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An Inside Look at Venture Capitalists
Christopher Thomas writes: "IEEE Spectrum has a scathing review of venture capitalists this month. Authors Nick Tredennick and Brion Shimamoto paint a devastatingly cynical picture of venture capitalism from the engineers' perspective." Funny to read, but probably 100% accurate. Wow.
They're not called "vulture capitalists" for nothing. They'll squeeze you for every last bit of stock and control possible. So, before you begin talking to them prepare yourself! I would try and take my project as far along as possible before selling any shares to these people. If you want more detail on just what I'm talking about visit the bootstrapper's website which will show you how to do this. Remmember the more sales you have the stronger your negotiating position will be.
I have to disagree that Venture Capitalists will "squeeze you for everything." Unlike many in the "those that can't do--teach" category, I've actually done venture capital deals. I've also done private offerings (equity financing sold to individuals), bank financing and debentures (privately held debt) -- as well as non-traditional methods of raising cash.
At different stages of growth, different types of capitalization are appropriate. In my experience, Venture Capital is most appropriate after you've gotten a start-up off the ground and built a management team (which can be as small as two people).
Besides going for Venture Capital mid-way into your growth pattern, you need to have a business that can realistically offer very high growth. If you have a less explosive business, private offerings can work -- they can be successfully sold if the folks get 2-3 times their money back.
Other options include setting up a non-profit entity alongside your start-up, assigning a charitable or socially helpful role to it, and seeking grant monies from private foundations or corporate foundations. The grant money can help offset operating costs for your for-profit start-up by paying you a salary and covering some office expense and equipment.
Still other methods for raising capital include piggybacking with established businesses. For example, a publisher can get an endorsed promotion of a book or booklet from a large association, the association solicits orders for the book via its members' newsletter, you split the revenues with the association, and generate substantial incoming cash.
... someone once said that VCs want impossible goals. How many business opportunities that existing with triple digits compound growth, clear exit strategy, and quantifiable risk? Nobody wants to be first to bake but everyone wants a double helping of the successful projects. The very nature of investments (harking back to the British India company) is to create competitive/proprietary positions which means exclusion of some sort, whether knowledge or opportunities.
... wait until someone tell them they bought 40% share of a electron microscope :-). What VCs continually forget is that they are investing in people, not business plans.
... at least every engineer has got someone else to blame for the stress :-).
Unfortunately VCs are the only people willing to invest in high risk (read unknown to them) speculative ventures. Banks are basically pawn-brokers and bean-counters, they only risk their money on assets which have a ready secondary market. But unfortunately there's none for failed (or half-finished) ideas which leads to a fair amount of cluelessness. I've just come from a dinner where someone said that the only reason a "VC" invested in their company was that they read in Red Herring that nanotechnology was going to be "big" and they thought a name like Nano-xxxx (name disguised to hide the guilty) was related
Oh well
LL
The old saw about "The world beating a path to your door if you have a better mouse trap" is pure hokum. The one thing that Microsoft proved with Windows 95 is that if you have enough marketing money you can sell anything - no matter how bad it is. Conversely - take the best commercial program you can find - write up a sign that says "Software $5.00" stand on a street corner with the sign and see how many copies you sell. I have tried that: all you'll get is sun-burned; marketing is far more important than product when it comes to making money in a business.
A year ago, I would have made the same decision as you.
Now that I have studied Confucius and worked in industry for a while, I would not.
Accept the $5 million. Consider that money as research funds. Build a company. Hire engineers. Learn as much as you can, and work as much as you can. Be glad that you have a roof over your head. Acquire valuable experience. The engineers that you umbrella will be grateful.
Basically, the real world we live in is not the ideal world. Read Mark Twain and Mencken to understand this deeply. Then read Confucius to preserve your idealism, even in the midst of the crazy world that Clemens and Mencken will show you. Confucianism will show you how to commit right action, and protect idealists, even in a selfish world.
Imagine that you're an engineer. You come up with an idea that makes the company millions of dollars. What will you get in return? You'll get a $5,000 raise, and "the opportunity" to work on something that will make them even more money. Yip-pee-yah-yay. What do you think- they're going to give you enough money to retire?! You're lucky enough that they aren't tossing your ass out on the street; You're to feel lucky for even having a job.
Very few people are motivated by idealism. I am. You are. But the VC you talked with was not motivated by idealism. He was handing out money, hoping to get much more in return. I don't know what the larger situation was, but these guys aren't hurting for cash.
If the situation ever comes up again: Take the money. Work with the VC. Your VC's life will be business as usual: Some successes, many failures. If it's really bad, they might need to delay building that new house on their lot, and tearing down the old one. Learn everything you can about how your distributed systems work, and learn everything you can about how the world of funding works. You will become a more knowledgable and experienced person in the process, and fund the lives and research of many engineers with you.