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So, you’re an entrepreneur. And you think you want Venture Capital. Because, you’re a venture. And you need capital. Right?
Marc Andreessen, stepping profoundly onto the blogging stage just this past week, has written an eloquent pair of posts on the truth about venture capitalists. Read Part 1 here and Part 2 here. The posts are thorough, candid and really, in a way, quite lovely in their honesty. He presents some simple and important insights about VC that any entrepreneur should consider before deciding that VC is their best capital development strategy.
There are so many misconceptions among entrepreneurs. I’ve even seen ‘us’ & ‘they’ mentalities, and a skewed focus on “getting VC investment” as the win. Um, starting and running a profitable company? That is the actual “win”? There are things that Venture Capital is good for, and others that it is not. No harm, no foul.
If you’re pursuing Venture Capital to finance your startup, then reading these posts is mandatory “understand your audience” homework.
Marc’s unblinking honesty is refreshing and educational, and is an absolute must read for anyone immersed in the capital development process. This entire passage on why a VC may turn you down, and what you can learn if many do, is just great (my emphasis added):
One, she can’t see the leverage — she can’t see you getting to a sale or IPO with a credible prospect of a 10x return within 4 to 6 years. If she can’t see this, and 10 of her peers at other firms can’t see it, then you may want to revisit your fundamental business model assumptions and try to understand what’s missing.
Remember, it’s in her best interest to see the full potential in your business — she is looking for high-potential startups in which to invest.
Two, she thinks that what you’re doing is too early or unproven.
This is the one that drives entrepreneurs nuts. Isn’t the whole point of venture capital to make risky investments in unproven technologies and markets?
Unfortunately, that’s life — sometimes things are simply too early for venture capital. In that case, develop your idea further with bootstrap or angel funding and then take it back to the VCs later with more proof points.
Three, she isn’t convinced that you’ve assembled the right team to go after the opportunity. This usually means she doesn’t think your technical founder(s) are strong enough, or she doesn’t think your founding CEO is strong enough. Again, it’s in her best interest to see the potential in the team if it’s there — so if she and 10 of her peers pass on your startup because of concerns about the team, then you may want to rethink your team.
Guys, when the fit is right, they can actually be on your side…
Finally, keep in mind:
A venture capitalist’s ideal investment is the one that would be a huge success without her.
Before you spend a lot of time and energy lining up meetings with prospective investors, be clear: Do you really need venture capital? Do Venture Capitalists need you? If both are truly a “yes” your job just got much easier. If you even think either might be a no, now would be a good time to rethink your strategy…
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