This post originally appeared on TechCrunch.
There’s a line of thinking in Silicon Valley that you should build product businesses rather than services businesses. This thinking is largely driven by the venture capital industry (and subsequently Wall Street) who are in search of high margin, highly scalable businesses.
It’s nearly impossible to get a services company financed by VCs. You’re a small fish.
So pervasive has this thinking become that on several occasions startup companies with profitable & fast growing services businesses have come to me wanting to show me the product businesses they created internally to see whether they would be financeable or whether they might be able to create “spin outs” that could be financed.
A great recent example of this was a successful group of entrepreneurs who had created a company that will do $10-12 million in revenue at their system integration business (read: services business) in 2011 after having done $5 million or so in 2010 and $2-3 million in 2009. They feel very confident they can hit $18 – 20 million in 2012.
They have created two internal technology “products” and wanted to figure out how they could turn their services business into a product business that could be financed. This team is talented. They wanted advice. And probably some money. I gave them advice I don’t think they were expecting from a VC,
“Don’t raise venture capital for this business. Ever. And stop effing around trying to create a product company.”
It is advice I give entrepreneurs often as I have written here on
This post originally ran on TechCrunch. Lately I have seen a number of deals announced on TechCrunch in which 5 or more different VCs were participating in the deal.
This always makes me chuckle because in my first company we had 5 investors in our first round and we picked up 5 more before we finally sold the company.
In my second company I had only 1 investor.
When this first ran on TechCrunch I got the greatest comment in the world that I had to repeat here, “VC’s are like martinis: the first is good, the second one great, and the third is a headache.” LOL. I love that. And it’s kind of true.
While there is no right or wrong answer, having seen the extremes I’d like to offer you a framework for considering the right answer for yourselves.
The Perils of Many
I understand the appeal of having many VC firms on your cap table.
I recently filmed a show for This Week in Venture Capital in which I talked about how to prepare for a VC meeting: whom you’ll meet, who should attend from your side, what materials you should bring and how you should run the meeting. I wrote the summary notes in this blog post. That notes only told part of the story.
Bijan Sabet – investor & board member in some small 😉 companies you might have heard of like Twitter, Tumblr, Boxee & OMGPOP – took issue with the whole notion that you even need a Powerpoint deck anymore. Please read his compelling & short post on the topic.
If you want a very quick primer on all the stuff nobody ever tells you about raising venture capital check out this video where Mark Jeffrey & I break it down on This Week in VC. A summary of what we discussed is below:
Not 100% in order of the video, but close. All of this is covered in more detail on the TWiVC video above (and much of it is covered in text on this blog on the “Raising VC” tab)
1. Will a VC sign an NDA (non-disclosure agreement)? No. If they did they would be in constant violation because VCs often see 3-4+ companies in every market that they operation. NDAs would make it impossible to do business. Asking for one to be signed shows naïveté.
2. What is the VC process?
Meet with one person from the firm – partner or associate. If you can meet a partner up front it’s always best but sometimes it’s not possible. The first meeting will often by with an analyst, associate or principal. Often principals are allowed to do their own deals whereas associates are not. Associates are good an important people – I discuss this in the video.
I was recently speaking with some founders about their fund raising process. They had received a term sheet from a VC and were wondering whether to work with this firm. I personally had three separate data points from entrepreneurs who took money from the firm that said “never again.”
I really try to stay out of the middle of these things so I softly said to the team, “maybe you should contact these companies and see how their experience went?” From there I figure they can both figure out what to discuss – or not. One bad comment doesn’t always scare me as there’s often two sides to every situation. But three from different, independent sources? Pattern, me thinks.
This experience made me want to dig into my archives, re-write & publish this piece.
I often tell people that raising venture capital is more difficult than getting married. In marriage if you’re unhappy you can at least get divorced (in most countries). Not so in venture capital. You’re tied at the hip to your VC.
And worse still, your VC will have certain controls in the company that don’t make it simply a matter of a “wasted opportunity.