Entrepreneur Myths (27 page)

(Q3)
Have you ever encountered a Devil Angel? Vampire Angel?

(Q4)
Have you been fortunate enough to find a Sugar Daddy or Sugar Momma? Did your venture make money for them? If not, did they even give a fuck, since they were so wealthy? If you failed, did they fund your next venture?

(Q5)
What types of angels have you encountered?

(Q6)
Do you think angel organizations are helpful?

Entrepreneur
Myth 39
| VCs are smarter than you

When I was a younger entrepreneur, I believed VCs were much smarter than I, due to their vast experience as investors, former entrepreneurs and financial wizards. My logic was sound: they were experts because they (1) have access to substantial deal flow, (2) are trained to analyze and structure deals, and (3) are exposed to more real-time information. I was wrong back then and even more wrong today.

The VC game has changed over the last few years. I chatted with a successful, former VC at a charity dinner in San Francisco in 2011. He told me he got out of the VC business, changed his course and invested into a winery in South America. “I can’t add enough value as a VC anymore,” he explained. “The cost of starting a company has been substantially reduced, where VC’s are not needed as much.” Bingo. Game’s up. I’ve heard similar stories from other VCs. At least this VC was smart enough to know he wasn’t any smarter than some of the smarter entrepreneurs. VC smartness is about to be tested hard during the social internet revolution.

Venture capitalists come from various backgrounds. Some are previous entrepreneurs, while others accumulated a number of degrees from prominent universities before joining venture capital firms. Others worked for large corporations and have no fucking experience running a startup, or being backed against the wall trying to meet Friday payroll. Still, there are a lot of smart motherfucker VCs out there.

If you’re a newbie entrepreneur, don’t be nervous when you’re lucky enough to get in the door to pitch a venture capital firm. Not all venture capitalists are geniuses or even vultures. I’m convinced more than ever that VCs are like cheetahs (See Myth 56: Venture capitalists are vultures). Many VCs are nice and extremely smart. As in any sector or industry, there are a few VCs who spoil it for the rest.

Nice or not, VCs are not smarter than you when it comes to
your
venture and
your
sector

VCs might think and act as if they know more about it than you do, but it depends on you knowing what the fuck you’re talking about as well. You can impress a VC by showing them you know more about your market, sector or product than anyone they know, outside of the firm or inside. But damn it, don’t ruin it by acting like an arrogant prick. Be nice, even when you realize you’re smarter than them.

I’ve been in meetings with VCs who were absolutely, positively, fucking
brilliant
. I walked out thinking, “That VC has a fucking
fast computer
inside his head.” I’ve also been in meetings where I wondered, “How the fuck did this person become a venture capitalist?” Like in any business, you’re going to have extremely smart and intuitive people, and you’re going to have dumbasses and fucking idiots, too. But speaking from both sides of my mouth — a VC can’t be too stupid if they successfully raised money for their own fund — the same fund you want a piece of to fund your growing venture.

I’ve had entrepreneurs pitch me for money and act arrogant because I wasn’t an expert on a specific topic or sector. You see that a lot from entrepreneurs in Silicon Valley. They strut into VC meetings acting as if they’re doing the VC a fucking favor and offering them the investment opportunity of a lifetime. This happened more often during the first Dotcom Bubble, and to some extent it started happening again in the bubble of 2011.

The easiest way to get the VC’s attention is to present them with a venture (your venture) that is actually making money, or has substantial traction in the marketplace. Explain that you’re talking to them because you need growth capital and you think they’re extremely smart. The money flows quicker to you this way.

You can’t assume VCs know everything, because they don’t. There is just too much to know and absorb in fast-moving markets like technology, even for the smartest VC. Your company presentation should be designed to present the venture in full, but still be able to skip slides or discussion points without losing pitch momentum.

I’ve had entrepreneurs pitch me with 30-slide presentations, explaining things I already knew. Now, that’s a quick way to put me to sleep. You have to figure out the intelligence of the VC as quickly as possible because you don’t want him wandering off on you. Some VCs are A.D.D. enough; don’t make it any easier for them.

I never get tired of hearing the entrepreneur pitch and hearing the entrepreneur’s dream. I don’t know how other VCs view entrepreneur pitches, but I like having the opportunity to learn about a sector I may not know about from, hopefully, a domain expert in the field. I love to learn from entrepreneurs, and I always assume they know more about the sector than I do. They should — if they want my fucking money.

Brain Candy: questions to consider and ponder

(Q1)
Have you been in VC meetings where the VC acted as if they knew everything but really didn’t know what the fuck they were talking about?

