Venture Finance - Reality vs. Rumor with Dick Brown
LEMMINGS LOSE
If you live in Boston, you learn to avoid the city for two weekends in September - those just before the colleges re-open. In these few days, tens of thousands of kids descend on the city in U-Haul trucks, all moving into their dorms or apartments. The younger are accompanied by doting parents and the older, with six packs. Tell your first-time neighbor on Commonwealth Avenue that disasters are about to occur and that entire blocks are to be assaulted by the young in chaos reminiscent of Omaha Beach on D-Day, but without beach masters.
Nearly in parallel, every entrepreneur worthy of name has calculated that VC’s and angels are finally returning from hiatus at Cape Cod or The Vineyard and that this is the perfect time to submit their Business Plan.
Big mistake! There are nearly as many entrepreneurs with this strategy as kids cramming into BC’s dorms in Chestnut Hill. Each returned VC, still suntanned, dreads opening their morning emails and mailmen in the financial district curse the hundreds of bulky BP’s chafing their hips through delivery bags. A BP to produce time machines for less than $100 probably won’t catch anyone’s attention.
For many months I have acted as your TNNWC consigliore for raising money. Today we start by adding another caution to the list: Stay away from Boston investors until at least October.
There are many, many more. In my early years in New York, many of my friends were “in the theater” (or, more correctly, trying to be hired). When sober, they would tell of the outrageous odds of ever once walking the boards on Broadway, not to consider achieving the meteoric levels of actors with well-known names. Entrepreneurs face the same daunting challenges and in an earlier column, we calculated their chances at success as about the same as being struck by lightning.
I wrote a book, “How To Raise Money, Insider Edition” (http://www.amerwld.com/), focused on finding success in raising capital. In addition to history, famous players and the basic industry structure, other entire sections discuss “what not to do” and how to avoid the beginner mistakes that can result in no one ever reading the price possession that you labored upon so lovingly. Just a few of these gaffs I‘ve seen (all true) show how bizarre they can get:
One plan was entirely text, margin to margin, top to bottom. There were no common punctuation marks such as paragraphs and indentations - just “wall-to-wall” text that even the most determined reader could not tolerate beyond a few lines. (Can you hear a tekkie in the background saying: “I know it’s a little unusual, but I never learned punctuation in school and our ideas are so overwhelming that I know the VC’s will love it despite this little flaw - and (smirking), if they object, we evoke James Joyce.”)
Another plan totally neglected nearly all of the conventional rules of BP’s. The Executive Summary started slow and topped out at 28 pages. The P&L numbers in the text didn’t match the same numbers in the pro forma. The names of three of the principals were spelled differently in diverse sections of the plan and two of these people had different titles. Perhaps most intriguing, the touted technology was totally new and unproven. Unfortunately there was no mention of any working prototype or model, save the unsubstantiated musings of team members and a couple of consultants. There were two pages of mystical math, with no text or explanation.
Such sloppy work is evident in perhaps 10% of all BP’s. I have never quite understood why people allow their “finished products” to be of such poor quality. I think that sheer arrogance is at least part of the reason - essentially: “My BP is of such brilliance in concept and thought that I will not be bound by the shackles of acceptable English construction and talk down to mere investors” ... The “ee cummings defense”. The rest suffer from sheer laziness and the feeling that: “well, this has been a lot of work and this level of quality will just have to do.”
The rest of BP’s tend to fall into the “just OK” category, lacking any fundamental errors … or, brilliant, memorable touches. This seems to be due to a total lack of review or input by anyone outside the original team. Although a handful of paranoids fear third parties will steal their precious ideas, the real reason is astonishing … they refuse to spend any funds in the preparation of their plans. Although an average BP may seek $500,000 in capital, the principals refuse to spend any money in the preparation stage. I’ve seen plans where merely $500 to 1,000 spent having an English teacher review the plan could easily have tipped it from mundane (and rejected) to “slick” (and accepted.) To me the ROI is a “no-brainer”. Why this remains a classic hang-up remains a mystery.
Failure of competent peer review obscures perhaps the single largest reason for BP’s (and their authors) to fail to obtain the necessary financing. This is covered extensively in my book. One “law” to observe - there are classes of financial resources available to fund ventures. Very briefly, these are:
| Family and Friends | Up to $ 100,000 |
| Angels, Individual | Up to $ 250,000 |
| Angles, Groups | Up to $1,000,000 |
| Small VC’s | Up to $2,500,000 |
| Classic VC’s | Over $3,000,000. |
Invariably, new entrepreneurs solely chase VC’s mostly because they don’t know any better. These uninitiated are shocked to learn that the VC’s usually won’t even acknowledge receipt of BP’s of less than their minimum investment level. Hence many of the myths and misinformation surrounding this class of investors. Further, the culture changes rapidly from class to class. At the Family and Friends people may invest simply because they like you. At the VC level the “who do you know that we know?” test becomes dominant.
So, the average entrepreneur spends most of their time in search of funds from sources where they have already lost before they even begin.
The cure? Educate yourself about the “rules of the game” before you even start. Read books, meet people, take classes and sniff butts. If you decide to become an entrepreneur you’re going to spend most of your career raising money, so you might as well become competent early on.
And, I’d be remiss if I didn’t mention my book again. It distills most of the knowledge in a short, entertaining manner that will prepare you for most of the rocks and whirlpools ahead.
Or, maybe you’re one of the “thrifty” ones that think spending less than $20 (current discount price) in order to raise $1,000,000 or more to be an outrageous expense.
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