Entrepreneur Myths (18 page)

The rest of the management team was perplexed as to why they sold out when the market was still growing. The lead founder was one smart, fucking dude, and I’m grateful to him for teaching me how to analyze the markets. Three months later, the Dotcom Bubble burst and the market tanked. The value of the stock went downhill fast. Fortunately the founder had structured the acquisition so part of it was upside in the form of stock, but a good portion of it was in the form of cold, hard cash. It was fucking brilliant.

Exiting is an art as much as a science

One of the smartest entrepreneurs in the art of the exit is Mark Cuban. Cuban is a true entrepreneur. Before he was the owner of the Dallas Mavericks basketball team, he made his money by co-founding AudioNet (later renamed Broadcast.com), then going IPO and flipping it to Yahoo when the internet hype was at its highest in 1999. The flip was pure genius. Yahoo stock at the time was extremely valuable, and Cuban and his partner, Todd Wagner, worked out the necessary steps to hedge their stock against the market downswings. Now, that’s fucking smart.

There is another option for entrepreneurs. Fuck the queen

Some entrepreneurs actually build their ventures to generate cash. It’s a novel concept for some, but it actually works. And it works better today than during the Dotcom Bubble of the 2000s. The reason is simple: the digital infrastructure has been built out, the technology user-base has hit mainstream, the users are more sophisticated and they are willing to buy online.

You’ve heard the old saying, “Cash is king”? In entrepreneurship, “Cash flow is queen
.
” Never, ever forget that. That’s why you want to fuck the queen. I know one Silicon Valley entrepreneur in the wireless sector who made his fortune without going IPO or going Googlio. This smart motherfucker did what some entrepreneurs can’t or don’t know how to do — he made his money through the old concept of generating revenues, profits and cash.  This bitch was fucking the queen so hard, he was printing money. He told me he hated the concept of going public and wanted to keep every venture he owned. It’s hard to contest this strategy since, although he was a small player, his wireless empire was bringing in millions of dollars every month. He kept his costs in check and rode the coattails of the big wireless players. He believed great wealth was generated through cash flow generation. This was one fucking smart guy — I can say for sure.

Focus on frugal rate

Flip the concept of burn rate into frugal rate. Frugal rate is how I describe the rate that a startup saves money on a monthly basis. For example, the delay of leasing an office and working out of the home office during product development increases the frugal rate and reduces the burn rate.

When starting your venture, focus on revenues and cash flow generation. Sure, there are business anomalies, like Twitter, that grew quickly without the need to generate revenue or cash flow — but they were also heavily funded by venture capital. Even when funded by venture capitalists, and being fortunate enough to get funded with no revenues, make sure you are revenue and cash-flow minded. It’s a state of mind that should be part of your company culture. A high frugal rate increases the value of the cash queen, and enables you to delay seeking additional capital — which increases value of your company.

Don’t think IPO. Think cash flow. Fantasize about the queen.

Brain Candy: questions to consider and ponder

(Q1)
What is your goal for your venture? Do you plan to go IPO? Do you want to be acquired in the future? Who do you think should acquire your venture? Do you want to go Googlio with Google buying you, or some other company like Facebook or Groupon?

(Q2)
Do you know of any personal acquisition success stories? Are you one of them?

(Q3)
Do you have a strategy for generating cash and minimizing burn rate?

(Q4)
What do you think about the concept of frugal rate?

Entrepreneur
Myth 27
| Raising capital is easy if you have a great idea

I see investors funding stupid-ass ideas, and I see great ideas struggling to get funded. Don’t expect the journey of funding your venture to happen easily.

The idea that a great idea equals easy funding continues to propagate like a virus. Experienced entrepreneurs will catch the bug at times, and newbies are completely at risk. The funding process has an enormous number of unknown variables. Coming up with the great idea and assembling the right startup management team is a challenge, but raising capital is the hardest thing you’ll do as an entrepreneur.

I guarantee it.

The process of raising capital can be like going to the dentist. It is painful, but you smile after you’re through. The experience of raising capital varies. It depends on the type of investor you’re pitching. When entrepreneurs pitch me for money, I try to make it as painless as possible because I’ve been on both sides of the table.

Raising capital from angel investors is not easy. However, many angel investors have been entrepreneurs and can empathize with you. If they raised money from other people before they made it, then they understand your pain. They’ll likely be kinder in your company valuation because they already made their money, and have no need to dilute the shit out of you and control your venture. However, angels might be harder on you in regard to analyzing your financial numbers, operational acumen, timelines, or product launch schedules.

