Entrepreneur Myths (21 page)

Look at Twitter. In the earlier stages of their financing, VCs put $55 million into Twitter without any revenue to show, at a post valuation of $255 million. This was insane in my opinion, but I wasn’t privy to the financial metrics of the company. At the time of this writing, Twitter is valued at $8.2 billion. So Twitter’s ROI is working out so far for current investors but this is a power law example. And power law tells us hits like Twitter don’t happen as often as entrepreneurs and investors believe.

From a simple mathematics perspective, the bigger the money in, the harder it is to reach the higher ROI unless you find a bunch of Facebooks, Twitters and Groupons to fund along the way. It’s all relative. Warren Buffet generates ~20.3% returns every year, but he’s dealing with huge numbers. This may not sound like a large number, but when you’re dealing in billions, it is a remarkable accomplishment.

You have to be what I call a “frugalprener” even when you receive angel or venture funding. I was funded in one venture and didn’t draw a salary from the venture for more than a year. I could have paid myself, but since I owned a substantial amount of equity I chose not to receive any cash compensation. Finally, after some urgings from the investor, I started drawing a salary — but it was still for less than market rate.

Why would I do such a smart thing? Well, first of all, I could afford it. Second of all, I wanted to keep as much cash as possible to increase my frugal rate.

Why didn’t I move the money I wasn’t paying myself into a saving account and invest it back into the company and get more equity? That would have been silly because the investor had already put in a good amount of money, and I didn’t want to dilute the investor further. You have to consider scenarios like this because the investor will see from these types of actions that you don’t believe money grows on trees, and that you’re protecting his current equity position and further dilution in subsequent rounds by being frugal with the money he has invested.

I funded one entrepreneur for millions of dollars, but he didn’t give a shit about protecting my position in the subsequent rounds because really big money was circling like a shark to invest into his deal. Don’t be an entrepreneur asshole and forget what money got you to the bigger dance.

Regardless how your investors made their money (as long as it was legal), they didn’t get it from a money tree. My dear entrepreneur, be frugal and spend their money wisely — and make sure you protect their position in later rounds when the bigger money comes to play.

Brain Candy: questions to consider and ponder

(Q1)
Do you think money grows on trees? If you do, what type of trees? I guess if you sell fruit from the tree in the supermarket, you could say money grows from trees. Right? And paper is made from trees, and money is made of paper so … never mind.

(Q2)
Do you know of any arrogant entrepreneurs who greatly overvalued their startup? How did it work out for them? Did they raise the money? What was their valuation? Did they have a down round?

(Q3)
If money doesn’t grow on trees, where the fuck does it come from? The Fed? (But the Fed doesn’t have a pot to piss in to back the money. They are not gold-backed anymore. What a nice program to have.)

(Q4)
If you raised subsequent rounds of funding, did you think about the dilution scenarios for your current investors? Did you treat them like their money grew on trees, and not give a fuck if they got diluted as long as you got your big money?

Entrepreneur
Myth 31
| You can raise money overnight

The “I can raise money overnight” mentality will propagate among entrepreneurs until the end of civilization. I guarantee it. I can see it now. A meteorite the size of a moon is hurling at planet Earth for a catastrophic touchdown in approximately 30 days, 5 hours, 30 minutes and 15 seconds. But who’s counting? And there will be some dumbass entrepreneur saying he can raise the money overnight.

I have raised money, literally overnight. The deal was done in a few hours. But that’s really fucking hard to do on a continuous basis. I know entrepreneurs and investors who can make a few phone calls and get other investors to say “yes.” But that’s because they’ve already had major hits as entrepreneurs, investors or both.

Do you think Bill Gates, if he didn’t want to invest his own money, would have problems raising a few billion dollars on a new startup with just a few phone calls? Do you think Ted Turner, if he didn’t want to invest any of his own money, would have issues raising capital for another media venture?

Raising money overnight is like winning the lotto. It does happen but not often enough. The odds are stacked against you. The easiest way to raise the money overnight is through friends, and family (FAF) or business associates. But it’s still not easy. The quickest way to raise the money is to use your credit card — that is if you have a good credit score and a low A.P.R. I don’t advise it, but a lot of entrepreneurs have financed part of their ventures using their own credit cards.

