This link has been bookmarked by 12 people . It was first bookmarked on 16 Apr 2007, by Clay Burell.
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24 Mar 11
boris kudryavsky"Are you starting to get frustrated by the Venture
Capital Catch 22TM?" -
29 Oct 09
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25 Sep 08
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19 May 08
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Part 1: The Bad News
Before Embarking on a Campaign to Raise Venture Capital Funding, You Should Look at Yourself Objectively and Honestly to Determine if You Even Qualify. Most People Don't Stop to Do This.
Since the vast majority of venture capital hunters don't qualify, you will, in most cases, end up wasting 6 to 12 months of your life writing a business plan which will never be read and doing "dog & pony" shows for audiences who are at best only mildly curious or at worst engaged in "brainsucking" you for ideas.
Who Qualifies for Venture Capital Today?
Venture capitalists, like winning horse track gamblers,
bet on the jockey not on the horse.
Industry "stars" qualify for venture capital. This means someone who has already taken a start-up from zero to 50 million in sales or better. So if you're counted amongst the stars in your industry, you stand a good chance of attracting venture capital provided your current deal has the following elements:
* at least 2 other senior executives with experience in building wildly successful companies,
* a proprietary technology in a sector currently considered hot by the venture capital industry,
* a top-notch technical team,
* a target market at least one billion dollars in size,
* a minimum of one year of rising sales to blue chip customers. -
The Three Dirty Little Secrets About Raising Outside Capital
Let me share with you three secrets about raising capital which almost no one else will.
* First, chasing outside capital is by far the most unpleasant and drawn-out ordeal experienced by entrepreneurs. It always seems to take forever. (For this reason, veteran entrepreneurs try to avoid raising outside capital at all costs.)
* Second, based on the fact that your typical early stage venture capital firm invests in only one company out of every 500 business plans it reviews, your odds of succeeding are only 1:500. (If you are pursuing angel investors your odds improve to maybe 1:200, although no one knows the numbers for certain.)
* Third, in about 50% of instances where an early stage company actually succeeds in raising venture capital, the founder is fired within the first year and kisses most of his or her stock good-bye. Even the Wall Street Journal pointed this out in a article by Barnaby Federer from 09/30/02:
"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.
So your odds of being a successful venture capital-backed founder/CEO are actually only 1:1000.
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The Funding Problem
Here's what typically happens when a company needs to chase outside capital in order to commence or expand operations. After about 6 months one of three things occurs:
1. The lucky 1 in 500 finds investors.
2. Most die on the vine. In many cases, the wannabe entrepreneur simply abandons the project and moves on to something else. (As the joke goes, "That's why God created 'jobs' ".)
3. A savvy and tenacious tiny minority of entrepreneurs finally gets mad at having wasted so much time. Then it begins to figure out a creative way around the funding problem by focusing on creating cashflow with the resources and opportunities at hand, instead of continuing the futile quest for outside capital.
Necessity truly is the Mother of Invention.
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The Rodney Dangerfields of Entrepreneurship
Pretend for a moment that you are a venture capitalist or angel investor. Two founders visit you about separate deals. You ask them each what progress they have made in the 3 or 6 months that they have been working on their respective projects.
* One entrepreneur answers that he has been able to finish his business plan as well as find a means to generate cashflow which is being used to move the main project further along. Now he needs more money to fully capitalize on this developing opportunity.
* The other entrepreneur can only point to the "great" business plan he's polished to perfection over the past 6 months and the "great" opportunity lying before him.
Which entrepreneur would you be more impressed by if you were the investor? Back in the 1990s, I took a 4 year sabbatical from entrepreneurship to run a small business investment fund, so let me share my opinion. The former has shown that he is a doer; the latter has provided nothing in the way of evidence that he can create cashflow--any cashflow.
If you are not a recognized star when knocking on investor's doors, you'll quickly start to feel as if you "can't get no respect".
Lesson: cashflow wins far more respect from investors than the "great" business plan. If you are not an industry star you can begin to build your credibility up by finding a means of creating cashflow in your industry. -
Part 2: The Good News
I believe in...mastering the best that other people have figured out, [rather than] sitting down and trying to dream it up yourself.
Charlie Munger,
Warren Buffet's partner in Berkshire Hathaway
The Solution
There is no one guaranteed answer to the funding problem which all entrepreneurs face. What is the solution, however, is having several dozen successful strategies for creating cash, or its equivalent, in order to be able to get your company out of the starting blocks. -
If we look at the companies which qualify for those annual lists of the fastest growing companies, we see that over 95% were unfunded at start-up beyond a nominal injection of the entrepreneur's own money (in most cases, less than $10k). Most didn't even have a business plan. Why did this minority of unfunded entrepreneurs succeed while most start-ups seeking capital die on the vine or morph into something completely different—that is, something more do-able after 6 months?
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It's been said that true entrepreneurs are the artists of the business world. They create new businesses and products seemingly out of nothing. It's awe inspiring to watch a true entrepreneur formulate an idea and then begin making it happen within hours rather than sitting around for months writing business plans and pestering strangers for money.
In a nutshell, the successful cash-strapped entrepreneur designs a transitional business model for the launch, which can be described as “Heads I win; tails I lose very little.” Once their concept has some degree of traction, they can then choose to talk to venture capitalists from a bargaining position of strength.
Once you have cashflow life becomes much simpler. Cashflow not only enables you to pay your bills but it places your company into the “stream of opportunities” that established businesses enjoy. Cashflow also earns you respect and gives you the ability to say, "No thanks!", to those notoriously outrageous offers made by venture capitalists and private investors. -
I started researching a "better way" to launch and grow a company over its first year after doing my very first venture capital deal in 1987. It was akin to being mugged in a dark alley. There truly had to be a better way. So I began paying attention to what other entrepreneurs were doing. Quickly I noticed something peculiar about entrepreneurs in start-up mode. They can be broken down into two distinct groups
* The vast majority consists of dreamers who take the naive approach to business in that they spend a few months at first writing a business plan. Once it's polished and ready for circulation, they begin to look for investors, and look, and look, and look, ad infinitum.
* The tiny minority announces its intentions to go after a given market opportunity, and is seemingly magically, in business a month later without raising a dime of outside money. Sometimes they choose to take VC funding later--on their own terms--and just as often they choose to avoid it completely.
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21 Mar 08
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24 Jul 06
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They have taken their cue from the Gold Rush when the truly crafty business-people made money not from prospecting but by selling shovels to the prospectors. Likewise, today's money-raising services have found a low risk means to separate the cash-starved entrepreneur from any money he or she may have left.
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06 Jan 05
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22 Nov 04
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