Raising capital through venture capital can be extremely painful. Hey, don’t get me wrong — I think VCs are people too. Some entrepreneurs call them sharks; I call them cheetahs (see Myth 56). The painful part of the process is the length of time it takes to close a venture capital deal. To a certain extent, you can’t blame the VCs. They are using other people’s money (OPM), and have to make sure they make sound investment decisions.

As an entrepreneur, the problem I had with VCs was that most of them don’t tell you the reason they turn you down. I didn’t give a fuck whether a VC turned me down because raising money is a numbers game — but I at least wanted to know the reason. However, you don’t want VCs to think you care about taking money from them. When you don’t give a shit, that’s when they really want to look at your deal. Most of them don’t give you the reason because they don’t want you to have negative opinion about them in case you have another hot venture down the road. They’re just being chicken shit.

When I ran the venture capital fund, if I turned an entrepreneur down, I tried to give them the specific reasons for not wanting to invest — if they cared to listen. However, some entrepreneurs don’t want the feedback.

Raising capital is like having a baby

I’ve talked to thousands of entrepreneurs and funded more than 25, and the time it takes to raise capital averages 9 to 12 months. Miracles can happen. I raised capital in 24 hours or less more than once. But it doesn’t happen every day. And no, I didn’t raise the capital by gambling in Vegas — although I thought about it once or twice.

In today’s bubble-ish scenario in Silicon Valley, raising capital is a little quicker, but it still depends on the sector of your venture. I raised $100 million in three hours with a paper napkin presentation — so anything is possible. From what I’ve seen in the past, funding miracles are few and far between unless you have built an incredible amount of market traction like Groupon, Twitter, Facebook, etc.

My advice: Don’t fucking count on funding to happen as quickly as you think or want. You need to have enough cash reserves to sustain yourself through the process of raising money because it always takes longer than you think. It takes money to raise money.

The secret to raising capital is this:  It’s a numbers game — and you must have thick, lizard-like skin to go through all the bullshit you have to endure in the process. You can do it if you have a great idea, a good management team, learn from investor rejections and set your mind to it.

Go out there. Get some money.

Brain Candy: questions to consider and ponder

(Q1)
What do you think about the process of raising capital? What have you learned from it?

(Q2)
Do you think it’s easy to raise capital? Why?

(Q3)
Do you think it’s hard to raise capital? Why?

(Q4)
Do you enjoy raising capital?

(Q5)
If you don’t enjoy it, how did you raise money? Did you hire someone else to do it? If you did, how was that person or company compensated?

(Q6)
Do you think raising capital is like having a baby? Does it take too long?

(Q7)
What is the largest amount of money you raised on a venture?

(Q8)
What do you think about financial consultants or brokers raising the money?

(Q9)
If you raised capital for your venture, did you get angel money, VC money, institutional money, or family and friends money?

Entrepreneur
Myth 28
| You have to “dress for success” when raising capital

Thank God for Steve Jobs and Mark Zuckerberg. Have you ever seen these two guys in an Armani suit, or any suit? If they don’t wear suits, why should you?

I hate wearing suits and ties. I do own a few Armani suits, but I can count on both hands the number of times I wore them last year. Like Steve and Mark, I believe dressing for success is overrated. Any entrepreneur working 20-7-365 should dress to be comfortable. When I ran my first VC fund, I wore Levis and a T-shirts most of the time. When the weather got cold in San Francisco, I’d overdress and add a black leather jacket. Entrepreneurs would step into my office wearing suits and I’d see a surprised look on their faces. Within minutes, they loosened their ties before their money pitch. What the hell did they expect from me? My original goal was to be professional soccer player.

Many books and articles have been written about dressing for success. “The experts“ recommend you wear a business suit when meeting with potential investors. That’s bullshit. What you wear, to some extent, depends on the sector of your venture. You don’t see entrepreneurs wearing suits if they’re in the social media business or in most high-tech sectors. Steve Jobs wears a turtleneck sweater and he runs a public company. Have you seen what Zuckerberg wears? He’s no fashionista.

What’s the point of wearing an expensive suit to meet with investors? Do you think it makes a difference? It’s much more important to be self-confident and comfortable with investors, so wear whatever makes you feel comfortable — as long as you don’t show up in your soccer uniform or swimsuit. FYI: Speedos are not allowed during investor meetings unless you’re pitching a new swimsuit line.