tasks of creating something to sell and persuading someone to buy it. The pursuit of venture capital is sometimes a means by which to postpone the day of reckoning when the marketplace finally decides if the idea will fly.
* Venture capitalists behave like sheep investing only in whatever industry happens to be the flavor of the month. Everyone else need not apply.
* Rookie entrepreneurs talking to venture capitalists expose their ideas to increased risk because they cannot distinguish between genuine interest and mere“brain-sucking” to uncover corporate secrets.
* Once negotiations begin venture capitalists will typically stall in order to push cash short companies to the brink of bankruptcy as a way of extracting additional equity and concessions at the last moment.
* Terms demanded by greedy venture capitalists frequently work to erode and ultimately destroy the founding team’s motivation and commitment to building a successful company.
* With the first dollar of venture capital accepted the entrepreneur’s control slipsaway to MBA wonder-boys with only the shallowest of operating experience.
* As soon as venture capitalists become involved the founder’s role shifts from critical company building functions to preparing reports, attending endless meetings, writing memos, and hand-holding impatient and/or meddlesome investors.
* An infusion of capital often shifts the founding team’s focus away from selling to spending money in an effort to placate venture capitalists who often confuse bulking-up staff and assets with real growth.
* Venture capital brings with it tremendous pressure to create a liquidity event but this frequently results in bad decisions being made to launch products too early or enter into the wrong markets.
* The venture capitalist’s knee-jerk response to every problem faced by a portfolio company is to fire the founders and evade any personal responsibility for bad decisions.
Here's a bonus 11th reason why venture capital is bad. It is by far the most expensive money an entrepreneur can ever tap into. Let's do the math to see why this is. Suppose you and a venture capitalist agree to a "pre-money" valuation of $1 million for your start-up, and the venture capitalist then invests $1 million for 50% of the equity. After the investment, the company is said to have a "post-money" valuation of $2 million. Being 50/50 partners sounds acceptable, right?
Three years later the company is sold to a Fortune 500 corporation for $5 million. Do you and the venture capitalist each get $2.5 million from the proceeds? Not on your Nellie! The venture capitalist will have a so-called "liquidation preference" built into the original investment agreement which allows him to first take out 2 to 5 (or more) times his principal before anyone else sees a penny. So, let's say that in this example he takes out $3 million (i.e., a "3X liquidation preference"), plus any accrued dividends on his preferred stock. After exercising the liquidation preference and cashing in his dividends only $1 million is left. You, the founder, and your team, will then split this remaining money on a 50/50 basis with the venture capitalist.
This is a simplified example of what happens. In real life the founder and her team would probably receive far less than even the $500,000 due to all the fine print clauses.
At this point, you really have to ask yourself if it's even worth the effort.
The good news is that there is a wealth of academic research to support the contention that anyone wishing to build a company for the long term will be better off by not utilizing venture capital. As a result savvy entrepreneurs devise startup strategies that allow them to focus on generating cash flow during the first year instead of chasing venture capital. Conversely, naive “entrepreneurial wanna-bees”, such as those we observed in the recent dotcom era, have a philosophy which can be summed up as, “Give me X million dollars or this idea is dead!”.
If your entrepreneurial goal is a company “built to last” it’s usually best to forgo venture capital. On the other hand, if your goal is a company “built to flip” for a fast buck use venture capital if it is available to you.
While venture capital can be a tremendous boon to a tiny fraction of the companies pursuing it, in the vast majority of cases it presents the entrepreneur with a “Faustian Bargain”. Venture capital brings with it tremendous meddling and pressure from venture capitalists who in this day and age typically lack both the operating and industry depth of their predecessors. The effect of this on fledgling ventures is loss of control by the entrepreneur which then frequently leads to bad--and sometimes fatal--business decisions being made.
Here are ten drawbacks of venture capital for the entrepreneur to mull over before making a decision to pursue it.
* The decision to chase venture capital is often a tempting distraction from the much more complex and important entrepreneurial tasks of creating something to sell and persuading someone to buy it. The pursuit of venture capital is sometimes a means by which to postpone the day of reckoning when the marketplace finally decides if the idea will fly.
* Venture capitalists behave like sheep investing only in whatever industry happens to be the flavor of the month. Everyone else need not apply.
* Rookie entrepreneurs talking to venture capitalists expose their ideas to increased risk because they cannot distinguish between genuine interest and mere“brain-sucking” to uncover corporate secrets.
* Once negotiations begin venture capitalists will typically stall in order to push cash short companies to the brink of bankruptcy as a way of extracting additional equity and concessions at the last moment.
* Terms demanded by greedy venture capitalists frequently work to erode and ultimately destroy the founding team’s motivation and commitment to building a successful company.
* With the first dollar of venture capital accepted the entrepreneur’s control slipsaway to MBA wonder-boys with only the shallowest of operating experience.
* As soon as venture capitalists become involved the founder’s role shifts from critical company building functions to preparing reports, attending endless meetings, writing memos, and hand-holding impatient and/or meddlesome investors.
* An infusion of capital often shifts the founding team’s focus away from selling to spending money in an effort to placate venture capitalists who often confuse bulking-up staff and assets with real growth.
* Venture capital brings with it tremendous pressure to create a liquidity event but this frequently results in bad decisions being made to launch products too early or enter into the wrong markets.
* The venture capitalist’s knee-jerk response to every problem faced by a portfolio company is to fire the founders and evade any personal responsibility for bad decisions.
Here's a bonus 11th reason why venture capital is bad. It is by far the most expensive money an entrepreneur can ever tap into. Let's do the math to see why this is. Suppose you and a venture capitalist agree to a "pre-money" valuation of $1 million for your start-up, and the venture capitalist then invests $1 million for 50% of the equity. After the investment, the company is said to have a "post-money" valuation of $2 million. Being 50/50 partners sounds acceptable, right?
Three years later the company is sold to a Fortune 500 corporation for $5 million. Do you and the venture capitalist each get $2.5 million from the proceeds? Not on your Nellie! The venture capitalist will have a so-called "liquidation preference" built into the original investment agreement which allows him to first take out 2 to 5 (or more) times his principal before anyone else sees a penny. So, let's say that in this example he takes out $3 million (i.e., a "3X liquidation preference"), plus any accrued dividends on his preferred stock. After exercising the liquidation preference and cashing in his dividends only $1 million is left. You, the founder, and your team, will then split this remaining money on a 50/50 basis with the venture capitalist.
This is a simplified example of what happens. In real life the founder and her team would probably receive far less than even the $500,000 due to all the fine print clauses.
At this point, you really have to ask yourself if it's even worth the effort.
The good news is that there is a wealth of academic research to support the contention that anyone wishing to build a company for the long term will be better off by not utilizing venture capital. As a result savvy entrepreneurs devise startup strategies that allow them to focus on generating cash flow during the first year instead of chasing venture capital. Conversely, naive “entrepreneurial wanna-bees”, such as those we observed in the recent dotcom era, have a philosophy which can be summed up as, “Give me X million dollars or this idea is dead!”.
If your entrepreneurial goal is a company “built to last” it’s usually best to forgo venture capital. On the other hand, if your goal is a company “built to flip” for a fast buck use venture capital if it is available to you.
More Venture Capital Articles
Here is a great collection of articles written by experts from both sides of table.
Here is a great collection of articles written by experts from both sides of table.
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