Mike's Case Against Venture Capital

Mike Simonsen, our fearless leader at Altos Research, wrote an article for FoundRead this weekend entitled "My Case Against Venture Capital."Interesting how he and I wrote our articles independently this weekend, but advocated similar positions - heeding caution with respect to venture capital's role in funding your start-up endeavor.

Maybe its the "Altos Research Cultural Bias" in play. Since the founding of Altos Research, the company has bootstrapped - paying for growth as cash comes in the door (no pressure on the sales guy here though....). I've been on the other side working with start-ups with considerable cash (Aplia, Inc. with $10+ mln) and my own firm that I operated for 2+ years on angel funding. Now that I'm on the side of the "pay as you go" model, I don't think I'd go back unless there was a viable reason. There's a certain feeling of autonomy at Altos Research that I didn't feel in my previous tenures, including my own company...

His article is chock full of great examples and outbound links that are guaranteed to get the gears grinding if you're considering venture capital for your business.

Venture Capital is not the end goal

It’s interesting when talking to start-up CEOs and entrepreneurs how often they are enamored with landing venture capital, as if receiving the funding itself is their main business objective. Venture capital is the beginning of any start-up's journey- a vehicle to speed product development, expand market reach, and grow the firm more rapidly than what would be possible through self-funding from revenues. Venture capital is never the destination.

Just remember the VC's rough equation:

10 investments = 7 failures + 2 breakevens + 1 successful exit

You're one of ten - there's a better chance that you're one of the future failures in this model than the successful exit.

Just as bankers provide small business loans to firms that meet their expected rate of return hurdles, venture capitalists invest in start-ups that offer the opportunity for them to meet their own capital growth goals. This is not philanthropy. One rarely hears an entrepreneur express delight for their pending small business loan from their banker, yet closing a round of venture capital is met with valedictory celebration.

In many ways, it would seem logical that the bank loan should be the capital event to spark celebration at a small business, since the bank only wishes to be compensated with interest payments, instead of preferred shares. Of course, most start-ups don't fit the lending criteria of most banks - this is illustration is meant to offer some perspective.

Certainly venture funding is vitally important to fill the investment gap between angel investors, private equity, and traditional lenders. The start-up entreneur should just remember that there are two sides to any transaction. If a VC is willing to invest $5, $10, $15+ million in your biotech, software, or patented technology, that money will come at a cost. Be sure to weigh the cost/benefit of the transaction before considering venture capital funding to be the end game.

(There's some solid reading and perspective on venture capital and angel investing at The Smart Startup).

Some Basics on Angel Capital

While doing some reading tonight, I came across a couple of very informative articles regarding angel capital and seed stage start-up financing.

• Jim Roberts provides his Top 10 Tips for Entrepreneurs Seeking Venture Capital - a nice list of practical examples that focuses on developing relationships and taking the long view when considering angel funding.
  

• An article from The Huntsville Times written by an angel investor offering the "blocking and tackling" basic advice that is always good to remember when approaching angel investors.

• Some cautionary advice from BusinessPundit.com.

The key factor that I read time and time again, is that angel investing is an option and an opportunity for entrepreneurs. But remember, angel capital doesn't mean "manna from heaven."

New Social Network - "Were You There?"

I met Jonathan Hull, founder of "Were You There?" at a recent SVASE event. I just set up a membership and started playing around.

"Were You There?" bases its social networks on events, times, and places. Couple of examples - there are groups around the Kennedy assassination, Elvis Presley, and Venice, Italy.

Cool stuff. Definitely worth checking out for an interesting perspective on developing a new social network.

Venture Capital Investment Competition & the University of San Francisco

The Venture Capital Investment Competition (VCIC) is a unique opportunity for university students to act as investors, instead of the standard competition where students present their business plans.

In an obvious attempt to be a homer, I'd like to congratulate the University of San Francisco Graduate Student Team for their outstanding performance at the February 8th event, finishing in 2nd place with universities like USC and UC-Irvine in the field.

Mark Cannice is the Executive Director and Founder of the USF Entrepreneurship Program. Over the past couple of years, Mark and his colleagues have quickly transformed the department from a great little secret to an outstanding program for developing entrepreneurs in the fertile Silicon Valley environment.

Mark compiles the Venture Capital Confidence Index, and reported his most recent findings here.