For several months we have been seeking venture capital for our company. The experience has been nothing short of educational. I did it twice before. Both times through channels outside of the "normal" Silicon Valley world. This time around we have been pursuing the "standard" valley channels. And it leaves one who is seeking funding..well...ummm...underwhelmed.
There are tens of thousands of people who make their living in the silicon valley off the process of raising capital for a variety of start ups. If you read their web sites and listen to them speak, they are "the" center of the entrepreneurial universe. In fact they are middle men who feed off the inefficiency of the investment process. In the most efficient world the people with money (investors) would find and fund the idea (the entrepreneur) and the process would entail minimum of costs. However, if you listen to these middle men they will sing praises of their wisdom.
Some are , in fact, good. But as with any human endeavor, it turns out that only very few reach that level. The rest follow. Today most are looking for the next Google. It's akin to driving while looking in a rear view mirror. They would be funny if they didn't effect so many people's lives. It's worth remembering that first 42 venture capitalists approached by nascent eBay for funding turned them down. And that's with eBay generating real revenues and profits. 12 of the same 42 invested more than $500 million of their investor's money into online pet food endeavor before they figured out that it costs more money to ship the dog food then to sell it in the local retail store.
In fact, if you have half of an idea and an OK team you can get money from these guys. The problem is that you will be forced to accept absurdly low valuations and meddling of people who know nothing about your business on your Board. In fact, the entire process has become an assembly line. it works something like this:
- Angels - Unlike their real world counterparts these guys aren't in it out of goodness of their heart. Still, unlike their brethren further down the food chain they do show some moxie by accepting SOME risk while doing the Entrepreneur a GREAT favor at a laughably low valuation.
-Early Stage VCs- Are fed by their partners, the Angels. Angles bring their "survivors" to these guys for further nourishing and dilution. They will accept some risk, but not much of it. And they WILL tell you how to run your business. If they can, they will pawn your company off to another existing company in the field or pass you on down the food chain to
-Late stage VCs- try to take no risk and simply ride already proven business to absurd risk/reward ratio results. I am still not sure what is it that they do that regular banks can't since they have about the same amount of appetite for risk.
At times it seems that the actual business concept is irrelevant. If you fit into their valuation/target profile, they buy in. If you don't, tough.
Today's favorite profile would be:
- Company is about 6 months old
- Average age - 20
- Location - dorm room
- market segment - uncertain, but something to do with social community (left handed bicycle enthusiasts as an example)
- Revenue prospects - uncertain, but probably from advertising
- profitability prospects - don't be silly
This will get you a $3 million valuation and about $500 to play with. Good luck. Anything that deviates much from that profile is not going to be easy to fund.
Having said that, with all of its weaknesses and sill the only place on earth where this much capital gets distributed to so many startups. However flawed, it is still better than anywhere else. Shame, cause it could be so much better.
