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March 15, 2005
Today I told three entrepreneurs to not raise money
I have been quite vocal in the past about how entrepreneurs should not raise money unless they really need it. Today for some reason that theme came home to roost in spades. I told THREE entrepreneurs that they should NOT raise venture capital. Without using names, here are the scenarios:
Entrepreneur 1: Has a niche community web site around "peaceful living" or you might say "eco living". They have about 65,000 registered users who receive e-mails once a day an visit the site to read inspirational things that will help them lead better lives. The site has begun to sell some advertising and get some sponsors. They wanted millions of dollars to grow to millions of users quickly (ala Friendster) and create many cross-media properties like Oprah or Dr. Phil or Depak Chopra have. Now I am a technology investor so I don't really understand building cross media brands so I start out with a bias. But here is a site being run by two people in a basement that will be profitable on a very small revenue run rate. Why pour gas all over it? Do you really want investors who will come in with their own ideas on how to grow and push you to do unnatural things? If you really are passionate about the niche, grow into the niche with revenue and see how big it gets. Not every niche is an IPO. And if you take VC money they will try to push your niche larger and faster than it may naturally go. You will get irrational behavior. Don't do it.
Entrepreneur 2: Created a slightly profitable (on a couple million revenue) connector/management software company for VOIP and internet video delivery. One shareholder, the founder. Built the business with the only paying customers he could find through the dry years of 2001-2003, the world's oldest profession. Now that the venture markets are heating up he wants to leverage that work and customers into a "respectable" business and grow it like gangbusters. He wants a premium valuation for his company since it is profitable. First, private equity investors are going to have a problem with his customer base. For better or worse the public markets are not ready for a porn IPO. So the question is can he attract whole new customers? So in that way his current business is really not of much value and he is going to have to spin up a whole new sales channel and level of professionalism in the company. Against well funded venture backed and some public companies. I say life is too short for that brain damage. Keep your medium size business all to your self and take out as much cash as you can.
Entrepreneur 3: Has a digital media and software e-commerce system that has been in development for five years and finally has gotten a major customer. There has been alot of money put into the company by prior non-professional investors. The first major customer has an option to buy the company at a price that will make the prior investors whole but not leave much for the management team. The management team of course wants to raise more money, dilute the prior investors and get a larger piece for themselves. I advised him that if I were the prior investors faced with a return of capital or a cram down and further ride after 5 years of hard work, I know my decisions. As a new investor I wouldn't want to be selling that story to existing investors. Sell the company and don't raise more money.
Now if I could just see some deals that REALLY NEED my money...
Posted by Martin at March 15, 2005 11:30 PM
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Martin Tobias: I have been quite vocal in the past about how entrepreneurs should not raise money unless they really need it. Today for some reason that theme came home to roost in spades. I told THREE entrepreneurs that they... [Read More]
Tracked on March 17, 2005 6:49 AM
» Looking to raise VC? from Chris Selland's Weblog
Read this great post from Martin Tobias first. [Read More]
Tracked on March 18, 2005 3:04 PM
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