Why wouldn’t you give your child, or a friend’s child, a pet rattlesnake?
Because you know rattlesnakes as a pet are likely to end up badly.
They are going to deliver venom sooner or later, no matter how nice you are to them because that is what they do. It is in their nature.
Well, for the tech startup, the venture capital community should be viewed with precisely the same level of fear.
Venture capital firms are not there to make you rich. They are not there to build a great company and change how people live their lives for the better. Venture capital firms are there to make big dough from one investment out of 20, the other 19 having some expected level of disappointment.
Are you the one, or one of the 19? Care to find out?
Sooner or later, they are going to screw the owner who brought them in. They are going to force the startup to do really stupid things with that A Round causing the need for the B Round. They are going to fire the founders and bring in their malleable CEO. The founders and employees will see their stock options approach Venezuelan currency values.
Private equity serves great and noble purposes—just not for the employee equity holders of a tech startup. For them, they get the dilution of 30% or more for each round until they become mere employees rather than owners. That can happen, and usually does, pretty fast.
What are some of the common ways the VC bites the tech startup?
“We are not just green money, we are a true partner”
You will often hear this from the VC before they invest. They are going to introduce you to all kinds of firms who need your technology. They have wonderful connections with just the companies you want to meet.
Really? If you need them to introduce you to companies who really need your technology, you have a marketing and sales problem. Why can’t you call those companies yourself?
And that “introduction?”
Expect to talk to someone who will listen politely, and nothing will ever happen. What did that phone call cost you? 30% equity dilution. Really, was it worth it?
If you think they are your partner, sharing the pain, the risk, the ups and downs, just wait until you miss your mandated, impossible revenue number that second quarter because you felt it was more important to build out better customer service. That is a no fun board meeting.
“Look at all the companies we are invested in!”
This one brings back memories.
In Austin, we had a VC firm called Austin Ventures who wanted to invest in one of our startups. They had a reputation that was about as toxic as one could be.
The local paper did a story on them and the reporter innocently noted that while they were invested in a large number of Austin area firms, she could not find anyone willing to speak on the record about how Austin Ventures was helping them.
Well, want to know why? Because these guys were the typical VC firm —only they invested locally—and people spread the word.
So the entrepreneurial community could hear the stories about what it was like to have these “partners” on your board after the mating season was over. And it was really ugly. They have mercifully closed their doors, but the education they provided the Austin community lives on.
Venture capital is often seen by young or inexperienced entrepreneurs as the only way to get to market. They have no sales or marketing experience, so they do not even know the questions to ask. They watch shows like Startup.com where getting “funded” appears to be an achievement.
These shows do not show the denominator—dilution and servitude.
But there is an alternative. Sell your way to liquidity, perhaps a bit more slowly, by finding that early adopter. There are many ways to achieve this and we discuss them in detail on the site, ContingencySales.com.
This month we are taking one of our portfolio companies out to market, already having secured 7 customers, three sales partners, profitability from day one, a disruptive technology and a significant pipeline. Not a dollar of venture money in the deal.
You are best served, if you do want to bring in venture capital, by doing so long after you are very liquid and then you have the VCs fighting over you, offering reasonable valuations and limiting just how much they screw you in preferences.
Do the math. Expect sales will never reach the 5-year projections the MBA kid the VC sent to your office did during the due diligence process. Expect multiple rounds. Figure out what it means to own one tenth of one percent of your company.
If you become a trillion-dollar company, then it was worth it. But if not, one tenth of one percent is not lunch money.
And you are not an owner, you are a low-level employee.