Wednesday, May 30, 2007

Understanding the mind of the venture capitalists

I have been asked a few times by different folk about raising cash for there new company, I have advised them to start simple with other avenues of liquidity and progress to the VC funding only when you are in need of the big money(500k+), when you engage with the VC to raise funding you are entering someone else's domain, and area of expertise. You also need to remember that the VC company is run the same as any other company, it is run by human beings, the same as you and me, and some choices they make are based on gut instinct with a sprinkle of due diligence, others are made only on the numbers. The thing to keep in mind is that your deal although it is all important to you, is only one of many that the VC is working on and all these deals have to mesh together at that time for the VC company to function and make money as well, so though your idea may be great and they received it well you may still get a no, so be prepared and keep pitching until the "fat lady sings" and you see the money. I found this article from a blog which is for software entrepreneurs ( http://onstartups.com/) it talks about the mind and workings of the VC community and gives a link to a very useful site Venture Hacks which is run by (Babak) Nivi and Naval Ravikant. who have spent the last decade working as investors and entrepreneurs, smart guys and worth a look at.





VentureHacks: Peeking Inside The Blackbox Of Venture Capital

By Dharmesh Shah

If you're a startup entrepreneur, head on over to Venture Hacks, read their content and subscribe to their RSS feed. You'll be glad you did.

Disclaimer: I don't know Nivi and Naval (the guys behind the site) and I have no personal bias or conflict. I simply love the content on the site.

The reason I like the site so much is that it provides a rare glimpse into the black box of venture capital (and venture capitalists). For the most part, the industry is pretty closed and very few (except insiders) really get a glimpse into the details of the process. The reason is simple: For those that know enough to write about it, there' s rarely an incentive to do so. For those that don't know the innards of the business, you're not going to learn much that you couldn't pick up on your own through other sources. VentureHacks is the rare case where the authors know what they're talking about and are brave enough to actually do it. As an added bonus, they're witty and edgy too.

5 Reasons to Read VentureHacks

1. VC Negotiation Is An Art Form: As an entrepreneur, there are few things more "nuanced" that you'll deal with than raising institutional capital. Even if you decide not to raise venture capital, a lot of these skills and deal-terms will likely show up in other dealings you have (strategic partners, M&A transactions, etc.).

2. The Devil's In The Details: Most entrepreneurs focus too much energy on the "obvious" things like valuation. Fact is, there are other, non-valuation terms in the VC deal (vesting, stock option pool, liquidity preferences, etc.) that have a significant impact on the economics of your deal. It's easy to lure yourself into thinking you should solve for the highest valuation. But, in most cases, that's sub-optimal.

3. Great Advice Is Hard To Find: As it turns out, good advice in the VC business is hard to find. I would define good advice as a combination of competency (i.e. well informed) and objective (i.e. non-conflicted). You can get close sometimes (via lawyers, adivsors, etc.) but it's really hard to find great advice.

4. It's Not Enough To Be Smart: It's importat to remember that regardless of how smart you are, VC negotiation is not just a matter of raw intelligence. Sure, it helps t have a few brain cells to understand the dynamics of a deal, but a lot is hidden away in the dark corners that you only ever learn by doing it. It's also important to remember that the VCs do this for a living. Hopefully, you don't (you're building businessees for a living). You may be twice as smart as they are, but you're still at a disadvantage. Try to even the playing field as much as you can.

5. It's Intellectually Fascinating: Even if you're not planning on raising funding yourself, I think you might find the whole VC game intellectually interesting. Further, by getting yourself educated, you can perhaps help someone else that's a total newbie navigate the waters (See #3).






Slainte

Gordon

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