You need to have the mentality that you can raise money overnight, even though it happens infrequently. You have to believe. You may think I’m contradicting myself with this statement, but I’m not: you need to have that “I can do it overnight mentality” supported by persistence. Raising capital is difficult, so without a positive attitude, you’ll get your ass kicked around like a soccer ball. You can’t think, "Well, maybe, I think, I hope, I’ll try to raise the money in the next 9 to 12 months.” You have to sustain the killer instinct that you can do it overnight, and keep going even if it takes weeks or months. As I said in Myth 27, it’s a numbers game. It’s hardly an overnight success. I wish it was.

The media distorts the rate of overnight successes. According to various business industry sources, less than 1% of business plans are funded by venture capitalists. It’s probably even less. Let’s look at a few examples:

AirBnB struggled for years to gain traction. Y Combinator funded their seed stage and they finally took off. Currently AirBnb is in the billion-dollar valuation club — but now they have to work hard to prove they are worthy. They raised $112 million within a span of 12 months. That’s basically an overnight success. Good luck to them. I like their business model.

Media has it that Howard Schultz, CEO and founder of Starbucks, went to hundreds of investors before he found an investor for Starbucks. Do you have what it takes to be turned down more than 100 times by investors and still continue to raise capital for your dream?

I once had to go to more than 20 investors before I got a venture funded for a measly $100K. On another venture, I went to 50 investors and still couldn’t get the venture off the ground. Finally, it was funded through a customer. On yet another venture, I went to more than 100 investors over 13 months before I got the venture funded for more than $5 million.

Overnight success is faulty thinking. Just look at the music business. When you analyze the success of famous artists, they were always at it for years, even decades, before they became “overnight successes.”

Sure, it’s
possible
to get a commitment for funding from investors overnight. If you are lucky enough to accomplish this, make sure you provide all the necessary paperwork to the investor, such as the stock subscription agreement, before you accept any money. Don’t be in a hurry. I made that mistake once — not again. It cost me dearly in terms of equity because the investor changed the rules later. A good corporate attorney can guide you through the process, if you’ve not done it before (see Myth 22).

Please, don’t let me get you down. I’m an eternal optimist. I believe an entrepreneur can raise money overnight, but it is not fucking easy.

You have to be patient,

You have to be thick-skinned,

You have to be a little crazy,

You have to be able to take constructive criticism,

You have to be strong and not let negative people influence you,

You have to be able to say, “Fuck it,” I will get it done.

This sounds like lyrics to an entrepreneur song. Stay positive while raising money. It’s a mental game. Raising capital overnight takes planning, strategy, knowledge and enthusiasm. Do you want to know more secrets to raising money? Then stay tuned for my upcoming book,
Finance Myths
, where I will show you how to raise capital.

Brain Candy: questions to consider and ponder

(Q1)
Have you ever raised money overnight? How much money did you raise?

(Q2)
What is the largest amount of money you have raised? How long did it take? Was it difficult?

(Q3)
Have you used your credit cards to start your venture? Were you able to pay the credit cards back?

(Q4)
What is the quickest way to raise capital?

Entrepreneur
Myth 32
| Dumb money is bad money, and smart money is good money

 “I’ve already got smart money in this deal,” said more than one entrepreneur pitching me for money. If that money is so damn smart, I wondered, why the hell were they talking to me? Why didn’t they just go back to get more money from their smart money investor?

Being a venture capitalist and complexity scientist, I learned that the more I know, the less I know, and the fact that I know this critical fact makes me dumb-smart or smart-dumb. You can use either term; it refers to someone who’s both smart and humble due to experiencing success and failure in life.

For instance, Mark Cuban is smart-dumb money. He is smart but humbled about his smartness. The same goes for Ross Perot Sr. I can’t say much about his son, Ross Perot Jr. because I don’t know him but he didn’t seem smart when he sued Mark Cuban for ownership of Dallas Mavericks. 

Money is money. Money is not smart

I’ve seen rich dumbasses in my life. I should call them rich-dumbass-smart money just because they have money. Think about it. They can’t be that stupid if they’re loaded with dough. Smart is as smart does. So the rich dumbass that turned down investing into your social media startup is not a dumbass. They just may not understand your sector.

What is smart money? I guess you could say if Warren Buffet invested into your venture that his money is
really
fucking smart. Or is smart money that stack of money, with two eyeballs, on those annoying Geico insurance commercials that were run to death on TV? I admit Geico did a great job with the chameleon and cavemen commercials, but the “money with eyeballs commercials” are some of the dumbest ads I’ve seen in the history of advertising.