(Q2)
Does it even matter whether the VC is smarter than you in regard to your sector? Is that a positive or negative?

(Q3)
Are VCs generally smarter than entrepreneurs? Or do you think they just have more money?

Entrepreneur
Myth 40
| Venture capital is risk capital

Venture Capital is risk capital but not at the level entrepreneurs might think. Many newbie entrepreneurs think VCs are risk takers and will fund their venture in the seed stage. They won’t, unless the VC fund is a seed fund.

Experienced entrepreneurs know venture capitalists aren’t risk takers. VCs eliminate risk by funding ventures that already have traction. They don’t finance ideas, visions or dreams.

Note:  Angel capital is true risk capital. Friends and family (FAF) is friendly, risk capital.

VCs love traction

Looking at another way, venture capital is controlled, analytical capital. However, VCs can get emotional and lose their senses by investing into companies with sky-high company valuations. But, I assure you, even those companies have proven traction in the marketplace.

Decades ago, venture capital was risk capital. Silicon Valley was one of the key regions where VCs funded startups and took the substantial risks associated with funding seed stages of a venture’s cycle. Those days are gone. In those early days in Silicon Valley, VCs made business agreements on a handshake. Hey, that’s what I’ve been told by the old timers. Back then, managing partners of venture funds were former entrepreneurs so they were more operational than VCs today. Plus, the VC industry was small so, if you screwed someone, word spread like wildfire.

When you are launching your venture, forget about getting seed capital (the earliest money) from a venture capital firm, unless the VC fund is designated as a seed fund. The odds are so much against you getting funded that I recommend you play the lotto, go to Las Vegas or find an angel investor instead. The third is your best option.

”Venture capital” is a misnomer today. Most newbie entrepreneurs don’t know that venture capital firms get their money from institutions, corporations, pension funds, wealthy families, government funds, etc. Because they have a fiduciary responsibility to invest wisely, VCs today are as risk-averse as other types of investors — even more. Shit, some of them are as conservative as hedge funds. They avoid taking large risks because they don’t want their limited partners suing them or closing off access to capital flow for their next fund. Some VCs have more of the cautious “banker mentality” than the bankers.

VCs look for “sure thing” investments. They want to see a venture that already has market traction, either from a customer acquisition standpoint or revenues. They want to support a great management team, surrounded by great advisors and/or a great board of directors. They want to hear and read customer testimonials. And they want to analyze a venture that has a decreasing burn rate (the cash expenses every month that cannot be supported by revenues). Shit, they’d go gaga if your venture was cash flow positive.

VCs have a substantial amount of pressure to perform — just like the entrepreneur. A famous VC once told me it was easier to make money as an entrepreneur than a venture capitalist. The odds of an early-stage venture becoming a hit are extremely low. VCs have to play the odds and try to find that one company that’s going to give them a 10 to 20X return in order to pay for all the fucking losers in their portfolio. It’s a tough gig being a VC, so be kind and considerate when you ask them for money. VCs have feelings too.

What makes financing the startup difficult is that VCs like to fund larger deals because it takes as much effort and due diligence to fund a large deal as it does a small deal. Most VCs don’t want to bother funding a $50K to $500K opportunity because it’s either just too small of a transaction or the venture is in its early, early stages so it doesn’t meet their funding requirements. And here’s another obstacle: legal fees and due diligence for the transaction can run $25K to $50K per deal or more.

I love investing in the seed stage of a venture because of my complexity science background. The seed stage is the most chaotic and unpredictable stage. I use different metrics than VCs, plus, I don’t have pension funds to answer to if the venture goes sour.

Allow me to clarify: Pension funds and other institutional investors are limited partners in a venture fund, so they’re not involved in the daily decision-making process. However, if VCs don’t get a hit in their current investment portfolio, subsequent funding from institutional investors or pension funds is harder to obtain. That’s one reason why VCs are so damn cautious. While I was raising my second Tesla Capital fund, I faced those issues as well. The first thing a potential investor will ask before putting money into a second fund is, “Hey, how’s the first fund doing?”

VCs aren’t that different from you — they are actually entrepreneurs, but with money. Their business is the business of investing. They try to reduce their risk, just like you try to reduce all risks possible in your venture. When you see it this way, you can pitch them for money, entrepreneur to entrepreneur.

Some entrepreneurs say venture capitalists that invest into startups should call themselves “ad-venture capitalists” because investing in startups is definitely an adventure. I just call them “cheetahs” (see Myth 56 for the reason why).